Option Investor

Daily Newsletter, Thursday, 06/03/2004

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The Option Investor Newsletter                Thursday 06-03-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Waiting for Jobs
Futures Markets: See Note
Index Trader Wrap: See Note
Market Sentiment: Traders Brace for Jobs Report

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
     06-03-2004            High     Low     Volume Advance/Decline
DJIA    10195.91 - 67.06 10281.92 10193.78 1.21 bln    725/2109
NASDAQ   1960.26 - 28.72  1983.86  1960.26 1.50 bln    846/2170
S&P 100   543.92 -  3.66   548.40   543.87   Totals   1571/4279
S&P 500  1116.64 -  8.35  1125.31 1116.56
RUS 2000  562.44 - 11.12   573.56   562.44
DJ TRANS 2962.96 - 38.89  3001.13  2962.92
VIX        17.03 +  0.95    17.04    16.16
VXO        17.34 +  1.10    17.45    16.44
VXN        23.93 +  1.32    23.98    22.86
Total Volume 3,391M
Total UpVol    709M
Total DnVol  2,643M
52wk Highs     103
52wk Lows       82
TRIN          1.58
PUT/CALL      1.13

Waiting for Jobs
Jonathan Levinson

An afternoon decline picked up speed and urgency as the session
drew to a close, with the Dow declining 67.06 to finish at
10195.91 and the Nasdaq losing 28.7 to close at 1960.3.  While
volume was light overall there were big upside moves in the
volatility indices, with the VXO rising 6.77% to close at 17.34
and the QQV rising 7.03% to close at 22.07, well off its lows
below 19.  After the bell, the selling accelerated with the
futures setting lower lows.

Breadth was decisively negative with decliners more than doubling
advancers on the NYSE and Nasdaq, with down volume tripling up
volume on the two exchanges- on the AMEX, down volume nearly
sextupled up volume.

Daily Dow Chart

The Dow closed right on the ascending support line that forms a
rough pennant against the declining resistance off the mid-
February high.  Its equivalent on the Nasdaq futures was broken
to the downside today, helped along by the strong selling after
4PM, but on the Dow it held.  While the daily cycle oscillators
remain in upphases, we saw in last week's discussion that the
weekly and monthly cycles remain down.  This suggests that the
daily cycle upphase is corrective within that longer-duration
downtrend, which lines up with the pattern of lower lows and
lower highs since February.  A break below the rising daily
support line, which will occur if tomorrow sees a failure to
close in the green, suggests that the daily cycle upphase is
coming to an end and should pave the way to a retest of the 9900
level or lower.  A move above 10290, current resistance for the
daily cycle upphase, should set up a test of 10360.  If pulls can
break that upper descending resistance line, they'll have a shot
at turning this pattern into a bull wedge, but to do so will take
a lot of buying from here.

Daily Nasdaq Chart

The Nasdaq closed below the rising pennant support line, and
unlike the Dow, its 1o-day stochastic left off with the
suggestion of a bearish kiss.  The descending upper resistance
line from February wasn't even touched, and a rollover from this
lower, weaker high would be very bearish indeed.  Note that the
close was also below the 50 day EMA, with the 22 day EMA next
support just above 1950.  Next support is at 1940, followed by
1920.  A close above 1996 should see a test of upper descending
resistance at 2015, which would have bears significantly antsier
than they currently are, as that same bull-flag interpretation
discussed above would be on the table above that level.

Before the bell, it was announced that the ECB would leave its
overnight rate unchanged as expected.  The US Dollar Index had
been strong overnight and remained so on the release the news,
with US equity and bond futures negative approaching 8:30 and the
release of key US economic data.

The Q1 non-farm productivity revision came in above the 3.7%
estimated at 3.8%, up from the 3.5% initially reported.  Unit
labor costs exceeded expectations of .5% annual rate, posting
8%.  This indicates greater than expected inflationary pressures
on US corporations.

Initial jobless claims were also released at 8:30AM, with the
seasonally-adjusted number of new claims down 6K to 339K, missing
expectations of 335K for the week.  The total number of workers
receiving unemployment assistance rose 65K to 3M, which is a 5-
week high.  The week moving average of initial jobless claims
rose by 4,250 to 341K, and the previous week's reading was
revised up by 1K to 345K.

Bonds spiked lower on the release of the productivity numbers,
but bounced immediately when the disappointing employment data
hit the wires moments later.  The productivity data reflected
greater than expected inflation, but also an impressive worker-
output-per-hour reading that shows the fastest productivity gains
in over 30 years.  Whether this is the result of unprecedented
outsourcing of jobs or a genuine increase in domestic output-per-
hour is a key interpretive question, but for the moment the
persistence of US unemployment remains an important fly on the
recovery's wedding cake.  The record indulgence in debt at all
levels of North American society sponsored by the Fed's
reflationary / stimulative policies is less tenable if workers
are unable to grow their salaries at a rate sufficient to keep
ahead of broader price inflation.

On that topic, oil was once again a dominant topic in the
headlines.  It was reported in the early morning that Iraq's oil
minister stated that his goal is to reach 2 million bpd
production for export and overall output of 2.8 million bpd this
year.  Just after the bell, Qatari Oil Minister Abdullah al-
Attiyah announced that OPEC had agreed to increase oil output by
2 million bpd immediately, with an additional 500,000 bpd
increase to follow in August.  Oil futures rose on the news,
which was less of an increase than anticipated by traders.  As
Reuters reported, "This is bullish," said Nauman Barakat of
brokers Refco in New York. "Forget the promise of another
500,000, this is just plain two million. The market was convinced
it would get 2.5 million so this could wave a red flag to the

From OPEC's most recent press release today:

Having reviewed market developments since its 130th Meeting,
held on 31 March 2004, as well as the supply/demand outlook, the
Conference noted with concern that, as a result of several
factors, prices have continued to escalate, despite the efforts
by OPEC Member Countries to meet market requirements.  These
factors are mainly the robust growth in demand in the USA and
China, which had not been fully anticipated; geopolitical
tensions; and refining and distribution industry bottlenecks in
some major consuming regions, coupled with more stringent product
specifications.  Combined, these factors have led to unwarranted
fear of a possible future supply shortage of crude oil, which
has, in turn, resulted in increased speculation in the futures
markets with substantial upward pressure on crude oil prices.

Given current high and volatile prices and prevailing concerns
regarding supply security, and in order to ensure continued,
robust, global economic growth, especially in the economies of
fellow Developing Countries, the Conference decided to increase
the OPEC production ceiling (excluding Iraq) to 25.5 mb/d, with
effect from 1 July 2004, and to 26 mb/d, with effect from 1
August 2004, in order to ensure adequate supply and give a clear
signal of OPEC’s commitment to market stability and to
maintaining prices at acceptable levels to both producers and
consumers.  The Conference also decided to convene an
Extraordinary Meeting in Vienna, Austria, on 21 July 2004 to
review market developments.

Shortly following that release, it was announced that the United
Workers Union of Venezuela oil workers had voted to commence a
general strike at all industrial installations of the state-owned
Ecopetrol to commence on June 22, 2004.  I was unable to
determine the amount of oil that such could involve.

The Department of Energy reported crude oil stocks up 2.8M
barrels for the week ended May 28.   Gasoline supplies rose 1.3M
barrels and refineries ran at 94.9% capacity. Distillate
inventories rose by 200,000 barrels, and U.S. natural gas stocks
rose by 87 bcf to 1.564 trillion cubic feet.   The American
Petroleum Institute delayed its data today, citing technical
difficulties, but later announced an increase in crude stocks by
860,000 barrels and in distillate inventories 1.4M barrels.  For
the day, crude oil futures finished lower by 1.88% at 39.21.

At 10AM, the Commerce Department released the April factory
report, with factory orders falling 1.7% following March's 5%
gain, the steepest decline since April 2003.  Expectations were
for a drop of 1.2%.  Durable goods orders were revised lower to a
3.2% drop rom the previously reported 2.9%, the largest drop
since September 2002.  Non-durables were unchanged. The May non-
manufacturing index dropped to 65.2%, missing expectations of
66.3% following the record 68.4% April reading.  Readings over 50
are said to indicate expansion overall.

President Bush announced that CIA director George Tenet will
resign in July for personal reasons, praising his "superb" job.
There was speculation that the move was somehow related to the
President's meeting with private counsel yesterday and the
ongoing "Wilsongate" affair, but overall reaction to the news was

In corporate news. there was a slew of May updates from
retailers.  Some highlights include Sears, Roebuck (S) reporting
that May domestic same-store sales fell 3.7% y-o-y and total
sales fell 4.7% to $2.08B.   WMT reported a 5.9% y-o-y increase
in same-store sales, led by its Sam's Club chain, with total
sales up 13% to $21.43B.  Costco (COST) reported a 16% y-o-y
same-store increase, with total sales for the month rising 19% to
$3.8B.  May Department Stores (MAY) reported same-store lower by
3.8% from May 2003, with total sales down 2.7% to $978M.  Kohl's
(KSS) reported same-store sales higher by 5% y-o-y and  total
sales higher by 20% to $815.8M.  Nordstrom (JWM), pronounced
"Nahdstram" in the Commonwealth of Massachusetts, reported May
same-store sales up 9.4% from May 2003, and total sales higher by
12% to $499M.  Gap (GPS) reported a 6% same-store increase and
net sales of $1.2B for May.  The RLX closed lower by .47% at

After the bell, INTC gave its mid-quarter update, raising its Q2
revenue target to $8B - $8.2B and upping its estimate for gross
margins to 60%-61%.  Analysts had been expecting revenue of
$7.98B, and the upside surprise combined with the lack of
material news helped gap INTC to a spike high of 28.40 on the
news, following which price settled into a range just below 28 as
of this writing.  The company cited strength in demand for
communications products and said that demand for microprocessors,
chipsets and motherboards is consistent with previous

For tomorrow, we await the May employment report, including
nonfarm payrolls (est. +225K), the unemployment rate (est. 5.6%),
hourly earnings (est. .2%) and the average workweek (est. 33.8).
I noted in the Futures Wrap that bonds diverged to the upside
today, failing to fall despite the strong showing from the US
Dollar Index.  I would take that divergence to indicate the
market's expectation for a downside surprise in tomorrow's 8:30AM
report, but we'll find out soon enough.  I would expect a
terrible report to drop the US Dollar Index and rally bonds,
equities and metals, while a strong report should do the reverse.
An unexciting report would likely leave the market to its own
devices, which here looks like a trend of a strong dollar and
weaker equities.  Tomorrow will help complete the picture.


Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.


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Traders Brace for Jobs Report
- J. Brown

Thursday proved to be a busy day.  Action was volatile in the oil
sector with crude rocking back and forth over the $40 level but
in the end oil slipped lower.  OPEC did approve a production hike
but the general consensus was the 2 million barrel hike merely
legitimized what cartel members were already pumping.  Investors
grew exceedingly cautious over Intel's mid-quarter update after
the bell with the SOX semiconductor index leading the NASDAQ

Fortunately Intel (INTC) offered positive news and guided
revenues to the upper end of their previous guidance.  This has
the tech sector poised for a rebound tomorrow if the jobs number
doesn't disappoint.  Tomorrow is all about the jobs number.  As
long as it's not too hot or too cold we should be good.  If the
number comes in too hot then investors will worry that the Fed
may have to hike rates faster than expected and further impact
the economic recovery.

Overall the market slipped in a broad sell off as traders decided
to take some money off the table ahead of Intel's announcement
and the jobs report.  Every sector slipped lower with the
heaviest losses in technology and airlines.  It is noteworthy
that the Dow Transports may have turned in a technical bearish
reversal with today's decline erasing yesterday's strong gain.
The hardware sector also took it on the chin with a big drop
after several days of sideways action.

Declining stocks outnumbered advancers 3-to-1 on the NYSE and
almost 3-to-1 on the NASDAQ.  Down volume swamped up volume by
more than 4-to-1 on the NSYE and more than 3-to-1 on the NASDAQ.
Stepping back and looking at the technical picture on many of the
major indices it would appear that we're setting up for a roll
over under resistance.  This just happens to coincide with an
upturn in the volatility indices.  If the jobs number doesn't
excite then next week could be a tough one.


Market Averages


52-week High: 10753
52-week Low :  8861
Current     : 10195

Moving Averages:

 10-dma: 10114
 50-dma: 10253
200-dma: 10077

S&P 500 ($SPX)

52-week High: 1163
52-week Low :  962
Current     : 1116

Moving Averages:

 10-dma: 1111
 50-dma: 1117
200-dma: 1087

Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1180
Current     : 1445

Moving Averages:

 10-dma: 1442
 50-dma: 1442
200-dma: 1428


CBOE Market Volatility Index (VIX) = 17.03 +0.95
CBOE Mkt Volatility old VIX  (VXO) = 17.34 +1.10
Nasdaq Volatility Index (VXN)      = 23.93 +1.32


          Put/Call Ratio  Call Volume   Put Volume

Total          1.13        518,239       585,165
Equity Only    1.01        407,717       409,788
OEX            2.60         12,636        32,850
QQQ            2.36         60,151       142,234


Bullish Percent Data

           Current   Change   Status
NYSE          64.8    + 1     Bear Confirmed
NASDAQ-100    38.0    + 0     BULL ALERT
Dow Indust.   66.7    + 0     Bear Confirmed
S&P 500       61.6    + 1     Bear Confirmed
S&P 100       61.0    + 1     Bear Confirmed

Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart.  Readings above 70 are considered overbought, and readings
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend


 5-dma: 1.11
10-dma: 0.94
21-dma: 1.02
55-dma: 1.07

Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning


Market Internals

            -NYSE-   -NASDAQ-
Advancers     725       846
Decliners    2109      2170

New Highs      57        82
New Lows       24        24

Up Volume    283M      337M
Down Vol.   1210M     1140M

Total Vol.  1504M     1497M
M = millions


Commitments Of Traders Report: 05/25/04

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.

S&P 500

Not much movement from the commercial traders.  It looks like
they shifted a handful of money from shorts to longs.  Conversely
the small traders have rotated some money from longs to shorts.

Commercials   Long      Short      Net     % Of OI
05/04/04      397,964   417,175   (19,211)   (2.4%)
05/11/04      401,365   421,672   (20,307)   (2.5%)
05/18/04      394,352   423,258   (28,906)   (3.5%)
05/25/04      400,713   420,764   (20,051)   (2.4%)

Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   23,977  - 12/09/03

Small Traders Long      Short      Net     % of OI
05/04/04      137,112    80,201    56,911    21.6%
05/11/04      135,534    76,987    58,547    27.5%
05/18/04      139,647    74,597    65,050    30.4%
05/25/04      136,086    79,060    57,026    26.5%

Most bearish reading of the year:  (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02

E-MINI S&P 500

There was a big drop in longs by the commercial traders but
it was coupled with a significant drop in shorts too.  They
remain net bullish on the S&P 500.  Small traders have grown
net bearish after last week's bullish reading.

Commercials   Long      Short      Net     % Of OI
05/04/04      316,840   370,781    (53,941)  ( 7.8%)
05/11/04      378,696   362,887     15,809     2.1%
05/18/04      390,484   357,157     33,327     4.5%
05/25/04      353,722   336,406     17,316     2.5%

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:  133,299   - 09/02/03

Small Traders Long      Short      Net     % of OI
05/04/04      119,308     74,407    44,901    23.2%
05/11/04      101,199     94,408     6,791     3.5%
05/18/04       62,216     87,269    25,053    16.8%
05/25/04       91,515    100,759   ( 9,244)  ( 4.8%)

Most bearish reading of the year: (77,385)  - 09/02/03
Most bullish reading of the year: 449,310   - 06/10/03


Commercial traders have upped their long positions and remain
net bullish on the NDX.  Small traders have likewise upped their
short positions and remain net bearish.

Commercials   Long      Short      Net     % of OI
04/27/04       54,196     33,948    20,248   23.0%
05/04/04       56,931     35,209    21,722   23.6%
05/18/04       58,376     37,528    20,848   21.8%
05/25/04       59,891     37,630    22,261   22.8%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  22,261   - 05/25/04

Small Traders  Long     Short      Net     % of OI
05/04/04       10,247    24,764   (14,517)  (41.5%)
05/11/04        9,716    21,072   (11,356)  (36.9%)
05/18/04        9,843    18,935   ( 9,092)  (31.6%)
05/25/04       10,184    20,653   (10,469)  (33.9%)

Most bearish reading of the year: (14,517) - 05/04/04
Most bullish reading of the year:  19,088  - 01/21/02


Commercial traders are adding to their short positions while
small traders are adding to their longs, which is generally
par for the course.  Guess who is right more often?  Yup,
the commercial traders.

Commercials   Long      Short      Net     % of OI
05/04/04       24,296    22,181    2,115       4.6%
05/11/04       22,614    21,507    1,107       2.5%
05/18/04       22,257    22,444   (  187)     (0.4%)
05/25/04       23,578    24,632   (1,045)     (2.2%)

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
05/04/04        6,262     8,155   (1,893)   ( 9.2%)
05/11/04        7,009     7,640   (  631)   ( 4.3%)
05/18/04        9,098     6,591    2,507     16.0%
05/25/04        9,623     6,614    3,009     18.5%

Most bearish reading of the year: (12,106) -  3/09/04
Most bullish reading of the year:   8,523  -  8/26/03



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The Option Investor Newsletter                 Thursday 06-03-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: LXK, SLAB
Dropped Puts: CAKE
Call Play Updates: AET, BCR, DGX, IMCL, QCOM, ZMH, AIG, BA, ERTS,
New Calls Plays: None
Put Play Updates: None
New Put Plays: GS


When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


Lexmark Intl. - LXK - close: 90.59 change: -1.71 stop: 91.70

We knew we were skating on thin ice with our LXK play when the
stock just couldn't man age to pull itself away from the 50-dma.
Last week's rebound and rally above $95 should have generated
some follow-through if there was any to be had, and this week
we've seen the consequences of that lack of follow-through.  LXK
came down to fractionally break the 50-dma yesterday, but today's
breakdown really seals the deal, with the entire day's action
below that important average and more importantly, LXK ending the
day below our stop.  Positions not stopped out today should be
exited into any rebound on Friday.

Picked on May 13th at        $94.03
Change since picked:          -3.44
Earnings Date               4/19/04 (confirmed)
Average Daily Volume =     1.15 mln
Chart =


Silicon Labs. - SLAB - close: 48.28 change: -1.75 stop: 48.50

Knowing that it was a risky play right from the start with price
bumping into the PnF bearish resistance line, we wisely suggested
that breakout entries should not be considered.  Our desire was
to nab an entry on a rebound from the $50 area, which sadly was
never delivered.  Certainly yesterday's dip to the $50 level may
have looked marginally appealing, but not with the lack of an
afternoon rebound.  Sure enough, the selling frenzy continued
today, driving the stock back under the 200-dma and our $48.50
stop.  We really never got an opportunity to play on this one,
but clearly that is a good thing, as we shift SLAB to the drop
list tonight.

Picked on May 30th at        $52.19
Change since picked:          -3.91
Earnings Date               4/26/04 (confirmed)
Average Daily Volume =     1.16 mln
Chart =


Cheesecake Factory - CAKE - cls: 39.82 chng: +1.07 stp: 40.75

We've been more than patient with our CAKE play over the past
couple weeks, letting it consolidate ahead of the next downward
leg.  But we were starting to get concerned with the way the
intraday highs and lows were moving higher.  That mild
trepidation turned to conviction today as the stock gapped lower
and then rallied strongly until topping out just over the $40
level.  Today's candle engulfed the past 5 sessions, did so on
the strongest volume of the past 3 weeks and looks an awful lot
like a key reversal day.  So while our stop hasn't quite been
reached, we're going to advocate an early exit.  Any weakness
tomorrow should be used as an opportunity for a more favorable

Picked on May 13th at         $40.09
Change since picked:           -0.27
Earnings Date                4/20/04 (confirmed)
Average Daily Volume =         639 K
Chart =


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Man Financial announces the formation of the OneStopOption
Brokerage Group, addressing the demand for personalized,
experienced service for both securities* and futures trading
within the same firm. Licensed Option Principals Andrew Aronson
and Alan Knuckman specialize in live assistance of stock*,
option* and futures traders. The combination of the proven Man
Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for

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Aetna Inc - AET - close: 84.88 change: +2.52 stop: 80.00*new*

A number of healthcare and insurance related issues out performed
the market's malaise on Thursday and AET was leading the pack.
Shares gapped higher this morning and broke through its 40-dma
but remained under technical resistance at its 50-dma and the
$85.00 level.  We're unsure what really sparked the rally but
volume was double the normal on Thursday.  The company did
announce a new weight management program at the National Summit
on Obesity today.  AET also declared that it would be presenting
at the Goldman Sachs Global Healthcare Conference on June 10th.
We are going to raise our stop loss from $78 to $80.00.

Picked on May 30 at $ 81.20
Change since picked: + 3.68
Earnings Date      04/29/04 (confirmed)
Average Daily Volume:   1.5 million
Chart =


Bard C R - BCR - close: 57.51 chg: +0.36 stop: 54.25

BCR continues to demonstrate its relative strength against the
market's general weakness today.  There has been no post-split
depression that is common among stocks that have strong pre-split
ramp up.  BCR's technicals remain bullish but its stochastics are
looking overbought.  The stock might need a breather.  If you're
considering new positions look for a dip back to the simple 10-
dma near $56.

Picked on May 20 at $ 55.00 (post split)
Change since picked: + 2.51
Earnings Date      04/20/04 (confirmed)
Average Daily Volume:   386 thousand
Chart =


Quest Diagnostic - DGX - cls: 88.08 chg: +0.23 stop: 83.75*new*

In spite of all the movement the markets have churned sideways
the last two sessions and DGX has followed along.  Actually,
that's not entirely true.  DGX has been following its upward
trend and volume has been stronger than normal but the gains have
been muted.  We suspect that DGX is due for a dip and traders
might want to look for a pull back toward the $87.00 level as an
entry point.  Of course the market direction tomorrow depends on
how the street interprets the jobs data.  We're going to inch up
our stop loss from $83.45 to $83.75.

Picked on June 01 at $ 87.70
Change since picked:  + 0.38
Earnings Date       04/22/04 (confirmed)
Average Daily Volume:    603 thousand
Chart =


Imclone Systems - IMCL - close: 72.97 chg: -1.88 stop: 72.00

Red alert!  IMCL may have topped out at $77.25 during the last
few sessions and they have broken its short-term rising trendline
of support as well as its simple 10-dma.  Contributing to the
decline on Thursday was news that a large owner of IMCL stock
sold nearly 900K shares between $74-75 a share.  The owner's name
is Carl Icahn who still own 4.2 million shares of IMCL.
Unfortunately for us the SEC filing of his transactions also
included notes that he sold calls and bought puts - a strategy
that would certainly indicate he expects the price to drop.
Investors are probably hitting the "sell" button wondering, "Does
Carl know something we don't know?"  The recent drop has produced
a fresh P&F sell signal.  It might be a good idea to exit IMCL
promptly but with our stop loss at $72.00 we're going to stick it
out one more session and see where it closes on Friday.  Should
IMCL tread water tomorrow we might get some good news out of the
analyst meeting this Sunday.

Picked on May 26 at $ 74.05
Change since picked: - 1.08
Earnings Date      04/27/04 (confirmed)
Average Daily Volume:   2.9 million
Chart =


QUALCOMM - QCOM - close: 67.64 chg: -0.34 stop: 64.50*new*

Hmm... from the looks of it QCOM is starting to tire a bit.  The
stock continues to drift higher in its narrow rising channel but
its stochastics indicator is overbought and hinting at a dip.
Don't be surprised to see QCOM dip back toward its 10-dma near
$66.65.  Such a move might be an entry point for new positions
but we'd look for signs of a bounce first.  In the meantime we're
going to inch up our stop loss a bit from $64.00 to $64.50.

Picked on May 24 at $ 66.01
Change since picked: + 1.63
Earnings Date      04/22/04 (confirmed)
Average Daily Volume:   9.6 million
Chart =


Zimmer Holdings - ZMH - close: 86.38 chg: -0.73 stop: 83.00

Well so far so good.  ZMH finally "woke up" and started moving
yesterday with a run toward the $88.00 level before some last
minute profit taking.  Today's decline was mild and in tune with
the general market drift lower today.  Should ZMH continue to
slip look for a bounce from its 10-dma or the $85.00 level.  Such
a move might be a good place to consider new entry points.
Yesterday we raised our stop loss to $83.00 and we're going to
leave it unchanged.

Picked on May 27 at $ 85.20
Change since picked: + 1.18
Earnings Date      04/26/04 (confirmed)
Average Daily Volume:   1.2 million
Chart =


American Int'l Grp. - AIG - cls: 73.45 chng: -0.41 stp:

Continuing its halting bullish move, AIG pushed over the $74
level yesterday, helped along by the moderate broad market
advance.  After being unable to hold that level into the close
though, the bulls took another run at it this morning, but with
the broad market unable to hold its ground, the stock
deteriorated throughout the day, ending just above last week's
resistance.  While price action still looks favorable, we can see
daily oscillators tipping over in overbought territory and we
should expect another dip to test support before the stock is
able to make another strong upward push.  Look for new entries on
a dip and rebound from the $72 area, which is reinforced by the
10-dma ($72.42), 50-dma ($72.44) and 100-dma ($72.19).  Although
momentum entries above today's high may work, remember that we
have more resistance near $75.50, which is why our preference is
for pullback entries.  At this point in the play, we really
shouldn't see a break below $71, which is supported by the 20-dma
($71.19).  Raise stops to $70.50.

Picked on May 25th at        $72.00
Change since picked:          +1.45
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =     5.38 mln
Chart =


The Boeing Company - BA - cls: 46.10 chng: -0.65 stop: 44.00*new*

What started out as a very bullish session for shares of BA
yesterday, ended only moderately positive.  After plunging back
from the opening gap, the stock found support near $46 and then
rallied into the close.  But with the overall market acting
poorly on Thursday, BA headed back for another test of $46,
ending the day just above that level.  the bullish trend is still
very much intact and we're still looking for a rally up towards
the $50 level, but as we've been saying, buying the breakouts
does not appear to be the most prudent strategy, as demonstrated
by what happened following yesterday's move through resistance.
We'll continue to focus on pullback entries, first at $46 and
then down at stronger support at $45.  Following the breakout
above $46, we're cinching our stop up to $44, just under the top
of the late-May gap.

Picked on May 27th at        $46.20
Change since picked:          -0.10
Earnings Date               4/28/04 (confirmed)
Average Daily Volume =     2.95 mln
Chart =


Electronic Arts - ERTS - cls: 51.34 chng: +0.77 stop: 48.00*new*

Continuing its recent pattern, ERTS is having a hard time pushing
through the 50-dma.  Yesterday's move was simple, with the stock
opening near the 50-dma and then heading south until finding
support just over $50.  Today's action actually looked pretty
encouraging with ERTS well above the 50-dma at midday and looking
like it was ready for a breakout through $52.  But the sellers
appeared in the afternoon, pressing the stock down to close just
fractionally under the 50-dma again.  The good news is that the
stock managed a new recent closing high, while the bad news is
that resistance is still holding.  With today's price action as
our evidence, clearly breakout entries are not yet the right
strategy.  We need to wait for that breakout over the $53 level
(and the accompanying PnF Buy signal) before aggressively buying
into strength.  We'll continue to advocate pullback entries near
the $50 level in anticipation of the breakout through resistance.
Note that we've tightened our stop to $48 this afternoon, which
is just below both the rising trendline ($48.20) and the 200-dma

Picked on May 18th at        $49.60
Change since picked:          +1.74
Earnings Date               4/29/04 (confirmed)
Average Daily Volume =     3.93 mln
Chart =


Johnson & Johnson - JNJ - cls: 56.59 chng: +0.39 stop: 54.00

Can we classify that as a breakout?  You bet we can!  It wasn't
clear whether that was the case yesterday as JNJ fell back from
intraday resistance, but with today's move over $56.50, the stock
is definitely in breakout territory.  The validity of the move is
reinforced by the expanding volume, which is in stark contrast to
the lackluster action in the broad market.  Hopefully you took
advantage of the dip near the $54 level to get your entry into
the play, because that is probably the best entry point we're
going to see.  It is possible to consider breakout entries above
today's high, but that isn't our choice with next resistance
waiting at $58.  Look at the last two daily candles and you can
see another reason why momentum entries just aren't the right
choice with JNJ -- in each of the past two strong sessions, the
stock came back substantially from its intraday high by the
close.  We knew JNJ would be a slow-mover, but this one has been
even slower than we expected.  Conservative traders might harvest
some gains near the $58 level as price begins to stall, while
those with a more aggressive style can hold on for a rally all
the way to our $60 target.

Picked on May 9th at         $55.30
Change since picked:          +1.29
Earnings Date               4/13/04 (confirmed)
Average Daily Volume =     7.35 mln
Chart =




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Goldman Sachs Grp. - GS - close: 90.55 change: -1.22 stop: 94.50

Company Description:
The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high net-
worth individuals. The company provides investment banking, which
includes financial advisory and underwriting, and trading and
principal investments, which includes fixed income, currency and
commodities, equities and principal investments.  GS recently
completed the acquisition of Spear, Leeds & Kellog, which is
engaged in securities clearing, execution and market making, both
floor-based and off-floor.

Why we like it:
After losing more than $17 from its early April highs, GS was due
for a rebound or at the very least some healthy consolidation.
We've been patiently waiting for that consolidation to run its
course and provide us an appealing opportunity to get onboard
before the slide begins anew.  The failed bounce near $94 over
the past week certainly would have worked for aggressive traders,
but the key issue is the $90 support level.  Looking at the PnF
chart helps to show why we've been cautious about adding this
bearish play, as price has been consolidating right on top of the
bullish support line.  But now it looks like price is actually
going to break down and that breakdown should afford a solid
entry for momentum players.  Note also that a break below $90
will issue another PnF Sell signal, reinforcing the current
bearish vertical count of $74.

For traders that don't want to enter on weakness, they'll need to
keep their eyes open for a subsequent rebound and failure near
the $92 level, which should be strong resistance in its own
right.  But it will be that much stronger with the 10-dma
($92.51) and 20-dma ($92.87) bearing down.  We'll use an entry
trigger at $90 (just under the recent lows) and then suggest
taking the breakdown or failed-rebound entries as risk tolerance
allows.  Initially we can expect decent support to materialize
near the $85 level and that should work for conservative exits
from the play.  But our official target will be for a move to
between $82-83, in the vicinity of the lows from last June-July.
Initial stops will be placed at $94.50 to allow for some movement
before the breakdown.  Once GS takes out the $90 level on a
closing basis though, we'll be looking to tighten that stop.

Suggested Options:
Aggressive short-term traders will want to use the June 90 Put.
Those with a more conservative approach will want to use the July
90 put, as it will provide greater insulation against time decay.
Our preferred option is the July 90 strike, as it is just out of
the money and should provide ample time for the play to move in
our favor.

BUY PUT JUN-90 GS -RR OI=6385 last traded @ $1.60
BUY PUT JUL-90*GS -SR OI=6338 last traded @ $2.85
BUY PUT JUL-85 GS -SQ OI=4115 last traded @ $1.30

Annotated Chart of GS:

Picked on June 3rd at         $90.55
Change since picked:           +0.00
Earnings Date                3/23/04 (confirmed)
Average Daily Volume =      3.75 mln
Chart =


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The Option Investor Newsletter                  Thursday 06-03-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Watch List: Chocolate, Copper and more
Option Spreads: I Guessed Right!  Help!!!
Traders Corner: Triangle patterns and price objectives
Traders Corner: Setting The Stage


Chocolate, Copper and more


How to use this watch list:
  Readers can use the candidates below as a springboard for their
  own research.  Many are in the process of breaking support or
  resistance or in the process of starting new trends or
  extending old ones.  With your own due diligence these could be
  strong potential plays.

Hershey Foods - HSY - close: 89.49 change: -0.13

WHAT TO WATCH: The six-week old consolidation in shares of HSY
may be ending soon.  The stock made another run at resistance
near $90.25-90.50 and failed but its technicals are hinting at a
bullish turn higher.  We would watch HSY for a breakout over
$90.50 and target a run toward $95.00.



Phelps Dodge - PD - close: 65.34 change: -1.59

WHAT TO WATCH: Phelps Dodge continues to struggle with technical
resistance at its 40-dma and has failed to breakout above this
descending pressure for the last week.  Today's 2.37% decline
happens to be a breakdown below its simple 10 and 200-dma's with
volume coming in stronger than average.  Its P&F chart is bullish
but we might speculate on a bearish position if PD breaks down
under $65.00 and target a move toward $60.00.  This would
coincide with the bearish development in its MACD indicator.



AmerisourceBergen - ABC - close: 60.98 change: -0.08

WHAT TO WATCH: ABC has rebounded strongly in the last two weeks
and is poised to breakout over resistance at $62.00.  Such a
breakout would also be a move through P&F chart resistance near
$61-62. Currently ABC's P&F chart points to an $80 price target.
We would look for a move toward $64-66.  If you prefer to buy the
dip, look for a bounce from $60.00.



Texas Instruments - TXN - close: 24.34 change: -0.84

WHAT TO WATCH: We mentioned TXN in the MarketMonitor this
afternoon as shares have fallen strongly the last two sessions.
Investors were being cautious ahead of Intel's mid-quarter update
after the bell tonight and TXN was move perilously close to
support at $24.00 on big volume.  Now that Intel has essentially
raised its guidance to the high end of previous forecasts we
might see TXN rebound strongly in spite its bearish technical


RADAR SCREEN - more stocks to watch

MRK $47.98 +0.15 - MRK broke out above its simple 200-dma a few
days ago but it is still struggling with resistance at $48.50.

WMT $56.60 +0.25 - WMT broke out above its 50, 100 and 200-dma's
intraday today but couldn't hold it and rolled over into the
afternoon.  The company's annual shareholder meeting is tomorrow.


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Option Spread Strategies

I Guessed Right!  Help!!!
By Mike Parnos, Investing With Attitude

Every once in a while, when the planets are aligned just right –
about as often as an eclipse – a directional trader buys a stock
and guesses right on the direction.  The problems are only
beginning.   They’re good problems, but problems none the same.

There you sit, with a potential pocketful of cash.  You have a
pretty good knowledge of options and what they can do.  After all,
you’ve been a CPTI student for a while.  But you find yourself at
a crossroads.  You know the right thing to do, but you can’t bring
yourself to do it.  You need some positive reinforcement, or, at
the very least, some self-discipline.

Options are a marvelous invention.  They’re better than
penicillin.  They can often cure what ails you by providing the
flexibility to construct a strategy to accommodate almost every
conceivable scenario.  So, read on and see how we can conjure a
compromise – and possible solution – to a situation that otherwise
may not have a solution.

For almost the first time ever (lol) I actually picked a good
stock!  EYET is up $10 this week.  Can we talk about a good plan
to own long-term.  You talked about a good directional play in an
option recently, how about a stock.  Unlike the option, I want to
own this long term, but protect the downside.

What are your “hypothetical” suggestions in a situation like this?
Different than owning the option, because a stock has no
expiration.  I've been using a trailing stop, but am afraid
volatility is going to take me out of the stock.  Puts are
expensive.  I’m actually considering selling the December puts
because of their high premium.  –Mark

Hi Mark,
You already have a nice profit (so far, on paper).   It’s true.
The volatility will likely take you out of the position if you
have a reasonable trailing stop.  You say the puts are expensive?
So you don’t want to pay for the safety that you say you want.
You can't have the best of both worlds.  Protection comes with a
price tag – the price of the protective puts.  You can choose the
deductible (strike price), but you have to measure the potential
pain vs. gain.

The Cost Of Insurance
If you bought the December $40 puts, it would cost you about
$6.50.  With about seven months left to December expiration, that
would mean the protection would cost about $.93 per month with a
$4.32 deductible (the difference between the current $44.32 stock
price and the short $40 put strike price).  True, it’s a little
pricey, but you would be protected for seven months and your
upside profit potential would be unlimited.  However, when you buy
insurance, if you have a pre-existing condition, the rates are
adjusted accordingly.

Another Option
EYET (at this writing) is trading at $44.32
Here’s the PUT option chain for EYET:
Month        Strike     Bid         Ask
Sept           25        .70        .95
Sept           30       1.60       1.85
Sept           35       2.80       3.20
Sept           40       4.50       4,90
Sept           45       7.20       7.70
Dec.           25       1.15       1.40
Dec.           30       2.10       2.50
Dec.           35       3.60       4.00
Dec.           40       6.00       6.50
Dec.           45       8.30       8.80

Here's an idea -- hypothetical of course.
1.  Sell the stock and take your profits. (You knew I was going to
say that, didn’t you?)
2.  Establish a bull put spread program.  Begin by selling the
Sept. $45 put and buy the Sept. $25 put for a credit of $6.35 (you
may be able to negotiate a slightly higher premium by shaving a
little from each bid/ask).

What Has This Accomplished?
a) you locked in your profits on the stock, and;
b) if EYET continues up, you will have pocketed another $5.45 of
profit.  If it goes down, then the worst that can happen is that
you buy shares of EYET for a discount net cost of $38.65.  Since
you want to own EYET for the long term anyway, this could be
viewed as a very attractive entry price. With the proceeds of the
sale of the stock, you should easily have funds/securities in your
account to handle the maintenance requirement.

September or December Options?
If you look at the above option chain, you’ll see that the
December $45/$25 bull put spread would bring in about $6.90 in
premium.  The same spread for September brings in $6.35.  You
would get an extra $.55.  But, that’s not much for three months of
time.  It’s best to stay with the September $45/$25 spread.  Then,
in September, you can establish a new bull put spread position
with the same, or different, strike prices – depending on where
EYET is trading at the time.

What If . . .
What if EYET close at $55 by September expiration?  The entire
bull put spread will expire worthless and you will have profited
by the $6.35 you took in as premium.  You may not have profited
the full $10.68, but you sacrificed none of your profits (no
deductible) when you sold the stock. Note that the result is the
same if EYET closes at $45.10.  In this case, you still keep the
$6.35 although the stock appreciated by less than $1.00.

What if EYET closes at $41 at September expiration?  If no
adjustments are made to the position prior to expiration, you
would be assigned the shares of EYET at $45.  Your actual cost
bases on these new shares is only $38.65.

In Summary
You want to participate in future upward movement of the stock,
but you want to preserve your current profits.  By using the bull
put spread as described above, you put yourself in a position to
profit – even if the stock goes up, stays the same, or even goes
down a little.  A solution that makes everyone happy -- it’s a
beautiful thing . . .

June Position #1 – SPX Iron Condor – 1116.64
We sold 5 SPX June 1150 calls and bought 5 SPX June 1170 calls for
a credit of $1.20 (x 5 contracts = $600).  Then we sold 7 SPX June
1025 puts and bought 7 SPX June 1010 puts for a credit: $1.00 (x 7
contracts = $700).  Our total net credit is $1,300.  Maintenance:
$10,500.  Maximum profit range of 1025 to 1150.  Potential profit
is $1,300.

June Position #2 – BBH Iron Condor - $147.64
We sold 10 BBH $155 calls and bought 10 BBH $165 calls for a
credit of $.70 (x 10 contracts = $700).  Then we sold 10 BBH $135
puts and bought 10 BBH $125 puts for a credit: $.90 (x 10
contracts = $900). Our total net credit is $1,550.  Maintenance:
$10,000.  Maximum profit range of $135 to $155.  Potential profit:

June Position #3 – RUT – Iron Condor – 562.44
We sold 10 RUT 590 calls and bought 10 RUT 600 calls for a credit
of $.80 (x 10 contracts = $800).  Then, we sold 10 RUT 490 puts
and bought 10 RUT 480 puts for a credit: $1.00 (x 10 contracts =
$1,000).  Our total net credit is $1,800.  Maintenance $10,000.
Maximum profit range of 490 to 590.  Potential profit: $1,800.

June Position #4 – MNX – Iron Condor - $144.52
Sold 10 MNX 147.50 calls and bought 10 MNX 152.50 calls for a
credit: $.70 (x 10 contracts = $700).  Then sold 10 MNX $132.50
puts and bought 10 MNX $127.50 puts for a credit: $.60 (x 10
contracts = $600).  Our total net credit of $1,300.  Maintenance:
$10,000.  Maximum profit range of $132.50 to $147.50.  Profit
potential: $1,300.

QQQ ITM Strangle – Ongoing Long Term -- $35.98
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts
of the 2005 QQQ $29 calls for a total debit of $14,300.   We make
money by selling near term puts and calls every month.  Here’s
what we’ve done so far:
Oct. $33 puts and Oct. $34 calls – credit of $1,900. Nov. $34 puts
and calls – credit of $1,150. Dec. $34 puts and calls – credit of
$1,500.  Jan. $34 puts and calls – credit of $850.  Feb. $34 calls
and $36 puts – credit of $750. Mar. $34 calls and $37 puts –
credit of $1,150. Apr. $34 calls and $37 puts – credit of $750.
May $34 calls and $37 puts – credit of $800.
We rolled out the May $34 calls to the June $34 calls for a credit
of $.60 and then the May $37 puts to the June $37 puts for credit
of $.15.  The total net credit was $.75 ($750).  Our new total
credit: $9,600.

Note:  We haven’t included the proceeds from this long term QQQ
ITM Strangle in our profit calculations.  It’s a bonus!  And it’s
a great cash flow generating strategy.

ZERO-PLUS Strategy.  OEX – 543.92
In my Feb. 8th column, I outlined a strategy based on an initial
investment of $100,000.  $74,000 was spent on zero coupon bonds
maturing in seven years at a value of $100,000.  The principal
$100,000 investment is guaranteed.  We’re trading the remaining
$26,000 to generate a “risk free” return on the original
Our current position:  We own 3 OEX December 2006 540 calls @ $81
(x 300 = $24,300).  Our cash position as of May expiration is
$4,390 plus unused $1,700 = $6,090.

June Zero Plus Positions.
A June OEX bull put spread 515/505, taking in a credit of $1.15 x
5 contracts = $575.  We also sold the June 560 call taking in a
credit of $1.20 x 5 contracts = $600.  If all goes well, we’ll be
able to add an additional $1,175 to our cash position at June

OSX Calendar Spread Plus - $97.37
Originally bought 10 OSX June $115 calls and sold 10 OSX April
$115 calls at a cost of $2.15 ($2,150). We also put on an April
$100/$90 bull put spread and took in an extra $.70 ($700) to
reduce the cost basis to $1.45 ($1,450). We rolled out our April
$115 call and took in $1.20 - further reducing our cost basis to
$.20. Then, aggressive traders (which we are in this strategy) put
on the May $100/$90 bull put spread and took in $.95. So, we were
a “plus” $.75 ($750).

The May $115 call expired worthless.  For June, on Thursday, we
sold the June $105 call for $.70 against the June $115 call we
still own.  We closed our May bull put spread for a loss of $3.25
and rolled it out to the June $95/$85 bull put spread for a credit
of $2.25.  We had to trade 15 contracts of the bull put spread to
cover what we spent to close the May $100/$90 bull put spread.

We now have a positive $1.45 ($1450) -- $750 from before and
another $700 from selling the $105 June call.  We bought ourselves
another month for the OSX to behave.  We’re scrambling and I’ll be
glad to be out of this damn trade with my butt still attached.
That’ll teach me to try something directional.  Never fear, we
shall persevere.

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have
questions about our educational plays or our strategies?  To find
past CPTI (Mike Parnos) articles, first look under “Education” on
the OI home page and click on “Traders Corner.”  For more recent
columns, you can look under “Strategies” and click on
“Combinations.”  They’re waiting for you 24/7.

Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it’s not the cards we’re dealt. It’s how we
play them. Your questions and comments are always welcome.
Mike Parnos
CPTI Master Strategist and HCP

Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the
numbers represented here may have been achieved or beaten by our
readers, we make no representation that any individual investor
achieved these exact results. The tracking for the plays listed in
this section uses closing prices for the day the newsletter is
published and it is not meant to imply that any reader actually
received those prices or participated in these recommendations.
The portfolio represented here is hypothetical and for investment
education purposes only. It is only an illustration of what type
of gains a knowledgeable investor might receive utilizing these


Triangle patterns and price objectives
By Leigh Stevens

As some of the indexes appeared to hit bottoms in mid-May and
trended higher, there were some "triangle" patterns that formed
on hourly charts. As prices broke out above the top of these
triangles it could be anticipated not only that there would be a
good-sized move higher but also what might be some price
objectives for the resulting moves.

These patterns accompanied classic signs of an oversold condition
in terms of high bearish sentiment and lots of put activity, plus
low readings on indicators like RSI and Stochastics.

A frequent continuation (the prior trend continues after it
completes) pattern is the triangle. A triangle formation is
generally bullish in an uptrend and bearish in a downtrend.
However, sometimes it is neither and simply shows that buying and
selling has gotten in balance, causing a pattern of descending
highs and ascending lows, with resulting up and down trendlines
making a more or less symmetrical triangle such as is outlined
below on the hourly chart of the Dow 30 (INDU) -

The triangle forms most often as a pause in an up or down move
and when prices start going sideways.  A series of minor upswings
and minor downswings trace out two trendlines the angles of which
form a triangular pattern and these lines come together or
converge over time.

Each of the two opposing sides of the triangle should consist of
at least 2-3 points made by highs and lows, the same as for any
valid trendline.  The shape of the trendline can vary but common
to all types is that after prices get close (within 20-30%) of
where the lines would touch, prices make a move or breakout above
or below the top most of bottom most line.

The third "side" of the triangle is assumed as the vertical
distance between the initial high and low after which the sloping
trendlines begin to form from the various highs and lows.  This
3rd. line, closing the triangle, is imagined but not usually
drawn. In the above chart it is the wider vertical line
connecting the upper and lower trendlines.

There are variations in the SHAPES of the triangles, within the
context of all being 3-sided figures of course.  The ones that
have formed in some of the hourly Index charts are symmetrical
patterns as the two opposing angles have approximately the same
slope and are the most commonly seen triangle shape.

There is a measuring implication for where prices might go after
breaking out of the triangle: the height of the vertical line
often equals a minimum distance that will be covered as measured
from the apex of the triangle - that is, from the point where the
two lines converge.

Oh yes, there is a better "definition" given for the down-sloping
line (more highs to use), if we look back to early-May,
when prices started falling, as seen in the hourly Dow chart
below that encompasses a full month.  We draw the vertical line
"A" after the first low is made and that is only known later on
as further lows are made.

The implication that I am working with here is that this current
rally is capable of reaching 10,325 at a minimum based on what
often happens when there is breakout move from a triangle like
the one shown above.  While the rally can go higher of course, or
the rally may fail shy of this target, a target based on the
triangle it gives an idea of a possible price projection once
there was an initial rally above the converging lines.

In the Nasdaq Composite (COMP) chart below, a "minimum" price
upside has already been met based on a measuring objective that
is assumed from the triangle pattern outlined on its hourly chart
below -

The objective implied by the distance between the two sloping
lines added to the point where the lines converge (the apex) is
noted by the dashed horizontal line extending out from the top of
vertical line "B".  As with the case of the Dow chart I started
with, distance "B" is equal to distance "A".  This is not to
assume that the rally won't carry still higher but it may also be
the limit of the up swing for now.

Some other factors can also be looked at here - the RSI (length:
21) indicator is trending lower while prices go sideways and is a
bearish price/oscillator divergence.  The 2000 area will tend to
be a "natural" area of resistance based on it being an even 1000
increment. In technical analysis I emphasize looking at as many
other key factors as possible, besides any given one.

NOTE: My down-sloping trendline on the COMP hourly chart above
goes through a couple of the hourly bars near the end of that
trendline - an example of an "internal" trendline connected
through the most number of highs (or lows), rather than only at
the extreme ends of bar or candlestick lines.  The bars that pop
through a trendline are common where prices shoot up (or down) in
the first hour or two of trading before settling back to within
the dominant trendline.

An internal trendline that connects the MOST number of points is
also what I sometimes also call a "best fit" trendline. Going to
show that trendline construction is a bit of an art, certainly
not just science at least in the way that I find most useful.

I learned the internal trendline term and technique from
technical analyst and author Jack Schwager (Market Wizards) who
used to say about trendlines, that he "didn't believe in
trendlines, but did use 'internal trendlines' which do 'work' in
defining support & resistance".

Not surprisingly, the S&P 500 (SPX) has a similar triangle
pattern on its hourly chart as the Dow -

The upside objective implied by the prior triangle pattern is to
1132 in SPX.  Since prices did break out above the line of prior
hourly highs I would anticipate some further upside follow
through, so take 1132 as a reasonable objective here.

The S&P 100 (OEX) -

A possible objective here, based on the triangle measuring rule
of thumb, is to around 554.  Time will tell on that.  But, again,
given that OEX broke out above a cluster of prior hourly highs,
554 is a reasonable target for an extension of this rally.

However, if prices now start trading under those prior hourly
highs at 546-547 I might exit OEX call positions if I had them -
as an inability of prices to hold above prior highs would not be
suggesting that the rally has the staying power to reach the
implied 554 objective.

Assuming I bought OEX calls when the Index achieved a decisive
upside penetration of the down trendline or top of the triangle
(e.g., at 538) I would still have a profitable trade.  Absent an
hourly close under 546, I would take as an objective 554.  If
this level is reached and the market was still very strong, I
might sell half my position at least.  I often find that targets
implied by triangles achieve much of at least the first move in a
new or renewed trend.

Good Trading Success! using triangles


Setting The Stage
by Mark Phillips

As we've been discussing recently, the Housing sector appears
ready for a major fall, but given the incredible resilience of the
bulls in this area of the market over the past year, if we're
going to try to ride the group down, we need to do so with an
abundance of preparation and caution.  As we discussed last week,
when the tipping point occurs, it is not likely to be accompanied
by weakness in the fundamentals of the stocks in the sector due to
the fact that they all normally appear cheap by traditional
valuation metrics.

That means that if we're going to attempt a longer-term bearish
play in the Housing sector, we'll have to justify it based on the
technical picture.  Last week, I laid out my own personal
speculation of why and when it will make sense to look for the
ripe technical setup, based on the way I expect the sector to
perform AFTER the Fed begins the next rate hike cycle.  But that
is really just informed speculation, where I'm looking for the
herd mentality to create a certain flow of capital for the next
SEVERAL months after rates begin to rise.

That first several months is just the setup that gives us what
could be a very profitable move in some of these housing stocks as
demand dries up in a hurry.  Make no mistake --- The Housing
market IS a bubble right now and it has been driven the most
strongly by Easy Al's monetary policy, which (in the larger view)
has created an immense edifice of debt (which I affectionately
call the debt bubble).  Rising interest rates are not going to be
kind to either the multi-year bullish trend in real-estate (and
concomitantly the rise in the price of the Housing stocks) or the
holders of all that debt.  The problem will be compounded if
they've been foolish enough to listen to Mr. Greenspan and take on
variable rate loans that have nowhere to go but up.

Alright, enough of the background.  Let's start going through the
process of analysis, so we all know what to look for and what
filters to apply when it is time to act.  We should all be
familiar with the framework of the technical setup that will
precede actually taking a position in the sector, looking to
capture that major move.  First off, we'll want to see the overall
Housing sector weakening relative to the broad market and then
we'll look to pick off one or two of the weakest stocks in the

The typical tools we'll be using are relative strength charts
between the Dow Jones Home Builders index ($DJUSHB) and the S&P
500 ($SPX), both on candle charts, as well as Point & Figure (PnF)
charts.  Then once we've identified the desired relative weakness,
we'll turn our attention to some of the stocks in the sector,
cherry-picking the weaklings, using the same relative strength
studies.  Finally, once we've identified the most favorable
targets, we'll start looking for favorable entry points that also
afford us desirable risk-reward ratios on the order of 1:2, 1:3 or
even greater.  So let's get started!

First off, we'll start with a Relative Strength (RS) chart of the
$DJUSHB index relative to the $SPX, from which it should be
crystal clear that we're still early to the game.

Weekly RS Chart of $DJUSHB vs. $SPX

The 2-1/2 year rising channel shown on the chart above is a clear
demonstration of the way Housing has been outperforming the broad
market for quite some time.  That channel actually began back in
mid-2000, making it a 4-year bullish trend.  Obviously, we'll need
to be very careful about stepping in front of that behemoth!
You'll note that I've shown the potential for bearish Stochastics
divergence on the RS chart above (blue).  I believe this is a case
of looking too hard to see it.  More importantly, even when it
does set up with clean bearish divergence in the midst of a
bullish trend, note that price doesn't react very much.  I've
highlighted two prior instances (red) where there was clear
bearish divergence on the weekly RS chart, yet price action didn't
go very far and certainly not far enough to violate the dominant
bullish trend.

The next step is to look at the same RS chart, but in a PnF
format.  The standard 1-point box size has offered several Sell
signals over the past couple years, none of which has gone very
far.  So in order to filter out those spurious signals, I modified
the scale to a 1.5-point box size, shown below.  Note that there
hasn't been a single Sell signal since the bullish romp commenced
in early 2001.

Point & Figure RS Chart of $DJUSHB vs. $SPX

Now before you accuse me of just picking the scale that fits the
point I want to make, let me admit that is true, up to a point.
You see, we are going to be monitoring the PnF RS chart for a Sell
signal as one of the necessary triggers to start looking for a
trade entry.  If we've got a scale that has provided several false
Sell signals in the past, then how will we know when we get a new
Sell signal that we can believe it?  What I've done here is set
the threshold of our box size just large enough to filter out
those false signals, while still maintaining enough sensitivity to
make sure we get a timely Sell signal.  Make sense?

One quick comment about scaling.  You'll note that the correlation
between the scale in our first chart and the scale in the PnF RS
chart is a multiple of 100.  Stockcharts.com conveniently turns
the RS chart into a percentage scale.  More importantly, what's
the significance of the actual numbers?  There is no significance,
at least as it pertains to our study here.  We can for all intents
and purposes ignore the numbers except to use them as place
holders or reference points.

Now that we can see in the above charts that both views
demonstrate a strongly bullish trend of the $DJUSHB relative to
the broad market ($SPX), we should be looking for the point at
which we would have the first indication of the trend weakening
and then perhaps turning bearish.  The most obvious would be a
breakdown out of the channel shown on the candle chart, with
resistance then manifesting itself at the bottom of the channel,
which has for the past several years served as support.  Ideally,
that would mean a break below roughly the 0.4700 horizontal
support shown below.

Weekly RS Chart of $DJUSHB vs. $SPX - Sign of Weakness

Now take a look up at the PnF chart again.  I'm sorry, but I
didn't have time to annotate it with the key points.  But notice
that it would take a print at the 46.50 box in order to generate a
Sell signal, the first one in at least 3 years.  To me, that lines
up very nicely with the requisite break of the 0.4700 level on the
candle chart just above.

What we've done here is defined certain things that must happen
before we can ever set the wheels in motion to play the downside
in the Housing sector with a longer-term view.  Of course, we must
understand that these charts will not stand still in the months
immediately before us.  The trigger points may change, but the
basic theme is still the same, we need the charts to tell us
unequivocally that the $DJUSHB is losing strength relative to the

Obviously, there's a lot more work to be done, but I'm going to
force you to think it through a bit and leave things hanging right
here.  What do YOU think is the next step?  Do we have more
research/analysis to do on the sector?  Or is it time to start
stacking up the individual Housing stocks against one another?
It's not a trick question -- it's just a challenge for those of
you with the inclination to try and figure it out for yourself.
If you'd rather have me spell it out, I'm more than willing to do
so, but we'll have to save that part of the discussion until next

Have a great weekend!



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