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Daily Newsletter, Wednesday, 06/09/2004

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The Option Investor Newsletter                Wednesday 06-09-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Stocks Slide Into Reverse
Futures Wrap: See Note
Index Trader Wrap: Think fast, act slowly, and prepare for VOLATILITY!!!
Traders Corner: The Action Point Draws Near


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     06-09-2004            High     Low     Volume Advance/Decline
DJIA    10368.44 - 64.08 10431.32 10364.96 1.58 bln    681/2099
NASDAQ   1990.61 - 32.92  2019.22  1989.99 1.50 bln    795/2213
S&P 100   552.30 -  4.44   556.74   552.19   Totals   1476/4312
S&P 500  1131.33 - 10.85  1142.18  1114.76
RUS 2000  568.58 -  9.33   578.12   568.50
DJ TRANS 3028.23 - 44.17  3071.74  3027.69
VIX        15.39 +  0.38    15.46    14.56
VXO        14.57 +  0.82    14.82    14.26
VXN        22.35 +  0.09    22.52    22.08
Total Volume 3,438M
Total UpVol    648M
Total DnVol  2,740M
52wk Highs     167
52wk Lows       70
TRIN          1.46
PUT/CALL      0.92
*******************************************************************

Stocks Slide Into Reverse
by James Brown

After three days of gains in the stock market investors decided
to take some money off the table.  Wednesday's decline was very
widespread affecting every stock and sector specific index.  Wall
Street doesn't seem happy unless it has something to worry about
and today it fell back to its old favorite - interest rates.  It
is no longer a matter of if and when the FOMC will raise rates
but a matter of how much and how fast.  Everyone knew rates were
going higher from their 40-year lows but now there are concerns
that the Fed may hike them faster than previously expected to
combat any perceived rise in inflation.

The concerns over inflation sent the bond market lower, which in
turn sent yields higher and that affects mortgage rates.  This
was not lost on the homebuilders who fell sharply for the second
day in a row.  Tech stocks also took a beating as traders worried
that higher rates would impact corporate profits.  The
semiconductor sector took the brunt of the selling with a 3.24%
decline after failing at resistance for the second time in two
weeks.  Networking, Internets, software and disk drives were all
down close to 2% or more on the session.

Chart of the SOX semiconductor index:



Market pundits were blaming Greenspan's comments yesterday for
the rise in the U.S. dollar today.  That sent gold futures
slipping.  Gold finally settled at $384.50 an ounce, down $6.50
on the session.  Gold stocks followed suit with a 5.02% loss in
the XAU index and a 4.9% loss in the GOX index.  Metals in
general were weaker and copper futures melted for a 5.77% loss
that broke through support at $1.20 and closed at $1.166 per
pound.

Wall Street was eagerly anticipating the May Producer Price Index
(PPI) gauge on inflation.  The PPI was originally scheduled to
release on Friday but was moved to Thursday afternoon due to
Reagan's funeral and the market's closure on Friday.  Yet as of
this afternoon the PPI has been delayed.  If you visit the U.S.
Department of Labor's website (Bureau of Labor Statistics) you'll
see their notice that says the May PPI has been postponed "until
further notice".  This isn't new.  The January, February and
March PPI's were all delayed due to new challenges converting
data under a new classification system.  It is expected to be
released sometime next week but not before Tuesday and they will
announce it a day ahead before the data is released but don't be
surprised if they push the announcement back again.  As of today
economists are expecting the PPI to rise 0.5% in May on top of
April's 0.7% climb.

Crude oil prices remained in the spotlight as world leaders
discuss rising energy costs and its affects on the global economy
at the G8 summit going on in Georgia this week.  Crude oil
futures initially fell this morning to new six-week lows but
rebounded to close up 26 cents at $37.54 a barrel.  News out this
afternoon from the Department of Energy showed a rise in oil
reserves and analysts are pointing to this and other factors
suggesting the peak is behind us for oil prices.  News that the
U.S. strategic oil reserve would be full again in July or August
should cool speculation since demand would slow down a bit.

Speaking of slowing down the U.S. markets were not the only ones
to cool off a bit today.  The Japanese NIKKEI slipped 72 points
to 11,449 while the Hang Seng inched down 4 points to 12,339.
European stocks also traded lower.  The English FTSE dropped 15
points to close under the 4500 level.  The German DAX declined 21
points to breakdown down under the 4000 level.  The French CAC
slid almost 25 points to breakdown under the 3700 level.  It
looks like a "let's break support" party.  Of course the NASDAQ
was invited and showed up with a 33-point drop to close under the
2000 level again.  The Dow Industrials dropped 64 points to close
at 10,368 and the S&P 500 lost almost 11 points to close at 1131.

Overall market internals in the U.S. exchanges were negative.
Wednesday's action was almost a bearish mirror to Monday's gains.
Declining stocks outnumbered advancers 3-to-1 on the NYSE and the
NASDAQ.  Down volume overshadowed up volume by more than 3-to-1
on the NYSE and by more than 4-to-1 on the NASDAQ.  Overall
volume came in just above 3 billion shares on both exchanges.

Chart of the Dow Jones Industrials:



Chart of the NASDAQ Composite:



Chart of the S&P 500 Index:



It is easy to point fingers at the semiconductor sector for
today's declines.  The SOX did lead the way down and there were
plenty of headlines to help it along.  First and foremost was
OmniVision Technologies (OVTI).  This specialty chipmaker not
only issued an earnings warning for the current quarter but also
said it would delay some of its filings because management was
mulling over potential restatements for 2004 and 2003.  Shares
gapped lower and fell more than 30% to $17.63.  If that wasn't
enough Goldman Sachs decided to jump in and downgrade two foundry
stocks, Taiwan Semiconductor (TSM) and United Microelectronics
(UMC).  GS lowered its rating on the two from "out perform" to
"in line".  TSM is the largest semiconductor foundry on the
planet so this undermined confidence in the whole group.  TSM
slipped 4.3% to $9.24 while UMC fell 4.6% to $4.48.  Advanced
Micro Devices (AMD) tried to issue some good news by announcing
that Lenovo Group, a Chinese PC maker, had chosen AMD's Athlon 64
and Athlon XP chips to make their PCs with but traders weren't
listening.  Shares of AMD fell 4.14% and painted an ominous
bearish engulfing candlestick.

There was plenty of action among the Dow-components as well.
Boeing (BA) continued its winning ways and hit another new two-
year high after Lehman Brothers upgraded the stock to
"overweight".  Meanwhile Coca-Cola (KO) proved to be a drag on
the Dow with a 1.6% decline after announcing its No 2 executive,
Steven Heyer, was leaving.  Heyer is KO's president and COO but
after being passed up for the CEO's job many believed he would
leave for other opportunities.  Last but not least were the
telecoms SBC Communications (SBC) and Verizon (VZ).  Both stocks
traded higher today after the U.S. Justice Department announced
that it would not seek to reverse an appeals court ruling that
threw out the FCC's directive to force local telephone companies
to lease their networks to competitors at low rates.  Whew!
That's a mouthful.  In essence SBC and VZ will not have to share
their landlines with the competition.

Retail stocks are expected to see some action tomorrow as
investors speculate on more M&A activity in the group.  After the
bell this evening Target (TGT) announced it was selling its
Marshall Field's stores and nine of its Mervyn's stores to May
Department Stores (MAY).  TGT had been under pressure to sell off
some of its under performing department stores so it can focus on
its discount chain and better compete with larger rival Wal-Mart
(WMT).  The deal with MAY is worth $3.2 billion.  TGT also
announced it would spend $3 billion to buy back stock over the
next two to three years.

Looking ahead to tomorrow I am not expecting much.  Let me
rephrase that.  I'm not expecting much from the bulls.  Investors
are still a little nervous about any potential terrorist event
with the G8 Summit finishing tomorrow and the Reagan funeral on
Friday.  It's become normal for the markets to turn cautious
ahead of any long weekend but if the weekend is quiet we can look
for a relief rally on Monday.  Tomorrow does bring a few small
economic reports with the import/export data and the weekly
initial jobless claims.  Next week is options expiration so we
could see some volatility as traders adjust positions ahead of
Friday.  Overall investor's seem to be focusing on the June 30th
FOMC meeting and the Iraq handover.  There doesn't seem to be a
lot of impetus to buy stocks before these events.  Fortunately,
the latter could take on more of positive influence for stocks
now that the U.N. Security Council just approved the latest
resolution on Iraq's changeover.


************
FUTURES WRAP
************

Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.
http://www.OptionInvestor.com/indexes/futureswrap.asp


********************
INDEX TRADER SUMMARY
********************

Think fast, act slowly, and prepare for VOLATILITY!!!

In my opinion, if I wasn't at least alert to some type of option
expiration-related activity heading into next week's option
expiration, today's final close would have left me scratching my
head, as there were a couple of things that took place in today's
trade that simply don't make sense.

I agree with those traders that thought today's Market Volatility
Index (VIX.X) 15.39 +2.53% rise was modest considering some of
today's action.  Even more suspicious is the NASDAQ 100
Volatility Index (VXN.X) 22.35 +0.4% fractional rise, especially
when we consider the Semiconductor Index (SOX.X) 473.53 -3.24%
was smacked for a 16-point decline, as it falls to the June "Max
Pain" theory value of 475 well ahead of next week's Triple Witch
expiration.

Before we start looking at some of today's charting action, lets
quickly cover some of the internals, where today's trade does
have one of out shorter-term breadth indicators suggesting some
lack of near-term bullish leadership.

Market Snapshot / Internals - 06/09/04 Close



Four points as it relates to PRICE action.  By the close, the
SOX.X did slip below its WEEKLY Pivot and June "Max Pain" of 475.
By the close the Dow Industrials (INDU) 10,368.44 -0.61%
eventually gave up their DAILY S1 (10,379.63 from last night
Index Wrap) by just more than 10-points (I like to give the INDU
10-point either side due to its larger index value).  Now comes
the confusing part.... Two comments were made on the higher 10-
year yield ($TNX.X) trade today.  One was that some Treasury bond
traders sold bonds in disgust, when it was announced that the
Producer Price Index (PPI) report for May was going to be delayed
until June 15 or later.  A second comment was that the selling
was a "fear" response from the bond market toward inflation.

I would tend to think today's Treasury selling was a disgust
among traders as the Commodity Index ($CRB : cr00y) is back lower
at 270.00, where the decline in oil and commodities in general
would not be adding much confirmation to the "inflation" trade
today.

Moving on... while we wouldn't expect a great expansion of new
highs with a 1.18% decline at the NYSE and a 1.63% decline at the
NASDAQ, the 10-day NH/NL breadth advance is notably smaller than
what we have been seeing.

This has me making some notes/observation, with a focus on the
NASDAQ NH/NL 5-day and 10-day readings.

NYSE and NASDAQ NH/NL Breadth - 05/04/04-06/09/04



I've flagged today's trade with "Expiration Trick" where I think
we got some of the option expiration-related trade we discussed
in last night's wrap.  Two things I'm noting today.  Today's
trade would have the NASDAQ's shorter-term NH/NL 5-day Average
ratio (column AI) edging below its 10-day NH/NL Average ratio
(column AJ).  I'm also noting that on June 2 (row 349 and BLACK
underlined) the 5-day NH/NL average ratio looks to have made a
near-term inflection point high.  See how yesterday's NSDQ NH/NL
5-day Average ratio came juuuuuust shy at 74.6%, and now moves
below its 10-day?  Notable considering today's reversal.

I also find it observable that when Barton Biggs did a pretty
good job of finding an inflection point low with his "Market is
most oversold I've seen in 20 years!" (05/12/04 Index Trader
Wrap) it was 5-days later when the NSDQ 5-day NH/NL ratio moved
above its 10-day NH/NL ratio after the NASDAQ 5-day ratios
achieved that 19.9% inflection point low.

NYSE NH/NL indications still in bull mode for now with 5-day
above 10-day, and no apparent inflection points, unless
yesterday's NYSE NH/NL 5-day Avg. (column AE) of 83.2% becomes
the short-term inflection points.

U.S. Market Watch - 06/09/04 Close



Not an equity sector in the green by the close.  In BLUE I mark
the "it doesn't make sense trade" between YIELD and the CRB
Index.  If there is ANY sign that today's trade was NOT option
expiration manipulated, I'd have to say it was the NASDAQ 100
Volatility Index (VIX.X) 22.35 +0.4%, and I'll discuss the "why
this may be," as it serves as a VERY GOOD reason to actually
EXPECT VOLATILITY!!!!!!

Here's a quick look at the Pivot Matrix, and if there's ever a
time when a trader may need to be disciplined, then the week
heading into a Triple Witch is the time.  Remember, these option
market makers can be a tricky bunch.

Pivot Matrix -



Look at those DAILY R2 and MONTHLY R1 correlations.  Consider
those to be "in play" for tomorrow.  I mean it!

OEX Daily S1 and its WEEKLY S1 is the main correlative support
into tomorrows trade.  Get that one in your head when looking at
the SOX.X DAILY S1.  Here's why.....

Semiconductor Index (SOX.X) Chart - 10-minute intervals



OK.... so the SOX.X likes its WEEKLY Pivot and June "Max Pain" of
475.  Now... look at where I've marked tomorrow's DAILY S1
(correlates with the WEEKLY 61.8% retracement at 468.58 and is
the lower end of a zone of support).

In black text, I explain the possible scenario of how DAILY R2
could easily become in play.  On an intra-day basis, we might
also try and understand how the SOX.X traded on a sudden gap
higher back on June 4th, then went on to test its downward trend
into Monday and yesterday's closes.

So.... going into tomorrow's trade, begin to think that SOX.X is
still the weakest index in our WEEKLY pivot matrix, and if
weakness is going to lead lower, then DAILY S1 for the SOX.X is a
support level until broken back lower.

Now... look at these two option chains for the Semiconductor
Index (SOX.X) 473.53 -3.24% (closed Tuesday at 489) and the
Semiconductor HOLDRs (AMEX:SMH) $37.57 -2.94% (closed Tuesday at
$38.71).

SOX.X and SMH Option Chains - 06/09/04 most actives



How can anyone be so fortunate to get nearly a 100% gain in one
day's option trade?  One way is to be able to manipulate things
in your favor, where the predetermined outcome was planned the
prior day, then implement that manipulation.  I'm thinking the
traders that BOUGHT the SMH June $37.50 puts at $0.35 and SOLD
the July $37.50 calls at the open of trade, may have had a pretty
good idea of where the SOX/SMH was headed today.

Now... what would YOU do with a 100% gain, if you had it at
tonight's close?

If you even thought... Close it and take the profits and run!
Then you begin to understand the potential for VOLATILITY and the
potential for DAILY R2 if what was put on today, comes unraveled
tomorrow.  Where might a trader have some profit stops on such a
wonderful trade from this morning's open?  I didn't mark it, but
I'm thinking just above DAILY Pivot and/or WEEKLY Pivot as a
starting point.

Aren't you at least a LITTLE bit curious/suspicious as to why the
NASDAQ-100 Volatility Index (VXN.X) 22.35 +0.4% was little budged
today?  I am.... so be alert for VALATILITY.

OK... so now we make note of SOX.X support into tomorrow trade.

Here we go with the S&P 100 Index....  If the SOX.X can gravitate
toward its June "Max Pain" then the OEX may want to do the same,
but to do so, I think the SOX.X would have to still show some
weakness.

S&P 100 Index (OEX.X) - 10-minute intervals



Very similar intra-day trade in the OEX as just reviewed in the
SOX.X intra-day chart.  I've marked two "hot spots" on the OEX
that show trade where after the OEX moved above a yellow zone,
the dip into the zone got bought faster than you can pull your
hand of a hot stove burner.  If it happened once, be prepared for
it to happen again.

The intra-day chart of the OEX also looks like there are still
quite a few "trend traders" around this summer as the OEX got a
little pop on the retest of broken downward trend.  That's right
as the SOX.X traded its WEEKLY Pivot of 475 at 02:00 PM EDT.

NASDAQ-100 Tracker (QQQ) - 10-minute Intervals



Sticking with the 10-minute interval chart, traders can be
observing price action against the moving averages too.  For the
QQQ I do make note of a "volume spike" that came on some strength
after the 02:00 PM intra-day low, just after the QQQ can dipped
below its WEEKLY R1.  Right now, I'd consider that a "sell, or
short strength" back in the zone after a violation of WEEKLY R1.

If this is incorrect analysis, then we may well be alert for
STRENGTH back above that level.  If the VXN.X implodes lower,
then MONTHLY R1, here you come, if option expiration trade
unravels back the other direction!

Dow Industrials (INDU) Chart - 10-minute intervals



It wasn't until just prior to the close of today's trade that the
INDU finally "gave up" its DAILY S1.  I can't say the INDU traded
overly bearish, and if anything, traded pretty darned tough.  I
haven't looked at the DIA option chain, but my general feel is
that the INDU would be less likely to be "manipulated" into
expiration.

Jeff Bailey


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**************
TRADERS CORNER
**************

The Action Point Draws Near
by Mark Phillips
mphillips@OptionInvestor.com

Our discussion over the past couple weeks has centered on putting
together an action plan for playing the downside in the Housing
sector once the Fed begins to tighten monetary policy later this
year.  The comments from the Fed earlier this week have certainly
clarified the picture significantly and we're looking for a 25
basis point rate hike at the end of this month and quite possibly
another one in August.  As we've discussed, that first rate hike
will be the firing of the starter's pistol that starts the whole
chain of events we've been discussing.  If you've missed that part
of the discussion, here are links to the past two weeks' articles.

Look Before You LEAP
http://www.OptionInvestor.com/traderscorner/tc_052704_1.asp

Setting The Stage
http://www.OptionInvestor.com/traderscorner/tc_060304_2.asp

Alright, we left off our discussion last week after pointing out
some key levels that need to be breached before we can begin to
consider that the Housing sector has turned south against the
broader market.  In short, we're looking for an objective manner
in which we can see the inflection point.  I'm not going to update
those charts this week, but I think it makes sense to update the
status.

After the heavy selling in the Housing sector over the past couple
sessions, we might expect to have seen that inflection point take
place already.  At a minimum, it is definitely worth a look.  Have
we seen the $DJUSHB/$SPX relative strength chart break its
ascending channel?  Not yet, although current 'price' is testing
the bottom of that channel.  But we also need to keep in mind that
the bottom of that channel is currently near the 0.5050 level, and
last week we identified key support off both the candle and PnF
charts in the 0.4650-0.4700 area.  Based on those observations and
the price action over the past week, I don't think we've seen that
inflection point yet.

That brings us to the question I posed at the end of last week's
column -- namely "What's next?"  For those of you that said the
next step was to start analyzing individual stocks in the sector,
I offer a hearty "Tsk, tsk!"  Think back over what we've looked at
so far and if we were to jump to individual equity analysis, we'd
be skipping a bit step.  We have taken a solid look at the
relative strength charts of the Housing sector, but we have not
yet looked at any charts of the actual $DJUSHB index on its own
merits.  Hopefully it is clear that this should be the next step
in the analysis process.  So let's go!

Weekly Chart of the $DJUSHB



Well from the standpoint of a major bearish play, that chart
certainly looks intriguing, don't you think?  Currently in the
latter stages of a potential H&S topping formation, there could be
some major downside in store if the pattern completes with a break
below the $530 level.  Needless to say, there's still some work to
be done before we'll see that happen, but we now know where to
focus our attention.

Next we want to look at the PnF chart for the $DJUSHB and see if
we can find any confirmation for our views.  Remember last week
when we played with the scaling of the PnF chart in order to
remove the smaller and spurious false bearish signals on the RS
PnF chart?  We need to do the same thing with the PnF chart of the
$DJUSHB as well.  With the large swings that have transpired over
the past several months, it is hard to gain a good overall view of
the big picture using the standard scaling.  But let's take a look
at it just for reference.

Point And Figure Chart of the $DJUSHB - Standard Scaling



As you can see on the chart above, the standard scaling (5-point
box size) works fine for trading the swings associated with the
daily chart.  But we're looking for a longer-term and larger move.
We've directed our studies at the appropriate sized move by
focusing on the weekly candle chart and it makes sense that we'll
need a larger box size on the PnF chart to provide the appropriate
correlation.  So let's try a few different settings and see what
we come up with.

Point And Figure Chart of the $DJUSHB - 10-Point Box Size



Well, it isn't perfect, but I think you can see that we're making
progress towards a clean view at the big picture PnF chart.
Clearly the $530 level is a major level of support, as it has
provided the impetus for rebounds on three separate occasions
since the start of the year.  Note that the bullish support line
is also right at that $530 level.  In this view, the $DJUSHB is
already on a Sell signal, with a downside target of $430.  The
character of this chart is complementary to our candle chart, but
I think we can get our levels to line up a bit better.  Also,
remember that one of the key advantages to picking the right
scaling for the PnF chart is that we can select the scaling in
such a way as to eliminate past false Sell signals so that when we
do get a new Sell signal on the chosen scale, we will have greater
confidence in its validity.  So let's increase our box size again
and see what we can learn.

Point And Figure Chart of the $DJUSHB - 15-Point Box Size



Alright, now we're getting somewhere!  With this scaling, we can
see that there has only been one Sell signal since the beginning
of 2003 and that was only by a single box.  Over the past several
months, we've seen the $DJUSHB come down and find support just in
time to prevent a print at that $525 level, which would generate a
new Sell signal.  It will require a trade at $525 to remove the
current bullish bias in this scale, creating a fresh Sell signal.
I think it is interesting that the bullish support line rests down
at $435, which is effectively the same as the current bearish
price target on the 10-point box size chart above.

Adding to the intrigue, let's do a bit of forward thinking on this
15-point box scale.  Should the $DJUSHB print $525, it will then
be in a column of O's on this chart, and doing a quick vertical
count off what that column would look like at the time, we see it
would be a column of 5 O's.  Five times $15 results in $75, which
we then multiply by two and subtract from the top of the column
($585) and we're presented with that $435 number again.  Pretty
interesting, don't you think?  Between the 10-point and 15-point
box sizes, we have 3 different points that tell us to look for a
downside move to the $430 area once the breakdown gets underway.
While I haven't highlighted it on the candle chart above
(primarily because it is most clear on the daily chart), the $430
area should be a significant level of support.

Despite all those different pieces of data all pointing to the
same price levels, I'm really not satisfied.  The issue that is
bothering me is that anomalous PnF Sell signal in January.  The
fact that we got a Sell signal there, but no downside follow-
through tells me that we still haven't found the proper scaling
for the long-term picture to correlate with our weekly candle
chart.  A bit more tweaking and I think I have found the correct
setting though.

Point And Figure Chart of the $DJUSHB - 20-point Box Size



I know it's an iterative process to get here, but it takes a lot
less time to do than it does to write about it.  This final scale
setting really seems to be the right one for what we're trying to
accomplish.  Not only does it remove the spurious Sell signal from
this past January, but this scale setting hasn't seen a single
Sell signal since the index began trading.  The long-term trend
has been up for the past 4 years and this particular setting for
scale shows that bullish trend as never having been interrupted.

Coming back to what we're trying to accomplish with this study and
analysis, we are trying to capitalize on the trend change when
this bullish trend comes to an end, tied directly to official
interest rate policy.  That's what makes this particular scale
setting so appealing.  Throughout the past 4 years, it has not
given a single false Sell signal, so when it does issue one in the
months ahead, we should have a high degree of confidence that it
is actionable.

Actually looking at the numbers on the chart, we can see that it
will take a trade at $520 to issue that first Sell signal, so one
could make the argument that we'll be a bit late to the game
compared to the bearish entry triggers that would be supplied by
the H&S breakdown ($530), but in the big picture view, I think
that is a fairly small price to pay.  Once we do get that trade at
$520, it will have the 20-point box size PnF chart on a Sell
signal, with a column of O's containing four boxes.  That gives us
the ability to do a downside target calculation.  Four boxes,
times $20 per box, gives $80.  Multiply by two and subtract from
the top of that (future) column of O's ($580) produces a downside
objective of $420.

I don't know about you, but I've found this study to be quite
useful.  Several different scale settings for our PnF chart have
given us a downside target zone in the $420-435 area.  The only
piece of the puzzle that doesn't quite fit is that the H&S target
on a break below $530 is to the $360 area.  That's a pretty
sizable discrepancy, so we are forced to wonder what might happen
to bring the potential PnF bearish price targets into alignment
with the H&S price target.

The answer lies in the fluid nature of PnF charts.  Remember that
a price target is not finalized until the column that generates
that target is completed by an opposing 3-box reversal.  What
would happen if the $DJUSHB fell to the $500 level before
rebounding into a 3-box reversal?  On the 20-point box chart, the
downside target would drop by $40 to $380.  One the 15-point box
chart, we would have the downside price target dropping to $405.
If price dropped to $495 before giving the 3-box reversal, the
target on the 20-point box chart would remain at $380, while the
target from the 15-point box chart would then fall to $375.  For
the adventurous student, I'll leave the forward projections on the
10-point box chart up to you.

So let's recap where we are.  We've defined what has to happen in
terms of the RS charts to give us a long-term bearish bias on the
overall Housing sector.  Then we turned our focus to the Housing
sector itself, defining what has to happen there in order for us
to have a bearish bias (break below the $520-530 area) and we've
also defined a couple of downside target areas.  Conservatively,
it looks like we'll be able to target a move down to the $420-435
area, while the aggressive approach will be to look for a more
protracted move down into the $360-380 zone.

In my opinion, we've now finished with the preliminary sector
analysis and have the framework of an action plan in place.  Next
up we need to start looking at the individual LEAP-able Housing
stocks and try to identify which ones have the most favorable
technical patterns and then lay out a preliminary plan of action.
We've done the really hard work already and next week we'll start
the process of hunting for individual victims.  It should be fun!

See you then!

Mark


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The Option Investor Newsletter                Wednesday 06-09-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: None
Dropped Calls: AET
Dropped Puts: None
Watch List: Another Mixed Bag of Candidates


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STOP-LOSS UPDATES
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None


*************
DROPPED CALLS
*************

Aetna Inc - AET - close: 84.15 change: -2.18 stop: 85.00

AET opened above the $86.00 level on Wednesday but fell sharply
in the morning hours as investors reacted to news that one of its
board of directors had left.  That director was David Yost, the
chairman and CEO of AmerisourceBergen (ABC).  He resigned from
the board at AET because he felt it would be inappropriate to
stay on as Aetna pursued its acquisition strategy.  AET is trying
to bolster its pharmacy benefit management (PBM) business and
this would compete with ABC's business.  Fortunately for us we
raised our stop loss to $85.00 yesterday.  Keep an eye on AET's
gap from last week. With the sudden drop today the stock might be
headed toward the $82.50 level to fill that gap.

Picked on May 30 at $ 81.20
Change since picked: + 2.95
Earnings Date      04/29/04 (confirmed)
Average Daily Volume:   1.5 million
Chart =



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************
DROPPED PUTS
************

None


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**********
Watch List
**********

Another Mixed Bag of Candidates

___________________________________________________________________

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.
___________________________________________________________________


ITT Industries - ITT - close: 82.44 change: -0.94

WHAT TO WATCH: Traders looking for bullish candidates can keep an
eye on ITT.  Shares of this conglomerate have been very strong
hitting new all-time highs as of this morning.  Look for a pull
back to the $81.00-81.50 region as the entry point to buy a
bounce.  Currently, ITT's P&F chart points to a $108 price
target.

Chart=


---

Phelps Dodge - PD - close: 66.18 change: -2.77

WHAT TO WATCH: There was a huge 5.6% drop in copper futures
today.  The move broke through several layers of support as
traders fled from metals on the back of a strong dollar.  This
lead to a 4% decline in PD, which broke down through its 40 and
200-dma's.  Noteworthy on PD's chart is its MACD indicator, which
is about to produce a new sell signal under the zero line.  We
would consider bearish positions on a breakdown under $65.00 with
a $60 price target.

Chart=


---

Best Buy Co - BBY - close: 53.63 change: +0.08

WHAT TO WATCH: Retail has been very strong lately with the RLX
retail index hitting new all-time highs yesterday.  The group was
overdue for some profit taking so today's 1.4% decline in the RLX
is not a surprise.  We're watching BBY for a potential breakout
over resistance at $55.00.  Such a move might give it a chance to
play catch up with some of its peers in the group, like its
smaller rival Circuit City (CC) who has rallied strongly over the
last two weeks.

Chart=


---

OSI Pharmaceuticals - OSIP - close: 68.71 change: -1.71

WHAT TO WATCH: We've been watching OSIP for a breakdown under
$70.00 and its recent post-gap higher lows near $67.50.  OSIP
broke through both levels this morning but managed a rebound in
the last two hours of trading.  Bears are hoping OSIP will "fill
the gap" even if it's a partial filling.  However, we're a little
bit nervous opening bearish plays because OSIP is already down 15
points from its highs two weeks ago.  Now shares are short-term
oversold and due for a bounce.  That doesn't mean its going to
get a bounce but nothing moves in a straight line for very long.
We'd watch OSIP for a move under today's low or a failed rally
under $74.00.

Chart=



-----------------------------------
RADAR SCREEN - more stocks to watch
-----------------------------------

IBM $90.09 +0.05 - Big blue managed to hold on to its gains this
week while its peers in the hardware sector succumbed to profit
taking today.

ESRX $78.59 -0.92 - Shares of ESRX have been vacillating between
$78-$80 for the past couple of weeks.  Aggressive traders can buy
the bounce from $78.  We're still waiting for the breakout over
$80.

ITW $94.36 +0.20 - The relative strength in ITW the last month
has been amazing.  Shares managed to hit another new all-time
high today.  We'd wait for a dip before evaluating any bullish
plays.

EBAY $86.32 -2.68 - After days of consolidating sideways near its
highs EBAY is finally hitting some profit taking.  Bulls can look
for a bounce from the $84.00-85.00 region.


*******************
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*******************

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is $49.95. The quarterly
price is $129.95 which is $20 off the monthly rate.

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subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at

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and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


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**********

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