Option Investor

Daily Newsletter, Thursday, 06/17/2004

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The Option Investor Newsletter                Thursday 06-17-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: One to Go
Futures Markets: See Note
Index Trader Wrap: Semiconductors weigh on tech, oil approaches $39
Market Sentiment: The Waiting Game

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
     06-17-2004            High     Low     Volume Advance/Decline
DJIA    10377.52 -  2.06 10390.01 10338.13 1.57 bln   1670/1108
NASDAQ   1983.67 - 14.56  1993.93  1976.25 1.46 bln   1199/1811
S&P 100   552.60 -  0.83   553.63   550.62   Totals   2869/2919
S&P 500  1132.60 -  1.51  1133.56  1126.88
RUS 2000  569.57 -  0.50   571.16   565.21
DJ TRANS 3059.99 +  0.75  3062.53  6032.32
VIX        15.15 +  0.36    15.58    15.00
VXO        15.06 +  0.40    15.97    14.87
VXN        21.33 +  0.94    21.75    20.77
Total Volume 3,321M
Total UpVol  1,345M
Total DnVol  1,908M
52wk Highs     214
52wk Lows      131
TRIN          1.38
PUT/CALL      0.79

One to Go
Linda Piazza

One day remains in this option-expiration week.  Only one more
day of boredom remains before markets break out of their recently
established consolidation patterns.  At least, that's the hope
many market watchers express.

Muted reactions to economic numbers characterized Thursday's
trading, with markets drifting down or up according to the
latest release in a day punctuated by scattered releases.  Only
on the Nasdaq and some other tech-heavy indices did the drifts
take the indices far from the flat-line levels. The Dow closed
lower by 2.06 points or 0.02 percent, the Nasdaq by 14.56 points
or 0.73 percent, the Russell 2000 by 0.50 points or 0.09 percent,
and the S&P 500 by 1.53 points or 0.13 percent.

Some hints of another boring day on the markets occurred pre-
market.  Futures showed little reaction to overnight news that
might have been market moving only a week or two earlier.  The
day dawned with news of a car bombing in Iraq, with that bomb
killing dozens and wounding more than 100.  As the June 30 hand-
off date approaches, violence escalates as had been anticipated,
but the level of Thursday's carnage proved particularly
disturbing.  In addition, recent explosions have stopped oil
exports from Iraq, requiring repairs of blasted pipelines in both
the north and south of Iraq.  Crude oil prices rose pre-market,
with European and U.K. oil majors rising and crude-sensitive
sectors such as airlines sinking.

June 30 looms important for another reason, too, of course, with
a two-day FOMC meeting concluding that day.  Exacerbating the
worries of market watchers during the pre-opening hours was a
Swiss central bank decision to hike rates and further warnings by
central bank members in England and other countries.  In the
U.K., May's retail sales rose a higher-than-expected 0.8 percent,
increasing expectations for yet-another rate hike by the Bank of
England.  Economic numbers released in the U.S. before the market
open fanned worries about the pace of rate hikes in the U.S.

Our economic calendar included the release of initial claims and
PPI at 8:30, May's leading indicators at 10:00, natural gas
inventories at 10:30, and June's Philadelphia Fed number at noon,
but it was PPI that garnered the most attention early in the day.
PPI came in at a hotter-than-expected 0.8 percent higher due to
soaring food and energy costs.  Core PPI, excluding those costs,
rose more than expected, too, to 0.3 percent against an
expectation of a 0.2 percent rise.  Crude goods rose 2.8 percent,
with core crude goods falling 3.8 percent.  May's wholesale
prices climbed 5 percent, indicating that producers have been
able to increase prices to offset costs.  Intermediate goods
prices climbed 1.1 percent and 0.9 percent, excluding food and
energy.  Gasoline prices contributed to the higher PPI. While one
article trumpeted the news that "Wholesale Inflation Leaps on
Higher Producer Prices," raising the specter of Greenspan and
company ratcheting up rates at a faster-than-wanted pace, other
commentators calmly noted that PPI tends to be more volatile than

Markets also had to deal with the pre-market release of the
jobless claims number, balancing that stronger-than-expected PPI
against good news in the employment sector.  With last week's
claims number rising to a seven-week high and the prior week's
revised upward, attention focused on that claims number.  The
expectation for the four-week average ranged from 330K-346K,
depending on the source.  The actual number fell somewhere near
the middle of that range, at 336,000. Articles mentioned that
increased demand encouraged U.S. companies to hold on to workers.
First-time claims fell 15,000 from a revised-lower 351,000
(revised from 352,000).  The four-week average dropped to
343,250, easing away from that 350,000 level that many consider
the benchmark.  Some point to the federal holiday last week for
President Reagan's funeral as a major reason for the decrease in
claims, the second week in a row that has contained a federal
holiday.  Next week, much attention should focus on the claims

Before the release of the 8:30 numbers, S&P futures had been
holding steady and slightly higher than at Wednesday's close,
from about 1132.75 to 1134, but they dipped lower to support near
1132 after the release.  The dip wasn't extreme, and it was
predictive of the market open, also a dip that wasn't extreme,
although the Nasdaq did open almost five points lower.  Indices
opening near Wednesday's close didn't maintain those near flat-
line levels long, however, with markets slipping lower into the
10:00 release of May's leading indicators.  Market pundits
characterize the leading indicators index as a closely watched
number, and it appeared to cheer market watchers, with the SPX,
Dow, Russell, and Nasdaq all steadying immediately after the
release of that number and then climbing off their lows.  After
our markets opened, European markets had followed our markets
lower after PPI and had steadied immediately after the release of
the leading indicators and then drifted up into the European
close, following the same pattern the U.S. markets this morning.
The FTSE 100 and CAC 40 closed near flat-line levels, up 0.05
percent and 0.10 percent, respectively, but the DAX fell harder
after PPI than did the other two, and it closed lower by 0.44

Expectations for May's leading indicators ranged from a rise of
0.3-0.4 percent, with the prior month's release seeing a rise of
0.1 percent.  Leading indicators actually rose a higher-than-
predicted 0.5 percent, with one headline noting that eight of the
ten U.S. leading indicators rose.  Consumer confidence and stock
prices were the two leading indicators that dropped.  An increase
in factory hours and a rise in money supply prompted some of the

Then began the next set of economic releases.  Natural gas
inventories rose 94 BCF, according to the Department of Energy,
but that number appeared to produce no reaction at all.
Expectations for June's Philadelphia Fed Index had ranged from
25.3-28.00, with the market consensus being 26.4, according to
one article.  The number was actually a higher-than-expected
28.9, rising above May's 23.8.  The prices-paid component dropped
to 51.9 against May's 59.6.  As Jonathan Levinson noted at the
time on the Monitor, markets showed little reaction at first to
the Philadelphia Fed Index, perhaps still ruminating over the
previous releases and their implications.  Most markets then
drifted slightly lower, wafted along on a gentle, languorous

They tried to climb again, too, but late-day trading was
characterized by a dampening of any moves higher or lower, with
most indices finding a preferred level and sticking to that level
into the close. Breadth proved mixed, with adv/dec ratios at
19:14 for the NYSE and 12:19 for the Nasdaq.  Up volume
outnumbered down volume by a healthy margin on the NYSE, too,
with down volume more than double up volume on the Nasdaq.

Weakness in semi stocks and a Jabil-induced weakness in
electronic manufacturers pressured the tech-laden Nasdaq all day.
Flextronics (FLEX) and Celestica (CLS) fell along with JBL,
although Solectron (SLR) managed a nearly flat close ahead of its
after-hours earnings report.  Across the markets, other weak
sectors included biotechs, networkers, securities broker/dealers,
and computer storage companies, but a surprising number of
sectors closed in the green.  Many stocks closing higher were in
the oil-service, utility, and natural-gas sectors, but gainers
also included the homebuilders and healthcare stocks.  Studying a
list of sector decliners and gainers, some might consider the
trading to have been mostly defensive.

Stocks in the news included Jabil (JBL), of course, closing lower
by 3.56 points or 12.69 percent after the warning about Q4.  CSCO
traded lower by 0.52 points or 2.18 percent after announcing that
it would buy the intellectual property, most of the engineering
teams and certain assets from Procket Networks, a privately owned
company.  JDA Software (JDAS) announced its own acquisition, of
QRS Corp. (QRSI), a retail-industry software maker.  Although
JDAS opened lower and traded lower after the opening, it
rebounded and closed higher by 0.32 points or 2.61 percent.

Other scheduled economic releases included the money supply
figure.  Recently, some economists and other market watchers have
been scrutinizing the money supply figures, expressing the
opinion that money supply has been expanding at an abnormally
fast pace.  Many concluded that the Fed had taken an unusually
accommodative stance.  However, you'll notice that you don't find
the figures for money supply in this article.  That's because
I've recently come across articles by Mark Hulbert, with those
articles expounding on some of the reasons why we might not be
able to trust the money supply numbers.  Those reasons include
the Fed's tendency to seasonally adjust those numbers even many
years after their first release.  Recently, the Fed revised the
seasonally adjusted data for 1998, for example.  Hulbert also
mentioned a couple of ways that the errors could affect the money
supply number, including the as-yet-unproved possibility,
proposed by Madeline Schnapp of TrimTabs, that banks could be
erroneously entering figures for risky items into one measure of
money supply that has displayed that abnormally high pace of
expansion.  I don't know about you, but I don't have the
experience to sort through data sets that may be in error when
first released and then adjusted for the next six years and come
to any sound conclusion, so you won't find an erudite discussion
on money supply in an article I've written.

Another economic release scheduled for after hours was the semi
book-to-bill number.  Late last week and early this week saw
several analysts recommend that clients lighten up on their semi
related stocks, with Deutsche Bank and UBS being two of those
analysts.  Clients have apparently taken that advice to heart,
along with a number of their investing friends, because the SOX
headed south all week, rolling back down into the descending
regression channel that has contained its prices this year.
Stochastics rolled down into a full bear roll, and the SOX
confirmed a double-top formation, setting up a downside target
near 437.  Not benefiting Thursday's trading was memory-chip
maker SimpleTech's (STEC) lowering of revenue estimates on
Wednesday.  Semi.org had not yet released the semi book-to-bill
number as this article was submitted, so I was not able to
include that number in this article, but semi-related stocks
throughout the globe could certainly use some help tonight, with
our SOX perching on important support.

Annotated Daily Chart of the SOX:

As James Brown pointed out on the Market Monitor today, MACD
created a new sell signal.  The histogram is now negative, but
that sell signal was created from above the signal line, and the
MACD has not completely rolled down through that line.  I find
this an iffy time when watching MACD, because as it's on the
verge of rolling down through that signal line, it sometimes
turns right back up again.  This might be a particularly
important point since the SOX ended the day on possible mid-
channel support, just above the March low.  A positive or even a
buy-the-(negative)-news reaction to the book-to-bill number could
see beaten-down semiconductor stocks attempt to rise.  If so, the
30-dma has proven particularly important to watch over the last
month, with that average now marking the approximate confirmation
level of the double-top formation.  With that confirmed double
top formation, complete with bearish divergence as the second top
was formed, the expectation would be that the SOX will again find
resistance, perhaps near either the 30- or the 50-dma's.
Expectations or not, in-place trend or not, price action should
always be the guide.  A move above the 200-dma would signal that
the SOX might be ready to break out of that descending regression

A negative reaction to the book-to-bill number could be followed
by a further drop, confirmed by a move below 452.75-453.00.  The
expectation then would be that the SOX would fall down through
its regression channel toward that 437-438 downside target
predicted by the double-top formation.  Traders should note
intervening support before that target could be reached, however.

A SOX decline would create more pressure on the Nasdaq, of
course.  With tomorrow being opex Friday, I would caution against
placing large bets on any position, however, as the day could
produce false moves that are not particularly amenable to
technical analysis.

The Nasdaq's chart displays some troubling signs, too.

Annotated Daily Chart of the Nasdaq:

That potential head-and-shoulders formation just under resistance
pinpoints possible weakness, especially when coupled with the
rolling-down RSI.  Bullish traders prefer to see a measured
pullback in the form of a flag formed from a tight pattern of
lower highs and lower lows, a bull flag.  However, neither
stochastics nor MACD has fully committed to the downside, and the
Nasdaq has stubbornly maintained levels above the 200-dma, so we
can't assume that H&S formation will ever be confirmed.  Watch
that 200-dma for signs that the Nasdaq might be confirming that
H&S, rolling down toward the 1930 support again. A move up
through 2000 and then above last week's high would be a sign that
the Nasdaq is unexpectedly breaking to the upside out of its
bearish right triangle.  These formations typically break to the
downside, but "typically" is not synonymous with "always."

The Russell 2000 chart displays its own possible H&S, with the
Russell 2000 not yet ready to roll over into that right shoulder
and perhaps never ready to do so.  That possible right shoulder
forms at the 50 percent retracement of the decline from the April
5 high to the May 17 low, and has a descending neckline that
roughly conforms to the 30-dma.

Annotated Daily Chart of the Russell 2000:

Oscillators do not yet commit to a direction.  It's possible to
micro-analyze every nuance of each of the oscillators and
discover bearish price/RSI divergence as the possible head was
formed, but all we can say with certainty is that the Russell
2000 remains trapped between its 200-dma and 100-dma.  It's
positioned about midway between support and resistance and
displays a potentially bearish formation that has yet to be
confirmed.  A break much above 572 negates the potential H&S,
while a break below the 200-dma confirms it.  Until either of
those events occurs, we can't determine much else.

The Dow's chart displays indecision, too, with the daily candle a
doji at resistance for the second day in a row.

Annotated Daily Chart of the Dow:

Although I haven't included the channel on this chart, it's also
possible to characterize the Dow as trading lower since February
within a descending regression channel, with the top of that
channel described by the top red trendline on the chart above.
As other writers have noted, the Dow clings to that upper
trendline, not able to move above it and not willing to fall
below it.  Oscillators show inconclusive evidence.  Stochastics
and RSI poise on the verge of tipping over into bearish rolls or
else trending while the Dow begins a directional move higher.
Nothing on this chart signals that the Dow will head one
direction more strongly than the other, with the obvious
exception of an expectation that an index trading in a well-
formed descending regression channel might continue to trade
lower within that channel.  Since the weekly view shows
oscillators still trending up but showing the slightest tendency
to hook over, the possibility remains that this big regression
channel has been nothing more serious than a bull flag on the
weekly chart.

The SPX can also be characterized as trading lower within a
descending regression channel, although its channel formed
beginning in early March.

Annotated Daily Chart of the SPX:

As is also true of the OEX, the SPX's pullback on the daily chart
since early June could be variously characterized as a bull flag
(if you're a bull) or a broadening formation (if you're not so
bullish).  This week, that formerly broadening formation has
narrowed into a tighter range, however, with a top at about
1136.50 and a bottom at about the board-flat 100-dma, with
further support below at the 50-dma.  RSI begins to look more
bearish here, but stochastics kicked back up again, giving a
mixed outlook that goes perfectly with the flattening MACD.
Weekly oscillators look similar to the Dow's:  RSI and
stochastics headed higher, but showing a slight tendency to hook

After-hours earnings did little to clarify the situation.  They
included reports by Adobe (ADBE), Red Hat (RHAT) and Solectron
(SLR), with ADBE and RHAT both trading lower, and SLR headed
higher.  RHAT's revenue missed expectations, and the stock had
headed lower by 9 percent as this report was prepared.  ADBE had
dropped more than 2 percent.

Economic reports due Friday include only the 8:30 release of the
Q1 current account figure, with the previous number at -$127.5
billion, and with expectations firming up for a deficit of
-$140.0 billion, but ranging from $139.5-141.3 billion.  If
markets are going to move, they'll probably be prodded by
something other than economic numbers.

The often-seen tendency for an option expiration Friday is for
markets to clamp down late in the morning and attempt to maintain
equilibrium until the market close, a tendency that may be
exacerbated by the upcoming FOMC meeting and transfer of power in
Iraq, with both events now two weeks away.  While I would not be
surprised to see that trend continued tomorrow, be watchful of
the crude prices.  While lowered gasoline prices this week and
building inventories over the last couple of weeks might have
reassured markets, crude futures flamed up toward the
$39.00/barrel level Thursday.  That, coupled with the higher-
than-expected PPI, could start a fire that eats through some
support levels.  The Dow Jones Transportation Index, often a
leading indicator for the Dow, created a doji at the top of a
rise in Thursday's trading, and Dow bulls don't want to see it
turn down Friday, pressured by rising crude prices.

However, some possibilities for at least a modest rise exist.
Tech traders should watch the SOX's reaction to the semi book-to-
bill number.  Although several chart attributes suggest that the
SOX has room to fall, it's deeply oversold on a 30-minute basis,
and it may just see an oversold bounce unless the number
disappoints in a big way.  If a directional move gets underway,
market watchers want to see the various indices make a concerted
effort to move the same direction, rather than have the tech-
related indices moving in opposition to the others, for example.
If markets could all head the right direction, perhaps market
watchers won't even have one more day of boring trade but will
find something to excite them tomorrow.

I'm not counting on that to happen, but just open to the
possibility.  Be careful, keeping the trend of many opex weeks in
mind as you make decisions about entering positions.  After the
opening volatility, moves that appear to be promising may get
damped down almost as soon as they get started, especially if
there's no volume behind the move.


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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Semiconductors weigh on tech, oil approaches $39

The Semiconductor Index (SOX.X) 453.44 -3.37%  finished the
session down 15.85 points, led lower by Xilinx (XLNX, -6.7%),
ALTR (-5.4%), National Semiconductor (NSM -5.4%) and Novellus
Systems (NVLS -4.7%) as weakness associated with JBL's guidance
forced speculation that overall demand for semiconductors is

Weakness among semiconductors weighed heavily on broader
technology and many 4-lettered stock symbols with the very broad
NASDAQ Composite (COMPX) 1,983.67 -0.72% and its sibling NASDAQ-
100 Index (NDX.X) 1,464.03 -1.07% showing relative session
weakness against other major indices.

Despite recent weekly data that showed builds in U.S. oil
inventories, continued attacks on Iraqi oil pipelines had August
Crude Oil futures (cl04q) jumping $1.16, or 3.08% to settle at

U.S. Market Watch - 06/17/04 Close

While many 4-lettered stocks found a lower trade in today's
session, those with 1, 2 and 3-lettered stock symbols at either
the New York or American Stock Exchange faired better in what
could be called an "oil and water" trade.  While the NASDAQ
Composite struggles with downward trend, the NYSE Composite found
early morning support at its recently broken-to-the-upside
downward trend to post a 10-points gain.

Market Snapshot / Internals - 06/17/04 Close

While the NASDAQ's NH/NL 10-day Average Ratio slips lower by an
additional 2.2%, we get the feeling that that slippage has a
pulling effect on the NYSE NH/NL 10-day Average Ratio, where it
would currently take a reading of 74.0% for it to see a 3-box
reversal on its point and figure bullish % Chart.  I'll try and
tie this bullish leadership indicator in with a bar chart of the
NYSE Composite ($NYA.X) in a moment.

Sectors with good representation on the new high list today
include Oil & Gas (BR, BRY, CECX, CHK, COP, CRZO, DVN, GRP, JDO,
VPI, WGR, XOM), Steel (LSS, NSS, NUE, OS) and Food/Beverage (CSG,

NYSE Composite Chart - Daily Intervals

In last night's Index Wrap we looked at the NASDAQ Composite
(COMPX) and I'm showing the NYSE Composite ($NYA.X) with similar
use of retracement and trend.  While the COMPX struggles with
what would be the solid red trend on the above chart, the NYSE is
trying to hold this trend as support.

Now, as you and I follow the NH/NL ratios over time, we can see
that the NYSE holds greater bullish leadership, but lets not also
forget how much more "oversold" it was at 12% at its recent low
readings.  As we see the NASDAQ Composite struggle with downward
its solid red downward trend, I've added the dashed red trend on
the NYSE Composite chart, where perhaps we begin to make the tie
with the recent NYSE NH/NL 10-day Average Ratio high reading of
80% with this dashed red downward trend.

Now, I'm limited by time to how many charts I can get doctored
up, but one reason I think it important, or worthy of a review on
both the NASDAQ Composite (COMPX) in last night's wrap, and now
the NYSE Composite (NYA.X) in tonight's wrap is because of this
week's Triple With expiration.

Understand that it may be easier to "push around" the NDX/QQQ,
the S&P 100 (OEX.X), the INDU (30 stocks) and perhaps the S&P 500
Index (SPX.X) in order to get things squared up at an
options/futures expiration.

It's entirely different, and perhaps a more natural trade to
observe/understand both the NASDAQ COMP (3000+ stocks) and NYSE
Composite (3000+ stocks).

If I were to combine the two, I'd certainly have two indices
right at downward trends, some abatement of bullish leadership,
and a more defensive picture at this point.

Pivot Matrix -

Good gravy!  I'd go cross-eyed looking at all of these
correlations for tomorrow's trade.  Why do YOU think we'd see so
many correlations?  My best guess..... computers are doing a HECK
OF A LOT OF THE WORK as they try and get things squared up at the
quarterly Triple Witch.

The point I would have to make at this point is that unless
you're going to trade VERY TIGHT STOPS intra-day, with hopes of
getting some type of quick move intra-day, I'd be more tempted to
just sit on the sidelines with any type of trade entry at this

Semiconductor Index (SOX.X) - Daily Intervals

The bulk of today's declines for the SOX.X came in the first hour
of trade, where today's close comes below the SOX's long-term
upward trend from the October 2002 lows.  A recent MACD sell
signal, that is now present today led to a lower low.  A quick
check of Dorsey/Wright and Associates' Semiconductor Bullish %
(BPSEM) shows a net loss of 1.47% of semiconductor-related stocks
to reversing lower point and figure sell signals to 23.53%
bullish.  While still "bull alert" status having reversed up from
18% to a recent high reading of 26%, a break much below our
MONTHLY Pivot would have 435 back in play, if not a good washing
out in the weeks to come to the 412 area.

Jeff Bailey


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The Waiting Game
- J. Brown

Welcome to the waiting game.  The Producer Price Index (PPI)
showed that inflation at the wholesale level ticked higher than
expected but stocks really didn't react to the news.  That's
because the markets feel relatively confident that the FOMC will
only raise rates by 1/4 point on June 30th.  The only thing left
to do now is wait for the June 30th meeting to pass.  In the mean
time investors will be reacting to what will surely be a string
of bad news as we approach the Iraq handover of power.

There was news out this morning that terrorists drove a car bomb
into a crowd of Iraqis looking for work in the new government
military.  The explosion killed 35 people and injured more than
100.   The real unfortunate thing here is that we're likely to
here more of these reports as we approach the deadline.  The
combination of waiting for the interest rate decision and rising
violence in Iraq will likely to keep a lid on the stock market.

Not helping matters today was an earnings warning from Jabil
Circuit (JBL) last night.  JBL slipped more than 12% but it drug
the SOX semiconductor index down with it.  The SOX fell more than
3.3% breaking minor support at 460.  The next test for the SOX is
the 450 level.  The NASDAQ will have a hard time trying to mount
a rally without support from the semiconductor sector.

Earnings season is quickly approaching but there is still a
threat that we may see more earnings warnings.  Plus, the markets
may be back to its old tricks of looking for the whisper number.
Software maker Adobe Systems (ADBE) reported earnings of 44 cents
per share.  This was 2 cents above estimates and significantly
better than last year's 27 cents yet the stock fell lower in
after hours trading in spite of guiding higher for the next

Traders need to keep an eye on crude oil again.  Oil futures
rallied $1.16 to $38.81 a barrel.  Bulls can shop the energy
stocks for potential plays.  Overall the market internals were
mixed.  Advancers beat decliners almost 17 to 11 on the NYSE but
lost 12 to 18 on the NASDAQ.  Volume continues to be light.

I continue to watch the volatility indices.  The VIX/VXO/VXN all
bounced today but they remain near their lows, which could also
be a roadblock to any new rally of significance.


Market Averages


52-week High: 10753
52-week Low :  8871
Current     : 10377

Moving Averages:

 10-dma: 10351
 50-dma: 10261
200-dma: 10121

S&P 500 ($SPX)

52-week High: 1163
52-week Low :  962
Current     : 1132

Moving Averages:

 10-dma: 1131
 50-dma: 1119
200-dma: 1093

Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1180
Current     : 1464

Moving Averages:

 10-dma: 1472
 50-dma: 1448
200-dma: 1436


CBOE Market Volatility Index (VIX) = 15.15 +0.36
CBOE Mkt Volatility old VIX  (VXO) = 15.06 +0.40
Nasdaq Volatility Index (VXN)      = 21.33 +0.94


          Put/Call Ratio  Call Volume   Put Volume

Total          0.79        818,546       647,093
Equity Only    0.63        604,920       383,811
OEX            1.01         37,221        37,547
QQQ            5.43         14,854        80,593


Bullish Percent Data

           Current   Change   Status
NYSE          65.4    + 0     Bear Confirmed
NASDAQ-100    42.0    + 3     BULL ALERT
Dow Indust.   70.0    + 0     Bear Confirmed
S&P 500       63.2    + 0     Bear Confirmed
S&P 100       63.0    + 0     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: 1.02
10-dma: 0.98
21-dma: 0.92
55-dma: 1.03

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    1670      1199
Decliners    1108      1811

New Highs     135        72
New Lows       57        55

Up Volume    854M      413M
Down Vol.    671M     1024M

Total Vol.  1572M     1458M
M = millions


Commitments Of Traders Report: 06/08/04

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

Commercial trades are turning more bearish with an increase
in short positions while pulling a little bit of money out
of their longs.  Small traders have increased their positions
in both longs and shorts but continue to remain net bullish.

Commercials   Long      Short      Net     % Of OI
05/18/04      394,352   423,258   (28,906)   (3.5%)
05/25/04      400,713   420,764   (20,051)   (2.4%)
06/01/04      406,665   421,681   (15,016)   (1.8%)
06/08/04      397,294   452,904   (55,610)   (6.5%)

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
05/18/04      139,647    74,597    65,050    30.4%
05/25/04      136,086    79,060    57,026    26.5%
06/01/04      137,100    79,583    57,517    26.5%
06/08/04      158,373    92,794    65,579    26.1%

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

Hmm... could the commercial traders be trying to tell us something?
Both their large S&P futures positions and their S&P e-minis
positions have turned net short or bearish.  As would be
expected the small traders is walking the other way and has
significantly beefed up their longs.

Commercials   Long      Short      Net     % Of OI
05/18/04      390,484   357,157     33,327     4.5%
05/25/04      353,722   336,406     17,316     2.5%
06/01/04      325,865   325,274        591     0.0%
06/08/04      367,191   409,246    (42,055)   (5.4%)

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
05/18/04       62,216     87,269    25,053    16.8%
05/25/04       91,515    100,759   ( 9,244)  ( 4.8%)
06/01/04      111,484     90,625    20,859    10.3%
06/08/04      140,191     84,649    55,542    24.7%

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


Commercial traders remain net long on the NASDAQ 100.
Small traders remain strongly net short.

Commercials   Long      Short      Net     % of OI
05/18/04       58,376     37,528    20,848   21.8%
05/25/04       59,891     37,630    22,261   22.8%
06/01/04       59,944     34,784    25,160   26.6%
06/08/04       64,747     41,178    23,569   22.3%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  25,160   - 06/01/04

Small Traders  Long     Short      Net     % of OI
05/18/04        9,843    18,935   ( 9,092)  (31.6%)
05/25/04       10,184    20,653   (10,469)  (33.9%)
06/01/04        9,755    30,025   (20,270)  (51.0%)
06/08/04        9,716    29,594   (19,878)  (50.6%)

Most bearish reading of the year: (20,270) - 06/01/04
Most bullish reading of the year:  19,088  - 01/21/02


There has been very little action from the commercial traders
in the Dow Jones futures but they remain net short.  Small
traders remain net long but their resolve may be weakening
a bit.

Commercials   Long      Short      Net     % of OI
05/18/04       22,257    22,444   (  187)     (0.4%)
05/25/04       23,578    24,632   (1,045)     (2.2%)
06/01/04       23,397    24,393   (  996)     (2.0%)
06/08/04       24,636    25,821   (1,185)     (2.3%)

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
05/18/04        9,098     6,591    2,507     16.0%
05/25/04        9,623     6,614    3,009     18.5%
06/01/04        9,000     6,021    2,979     19.8%
06/08/04        8,325     6,431    1,894     12.8%

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 06-17-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: DGX, QCOM
Dropped Puts: SYMC
Call Play Updates: BCR, ETN, GDW, HSY, ZMH, ERTS, MERQ
New Calls Plays: AHC
Put Play Updates: CCMP, KSS, MO
New Put Plays: None


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.


Quest Diagnostic - DGX - cls: 87.12 chg: -1.08 stop: 84.95

After two weeks of trying we're going to err on the side of
caution and close this play.  As of yesterday the stock was
looking okay with a rebound back over the $88.00 level.  That's
what we had been waiting for as an entry point for new positions.
Unfortunately, today's decline has undermined our confidence and
thrown its technical indicators into conflicting signals.  More
aggressive traders might want to stick it out and see if support
at $86.00 holds up.

Picked on June 01 at $ 87.70
Change since picked:  - 0.58
Earnings Date       04/22/04 (confirmed)
Average Daily Volume:    603 thousand
Chart =


QUALCOMM - QCOM - close: 68.25 chg: -0.50 stop: 67.00

Again, we're choosing to err on the side of caution.  After days
of consolidating under resistance at $70.00 shares of QCOM have
broken down instead of broken out.  The close under its simple
10-dma is a technical failure meanwhile its MACD signal is close
to producing a new sell signal.  We'd rather exit now for a small
gain than watch it evaporate.  We can always choose to go long
again if QCOM eventually breaks out over resistance at $70.

Picked on May 24 at $ 66.01
Change since picked: + 2.24
Earnings Date      04/22/04 (confirmed)
Average Daily Volume:   9.6 million
Chart =


Symantec Corp. - SYMC - cls: 40.89 chng: +0.12 stop: 43.00

We couldn't have asked for more cooperation from SYMC, as the
stock crashed through the $44 support level and just kept on
going.  Yesterday's dip to a new relative low looked good and
then the bears finished the job today, driving the stock to an
intraday low of $39.7 before the midday bounce.  As you'll
recall, we were looking for a drop to the $39-40 area as our cue
to harvest gains on the play and today's price action certainly
qualifies.  Aggressive traders might be able to squeeze a bit
more out of the play on another drop on Friday, but we'd expect
price to pin fairly close to the $40 level for options
expiration.  We'll close the play out tonight and consider it a
success in what has been a difficult market this week.

Picked on May 13th at         $44.16
Change since picked:           -3.34
Earnings Date                4/28/04 (confirmed)
Average Daily Volume =      4.92 mln
Chart =


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Bard C R - BCR - close: 57.63 chg: -0.53 stop: 55.95

Wow!  BCR continues to churn sideways in a tight $2.00 range.  We
were thinking it may be time to drop it with this morning's early
weakness but shares rebounded higher the rest of the session.
BCR's strong finish into the close has given us new hope that the
stock might breakout over $58.00 soon.  We're going to hold on to
it and see how it performs tomorrow.  No change in our stop at

Picked on May 20 at $ 55.00 (post split)
Change since picked: + 2.63
Earnings Date      04/20/04 (confirmed)
Average Daily Volume:   386 thousand
Chart =


Eaton Corp - ETN - close: 60.95 chg: -0.43 stop: 59.95

We remain un-triggered in our recently added bullish play in ETN.
The stock gapped lower this morning but traders jumped in to buy
the dip near $60.00 and drove the stock back toward $61.  Our
strategy is to go long if and when ETN trades at $62.05.  Until
then we're just spectators.

Picked on June xx at $ xx.xx <-- See TRIGGER
Change since picked:  + 0.00
Earnings Date       04/14/04 (confirmed)
Average Daily Volume:    1.0 million
Chart =


Golden West Fncl - GDW - close: 107.96 chg: +0.35 stop: 107.00

Thus far we remain un-triggered in this bullish play.  Right now
our strategy is to open bullish positions if and when GDW trades
at or above $110.01.  More aggressive traders can choose to try
and jump the gun by entering on a breakout of its recent bull
flag.  The $108.50 or $109.00 levels might work as more
aggressive entries.  We are somewhat encouraged by the very slow
upward drift in GDW over the last three sessions.  The company
did issue a press release yesterday stating they would announce
Q2 earnings on July 20th.

Picked on June xx at $xxx.xx <-- See TRIGGER
Change since picked:  + 0.00
Earnings Date       07/20/04 (confirmed)
Average Daily Volume:    694 thousand
Chart =


Hershey Foods - HSY - close: 45.45 chg: -0.29 stop: 44.75

It looks like we are seeing a little post-split depression in HSY
after all.  Typically if a stock sees a decent ramp up into the
split it can experience post-split depression as the momentum
traders exit looking for the next play.  As of this afternoon we
were feeling okay with the bounce from its simple 10-dma.  Now
we're turning a little cautious since HSY fell sharply in the
last hour of trading.  We would not suggest new bullish plays
unless HSY produces a strong bounce from the $45.25 level.  We're
going to leave our stop loss at $44.75 but traders should start
aiming for the exits if HSY trades under $45.20.

Picked on June 08 at $ 46.11 (post split)
Change since picked:  - 0.66
Earnings Date       04/22/04 (confirmed)
Average Daily Volume:    441 thousand
Chart =


Zimmer Holdings - ZMH - close: 86.00 chg: -0.87 stop: 84.95*new*

"Please fasten your safety belts and make yourself aware of the
nearest exit.  In some cases the nearest exit may be behind you."
We realize the above lines are commonly heard in a commercial jet
before you take off but they may be appropriate here.  After 2
1/2 weeks of consolidating in a tight range under resistance at
$88.00 shares of ZMH have broken downward, not skyward.  That
usually spells trouble.  Its technical picture is gloomy with a
new "sell" signal in its MACD.  That alone may be good enough
reason to consider exiting this play now.  We're going to hold on
to it for at least one more day to see if shares bounce from the
simple 21-dma and or support at $45.00.  We will try and reduce
our risk by raising the stop loss to $84.95.  Interested traders
can keep their ears open for any good news next Tuesday as ZMH
presents at the William Blair 24th Annual Growth Stock Conference
in Chicago.

Picked on May 27 at $ 85.20
Change since picked: + 0.80
Earnings Date      04/26/04 (confirmed)
Average Daily Volume:   1.2 million
Chart =


Electronic Arts - ERTS - close: 51.65 change: -0.62 stop: 50.00

In what has been a rather lackluster expiration week, we've seen
very little in terms of directional action from our ERTS play.
fter last week's move over $53, the stock pulled back sharply on
Monday, and since then the bulls seem to have their hands full
just keeping price above the 50-dma ($51.31).  The good news is
that the bears haven't been able to gain the upper hand either,
and the two sides of battled to a stalemate ahead of option
expiration tomorrow.  Support is looking firm near the $51 level,
with resistance looming overhead in the $53.00-53.50 area.  We'll
more than likely have to wait until next week for resolution of
the current consolidation pattern.  That means aggressive entries
could work on another test of the $51 level, but be sure to keep
those stops in place at $50, just in case support fails.

Picked on May 18th at        $49.60
Change since picked:          +2.05
Earnings Date               4/29/04 (confirmed)
Average Daily Volume =     3.85 mln
Chart =


Mercury Interact. - MERQ - cls: 48.09 chng: -0.07 stp: 46.50

After the strong surge to just below $50 resistance a couple
weeks ago, MERQ has entered a quiet consolidation phase, with
price steadily moving lower within a descending channel that we
can view as a bullish flag pattern.  Support near the $48 level
seems to be holding up and traders looking to buy the dip are
getting a decent setup here, with price stabilizing at support,
with additional support offered by the 20-dma ($47.48) and then
the 200-dma ($47.18).  Traders that would prefer to see renewed
strength before stepping into new positions will want to look for
a move over the $48.50 level, which would constitute a bullish
break of the aforementioned bull flag pattern.  Traders expecting
a strong move before the weekend are likely to be disappointed
with options expiration occurring tomorrow.  For that reason,
waiting until Monday before initiating new positions may be the
more prudent choice.  Maintain stops at $46.50, which will be
protected by the 30-dma ($46.44) by tomorrow.

Picked on June 6th at        $47.56
Change since picked:          +0.53
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =     2.38 mln
Chart =


Amerada Hess Corp. - AHC - close: 74.15 change: +2.80 stop: 69.00

Company Description:
Amerada Hess Corporation explores for, produces, purchases,
transports and sells crude oil and natural gas.  These
exploration and production activities take place in the United
States, United Kingdom, Norway, Denmark, Equatorial Guinea,
Gabon, Indonesia, Thailand, Azerbaijan, Algeria, Malaysia,
Colombia and other countries.  The company also manufactures,
purchases, transports, trades and markets refined petroleum and
other energy products.  It owns 50% of a refinery joint venture
in the United States Virgin Islands, as well as another refining
facility, terminals and retail gasoline stations located on the
east coast of the United States.

Why we like it:
Carving out an impressive bullish trajectory over the past
several months, shares of AHC have completely ignored the
weakness recently seen in the broad market and have instead moved
in line with the persistent rise in energy prices.  With Natural
Gas moving to new 3-year highs and Crude Oil rebounding from its
recent spate of profit taking, AHC really put in an impressive
performance on Thursday, tacking on nearly 4%.  The stock has
been mired in a broad consolidation pattern between $69-75 for
the past 6 weeks as the bulls have digested the gains from the
most recent rise.  But with price once again nearing the top of
that range and on such a large one-day move (supported by strong
volume, to boot), we're inclined to think a breakout is coming
sooner, rather than later.  The PnF chart paints a bullish
picture as well, with its bullish price target forecasting a rise
to $99.

The key appears to be that $75 resistance level, which AHC hasn't
been able to hit since August of 2002.  Not only would a move
above $75 satisfy a breakout of the current consolidation range,
but it would create a fresh Triple Top Buy signal on the PnF
chart.  We'll err on the side of caution here and force AHC to
prove itself to us, setting an entry trigger at $75.  Entries
certainly look favorable on that initial breakout, although more
cautious traders may want to wait for a subsequent pullback to
test the $73-74 area as new support before jumping in.  The first
serious resistance comes in around the $78 level, but we're going
to play for a rise to test the H&S top from early 2002 in the
$82-84 area.  If we take the current consolidation pattern as the
bull flag pattern that it appears to be, then a breakout should
give us an upside projection roughly equal to the move that
preceded this consolidation (from $62 to $74) or $12.  That
translates to an upside target of $87, so our $82-84 target is
certainly reasonable.  Given our expectations for such a strong
rally, we're going to start out with an initial stop at $69, just
under the last two reaction lows.  We'll look to raise that stop
after we get the breakout over $75, but for now, it seems prudent
to give the stock some room to move.

Suggested Options:
Shorter Term: The July $75 Call will offer short-term traders the
best return on an immediate move, as it is currently at the

Longer Term: Aggressive longer-term traders can use the August
$80 Call, while the more conservative approach will be to use the
August $75 Call.  Our preferred option is the August $75 strike,
as it is currently at the money and should provide sufficient
time for the play to move in our favor.

BUY CALL JUL- 70 AHC-GN OI=  75 last traded @ $5.20
BUY CALL JUL- 75 AHC-GO OI=1298 last traded @ $2.00
BUY CALL AUG- 75*AHC-HO OI=2366 last traded @ $3.20
BUY CALL AUG- 80 AHC-HP OI= 945 last traded @ $1.40

Annotated Chart of AHC:

Picked on June 17th at       $74.15
Change since picked:          +0.00
Earnings Date               4/28/04 (confirmed)
Average Daily Volume =     1.07 mln
Chart =


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Cabot Micro. - CCMP - close: 27.82 chg: +0.94 stop: 30.00

Whoa!  We knew CCMP might be due for an oversold bounce after its
recent declines but we weren't expecting a 3.5% rebound.  The
stock had recently been falling perfectly after struggling with
resistance at its simple 40-dma and then falling through the
$30.00 level.  Its technical picture is now a little bit mixed
with short-term stochastics edging higher from oversold versus
its MACD that recently produced a new sell signal.  The good news
here is that the bounce failed at the $28.25 level but we suggest
caution when considering new plays.  More conservative traders
might want to lower their stop toward $29.50.  We're going to
keep our stop just above its 40-dma for now at $30.00.

Picked on June 13 at $ 29.46
Change since picked:  - 1.64
Earnings Date       04/22/04 (confirmed)
Average Daily Volume:    3.7 million
Chart =


Kohl's Corp - KSS - close: 45.53 change: -0.52 stop: 48.05*new*

KSS is reading our script wonderfully.  The stock is down six
days in a row and has broken through minor support levels at
$48.00 and $46.00 as well as its simple 10, 21 and 100-dma's.
Its MACD is in a new sell signal and volume is slowly rising on
the declines.  Yes, KSS looks pretty good here and that makes us
cautious that it might be time for an oversold bounce.  Traders
looking for new plays might want to look for a bounce and failed
rally under $47 or a move through $45.00.  We're going to lower
our stop to $48.05.

Picked on June 06 at $ 47.45
Change since picked:  - 1.92
Earnings Date       05/13/04 (confirmed)
Average Daily Volume:    3.7 million
Chart =


Altria Group - MO - close: 47.69 change: -0.12 stop: 49.50

In classic expiration-week fashion, MO has certainly failed to do
much since we initiated coverage of the stock on Tuesday.  The
past 2 days have seen volume continue to dry up, while price has
drifted along in an exceptionally narrow range of less than 50-
cents.  The bearish tone of both the candle chart and the PnF
chart obviously remain intact, but we will most likely have to
wait until next week for this tight consolidation pattern to
break.  The 10-dma ($48.12) and 20-dma ($48.18) should continue
to act as resistance and that means entries on a rollover from
those averages make sense in the near-term.  Traders that prefer
to enter on renewed weakness most likely will be waiting until
next week, when we should see the downtrend reassert itself with
a break below $47.25.  Maintain stops at $49.50, just over the
most recent high.

Picked on June 15th at        $47.55
Change since picked:           +0.14
Earnings Date                7/20/04 (unconfirmed)
Average Daily Volume =      6.97 mln
Chart =




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The Option Investor Newsletter                  Thursday 06-17-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Watch List: Printers, Wireless, Healthcare and more
Option Spreads: A Peek Into The Future -- July CPTI Positions
Traders Corner: Two Weeks And Counting


Printers, Wireless, Healthcare 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.

Lexmark Intl - LXK - close: 95.39 change: +1.13

WHAT TO WATCH: LXK is making a comeback after spending several
weeks basing along support at the $90.00 level.  Now shares are
breaking out over resistance at $95.00 and look poised to run
toward $100.  There is some resistance at $97 from early April
but its P&F chart points to a bullish price target of $102.



Mobile Telesys - MBT - close: 125.50 change: +9.50

WHAT TO WATCH: The market is interpreting some recent comments
from Russian President Putin as positive for business and Russian
stocks are trading higher.  MBT soared more than 8% to breakout
over resistance at $120 and $125 on big volume.  The road is
clear for a run toward its highs near $140.  Its bullish P&F
chart actually points to a $156 price target.



Borg Warner - BWA - close: 44.35 change: +1.44

WHAT TO WATCH: Auto and truck parts maker BWA is on the move
Thursday with a 3.3% rally through technical resistance at its
100-dma.  Volume was three times the norm indicating strong
buying interest.  Traders might want to consider bullish plays
with a trigger over resistance at $45.00.  We would target $48-
$50.  A move through $46 would produce a new P&F buy signal.



Coventry Health Care - CVH - close: 50.00 change: +0.58

WHAT TO WATCH: Healthcare stock CVH recently broke out over major
resistance near $47.00 and has now spent the last three weeks
trying to breakout over the $50.00 level.  The stock looks poised
to hit new highs and we would consider new long plays with a
trigger over $50.35.  Its bullish P&F chart points to a $62 price


RADAR SCREEN - more stocks to watch

MGA $83.23 +1.17 - We're still watching MGA for a bullish
breakout over resistance at $84.00.

EMMS $20.02 -1.30 - EMMS has broken down from its recent
consolidation on big volume.  Look for a move through round-
number support at $20.

TGN $42.57 +0.67 - The relative strength in shares of TGN might
make the stock a decent covered call candidate.  Shares hit new
highs on strong volume today.

RIMM $58.40 +0.83 - RIMM is trying to rebound from its recent
bout of profit taking.  Watch for the breakout over $60.00.

IMCL $81.70 +0.00 - IMCL still looks bullish here but traders
might look for another dip to $80.00 and buy the bounce.

EGN $45.84 +0.40 - EGN is another utility making new highs.

DE $68.52 +0.47 - We're still looking for the breakout over
$70.00 but more aggressive players might consider bullish
positions on a move through $69.

TXN $23.25 -0.91 - TXN was recently on the watch list for a
breakdown through support at $24.  It happened today on big

COF $71.98 +0.75 - COF still looking strong with the rebound from
$70.00.  Bulls might want to target a move to $75 or $77.


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Option Spread Strategies

A Peek Into The Future -- July CPTI Positions
By Mike Parnos, Investing With Attitude

Do you feel it?  You should.  Tomorrow’s opening will tell the
tale, but I have a good feeling.  It’s a familiar feeling for CPTI
regulars – the feeling of those freshly printed twenty-dollar
bills running through your fingers.

It looks like we’re about to record another impressive profit
month for the June expiration cycle.  Some people think that we’re
just lucky.  I don’t think so.  Directional traders are scrambling
(as usual).  They guess right (once in awhile).  They guess wrong
(more often than not).  They’re plastered to their computers with
a package of Tums and Alka-Seltzer while the value of their long
options wither away.  Bless them.  It’s their money that ends up
in our pockets.

Trade Notification:
Prior to Thursday’s close, we bought back the short MNX $147.50
call for $.10.  Even though MNX closed at $146.40, remember that
we’re exposed for the Friday opening on these European style
options. $146.40 is dangerously close to $147.50.  If they find
Bin Laden tonight, I don’t want it to cost us money.  It’s worth
the $.10 for the peace of mind.

A Sneak Peek Into July
So, Sunday’s column will be another fun one to write – if can take
the time off from counting the profits.  Don’t worry.  I’ll
manage.  However, let’s take a look at the positions we are
considering for the July option cycle.  There probably aren’t a
lot of surprises here.  If it ain’t broke, don’t fix it, right?

Position #1 – SPX Iron Condor – 1132.05
Sell 10 July SPX 1170 calls
Buy 10 July SPX 1180 calls
Credit of about: $1.10 ($1,100)

Sell 7 July SPX 1075 puts
Buy 7 July SPX 1060 puts
Credit of about:  $1.20 ($840)

Total net credit of about: $1,940.  Maximum profit range of 1075
to 1170.  Breakeven points of 1072.23 to 1171.94.  Maintenance:
$10,500.  Potential profit: $1,940.

Position #2 – RUT Iron Condor – 569.57
Sell 10 July RUT 600 calls
Buy 10 July RUT 610 calls
Credit of about: $1.00 ($1,000)

Sell 10 July RUT 530 puts
Buy 10 July RUT 520 puts
Credit of about: $1.30 ($1,300)

Total net credit of about: $2.30 ($2,300).  Maximum profit range
of 530 to 600.  Breakeven points of  527.70 to 602.30.
Maintenance: $10,000.  Profit potential $2,300.

Position #3 – SPX Credit Spread Boogie – 1132.05
We haven’t done this strategy is quite some time.  To review, it
consists of establishing a 25-point credit spread and taking in
$6-7 of premium (as much as possible).  If the trend continues,
you keep the premium.  If the trend reverses, you close the trade
for double the premium amount.  Then, you open a credit spread in
the opposite direction, using enough contracts to replenish what
you spent to close the initial spread.

Sell 3 SPX July 1125 puts
Buy 3 SPX July 1100 puts
Total credit of about: $6.30 ($1,800)

Profit potential:  $1,800.  Maintenance: $7,500 (initially).
We’ll need to keep a close eye on this one.  We have to be alert –
plus, we have to have a large enough account size to accommodate
trading an increased number of contracts if adjustments become

Position #4 – SOX (Semi-Conductor Index) – Iron Condor – 453.44
Sell 10 SOX July 490 calls
Buy 10 SOX July 500 calls
Credit of about: $1.10 ($1,100)

Sell 10 SOX July 420 puts
Buy 10 SOX July 410 puts
Credit of about: $1.30 ($1,300)

Total net credit of: $2.40 ($2,400).  Maximum profit range: 420 to
490.  Breakeven points: 417.60 & 492.40.  Maintenance: $10,000.
Potential profit: $2,400.

June Position #1 - SPX Iron Condor – 1132.05
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

June Position #2 - BBH Iron Condor - $140.95
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 – 569.57
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 - $146.40
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:
$5,000. Maximum profit range of $132.50 to $147.50. Profit
potential: $1,300.

QQQ ITM Strangle – Ongoing Long Term -- $36.39
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).  We rolled out to
the July $34 calls ($.20 credit) and $37 puts ($.60 credit) on
Tuesday and took in another net credit of $.80 ($800).  Our new
total credit is now $10,400.

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 – 552.60
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.

Our June 515/505 bull put spread expired worthless, as did our 560
short call.  Therefore, we are able to officially add the $1,175
to our cash position – that now stands at $6,265 ($4,565 plus
unused $1,700)

New July Zero Plus Positions.
July bull put spread 535/525 for credit of $1.30 x 5 contracts =
$650.  Short 570 call for credit of $1.40 x 5 = $700.  If all goes
well, we’ll be able to add $1,350 to our cash position as we wait
for the market to move up.

OSX Calendar Spread Plus - $99.51
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).

This has been going on for a few months.  As of May expiration, we
had a positive $1.45 ($1450) -- $750 from before and another $700
from selling the $105 June call.

Results:  The $95/85 bull put spread expired worthless.  We had
bought back our short $105 June call for $.10 early in the week.
The June $115 call expired worthless.  It’s finally over.  Thank
goodness.  And it all worked out fine.  After a couple of months
of chaos, we emerged with a profit of $1.35 ($1.45 - $.10).  The
profit: $1,350.

If nothing else, we put a few more CPTI dollars of profit into our
coffers.  The biggest benefit came, however, if you followed the
trade from the beginning and saw the adjustments that were made as
the trade progressed.  The OSX didn’t move the way we had
anticipated and we had to do some tap dancing (adjusting) but it
all worked out.

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 "Spreads &
Combos." 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


Two Weeks And Counting
by Mark Phillips

The Fed's decision on interest rates is now just under 2 weeks
away and with continued strong economic data, the market is
factoring in the near-certainty of a rise in the Fed Funds rate.
The only unknown is whether it will be 25 or 50 basis points.  I
continue to believe that the Fed will take a gradual approach,
preferring to make only a token move unless there are strong signs
of an overheating economy.  With the recent comments from various
Fed officials, it is clear to me that they don't see any signs
that would make them want to take a more aggressive approach with
respect to interest rate policy.  So that means we continue with
our analysis under the premise that in two weeks we'll see a 25
basis point interest rate increase.

As we've discussed in recent weeks, that move will be akin to the
starter's pistol, getting the process of a deflation of the
overheated Housing market moving for real.  If you're just tuning
in to our discussion or want a refresher on this long, rambling
discussion, the prior installments can be found at the links

Look Before You LEAP

Setting The Stage

The Action Point Draws Near

While we have continued to see weakness in the Housing sector
($DJUSHB), we have not seen anything that could be construed as a
break in the longer-term bullish trend.  The quickest way to
confirm that is to pull up the relative strength chart of the
$DJUSHB vs. S&P 500 as we've done already.  I haven't duplicated
that chart here today for the sake of expediency and moving on to
new territory.  Those of you that use Qcharts can bring up the RS
chart on your own by typing in "$DJUSHB /index:spx.x".  Make sure
to put it on the weekly timeframe and then draw that multi-year
rising channel, and we can see that price is drifting along right
at the bottom of that channel.

That, plus the fact that we don't yet have a Sell signal on our
modified-scale PnF chart of the $DJUSHB index, preserves our
premise that the tipping point for the sector is still likely to
occur after the FOMC meeting in two weeks.  Recall from last
week's discussion that we've finished with the sector analysis and
are ready to proceed with looking at some individual equity
analysis.  Going back to our initial list of LEAP-able Housing
stocks (since we're looking at a nice long-term option play in
this arena), we have several targets of opportunity to consider:

Our first step in the equity-specific analysis is to determine
which of those stocks are showing the most weakness relative to
the $DJUSHB.  Repeating the process we went through in comparing
the sector to the SPX, we now go back to Qcharts and start putting
in each symbol relative to the $DJUSHB.  That's a lot of charts to
go through, so let's get cracking!

Weekly RS Chart of CTX vs. $DJUSHB

Relative to its sector, CTX put in a pretty convincing double top
formation and has been in decline for most of this year.  In spite
of that near-term weakness in the trend, we need to be cautious
about this one, with horizontal support still intact.

Weekly RS Chart of LEN vs. $DJUSHB

I actually like the looks of this chart, as we have a very clear
consolidation wedge in process, with "price" holding near the
bottom of the wedge.  The hint that perhaps the neutral pattern
will break to the downside is the fact that the longer-term rising
trendline (red) has already been broken.

Weekly RS Chart of RYL vs. $DJUSHB

Unfortunately, we couldn't show the entire chart here, as the view
shown above gives a rather unclear impression as to what to expect
going forward.  But that red trendline actually begins in early
2001, which tells us that we should view the trendline break as a
significant event.  Of course, horizontal support is still intact
near the 0.125 level and then we will have the relative low from
late-2002 near the 0.110 level to contend with.  But my read of
RYL's RS chart is that this one is just starting to turn to the

Weekly RS Chart of DHI vs. $DJUSHB

Ouch!  That is not what we want to see as eager bears!  Sure, the
break of the rising channel is encouraging, but that must be put
in the proper context of the fact that DHI has clearly been
significantly stronger than the overall sector for the past year.
There's nothing in this chart to suggest that position of
dominance has been abdicated just yet.

Weekly RS Chart of HOV vs. $DJUSHB

The overall picture presented by HOV is very similar to what we
saw in the DHI chart above.  HOV has been in a position of
dominance relative to the sector for more than a year, and we're
just seeing that being equalized now.  With the chart still
holding above horizontal support, I'm not seeing a flashing sign
of relative weakness here.

Clearly, these last two charts are the strongest of the bunch,
with the strong uptrends of the past year broken, but horizontal
support still holding up fairly well.  That tells me that our
efforts will be best spent by focusing on the first three stocks
on our list -- CTX, LEN and RYL.

Alright, so we've looked at each of the Relative Strength charts
and while the first 3 certainly provide a cleaner picture for a
bearish play, it's certainly difficult to make a conclusive case
for any one of the three over the others.  Additionally, while in
the big picture DHI and HOV have been much stronger over the past
18 months than RYL, CTX and LEN, we mustn't ignore the possibility
that these stocks may have had a stronger run and thus be
susceptible to a bigger fall.

Frustrating as it may seem, I don't think we have any hard answers
yet.  But don't despair, because we still have lots of tools in
our arsenal.  The next step is to look at relative strength charts
of each of these stocks relative to one another.  The reason we
didn't go here first is that we were hoping that the RS studies
against the sector would week out some of the candidates for us.
My gut reaction after having gone through that process would be
that our principal candidates should be LEN, CTX and RYL, but the
evidence isn't quite strong enough to make that an unequivocal

Since we have an initial perception that HOV and DHI are the
strongest stocks of our group, let's first determine which of
these two appear to be the strongest.  As you can see from the
chart below, I think we can make a clear case that DHI was the
weaker of the two through early 2003, but since then it has been
gaining strength.  We can make a solid case of this RS chart
having put in a bottom, with a likelihood of an upside breakout
coming in the weeks ahead.

Weekly RS Chart of DHI vs. HOV

Not only do we have a perception that DHI appears to be
strengthening against HOV, we have a clear level defined on the
chart above that will confirm that increasing strength.  Either a
lack of weakness from DHI or excessive weakness from HOV can
satisfy that breakout criteria.  Now that we've defined DHI as the
strong horse, we can use it as our baseline, against which to
compare RYL, CTX and LEN.

Weekly RS Chart of CTX vs. DHI

As you can see, we have a nice little bearish wedge in the CTX
relative strength chart, and it has been building for quite a
while.  The next test of key support near 1.50 will tell us a
great deal about what to expect in the months ahead, but based on
probabilities, I would venture that we have a major breakdown
coming.  I like what I see here for a downside play on CTX.

Weekly RS Chart of LEN vs. DHI

The picture on the LEN chart isn't quite so clean, but we do have
a major break of support that has taken place this year.  The
break of that rising 6 1/2-year rising trendline should not be
taken lightly and I view it as a major sea change event.  Combined
with the steady trend of lower highs over the past 18 months, LEN
definitely makes my short list of first string candidates.

Weekly RS Chart of RYL vs. DHI

Based on those last three charts, I'd have to say that we have a
pretty close horse race between CTX and LEN, but that RYL has
dropped back a good distance.  Yes, RYL is weak compared to DHI,
but not nearly to the same degree as our other two prospects.

I know this has been a real brain exercise, looking at so many
different RS charts in such a brief span of time, and I would
certainly understand if your eyes have started to glaze over.  So
let's briefly recap what we've determined today.  DHI is the
strongest of our group of 5, and it appears that we have a close
race between CTX and LEN as to which one is going to be our
favored bearish play following the start of the interest rate hike

All of this analysis was simply the preamble to determine at what
point we might consider a bearish long-term play in the sector.
That's what all the preliminary sector analysis accomplished.
Then we took our list of candidates and narrowed it down to two
that looked the most likely from a relative strength (or weakness,
in this case) standpoint, was most likely to give us an attractive
setup for a downside play.

Next week, we can finally get to the meat of the matter, diving
into the actual price charts of CTX and LEN, looking at their PnF
charts as we did in the sector analysis portion of our discussion
and we can actually determine the most favorable action points.
It's been a long road, but for those of you that stuck with me, we
should be able to finish this discussion off in fine fashion next
week.  I hope you've found this to be a beneficial and educational
exercise so far and we should be able to tie everything up in a
nice pretty package next week.

See you then!



By Leigh Stevens

I don’t use this variation so much myself to gauge or establish
upper and lower trading range parameters or bands, but this is
not to say that they are not of value and that some good traders
don't make excellent use of them.  This indicator does provide
some unique information.  Fellow market "technician" John
Bollinger invented the Bollinger band envelope variation.  My
reservations about their use is that it is hard to pinpoint a
specific buying or selling area, as these bands expand or
contract according to market volatility.  This is both, I think,
the technique’s strength and it's weakness.

Bollinger Bands (Boli Bands) combine a centered moving average,
which is part of the indicator but is usually NOT shown.  BB
basically combine the moving average envelope technique with a
measurement of current and recent price volatility to determine
the optimal placement of the upper and lower lines.

The purpose of this Indicator is basically the same as moving
average envelopes: are prices high or low on a relative basis?

Just as with (moving average) envelopes, two bands – the
convention is to call these lines "bands" to distinguish from the
fixed percentage envelope technique – are placed above and below
a centered moving average, which is often set or "defaults" (by
the charting software) to 20-days.  However, unlike lines that
are a fixed percent above or below the moving average, Bollinger
bands are plotted two standard deviations above and below the

The charts below offer examples for a period when the Nasdaq
Composite Index (COMP) was in a stable (down) trend.  Disregard
the top date as that is today's date when I looked at this chart,
but the period shown is from Feb '02 until the end of 2002 –

The following chart was during a period of 2000, when COMP was
having a more volatile period of wide-ranging price swings when
it was forming a top.

In the former chart (above), the bands are of a relatively narrow
width and in the chart below significantly wider apart at least
during the initial top-building process. [NOTE: In the period
below the price range was 1800 points, a 36% swing; the upper
chart range was 800 pts, a 42% range and close enough percentage
wise to compare.]-

We can next look at very different periods for the same item, a
stock here used in a prior Trader's Column, to illustrate the
widening and narrowing of Bollinger Bands in a more wide-ranging
(volatile) trend –

Standard deviation describes how prices are arrayed around an
average value.  One standard deviation is a set of values that
contains close to 70% of the price fluctuations that occur above
and below the moving average used in the Bollinger band
calculation.  95% of the fluctuations will occur within two
standard deviations of the moving average in question.

Since each Bollinger bands is placed at a fluctuating line that
is equal to two standard deviations, 95% of all price action will
theoretically occur within the upper and lower lines.  Each band
represents therefore, implied support or resistance.  Price
swings are unlikely to be sustained above or below these lines
for long.

Because of how they are constructed, Bollinger bands expand or
contract in order to reflect market volatility or the degree of
movement in the price swings occurring at any given time.

If the bands are relatively narrow, the market is experiencing
lower price volatility or narrower price swings and the lines
will intersect at upper and lower points that will tend to mark
the extremes (highs and lows) for these quieter market conditions.

If prices are experiencing wide-ranging price movement, the bands
expand to reflect the higher volatility that exists.  If the
bands are wide and you can usually quickly see this visually in
the pattern of price activity, the market is experiencing higher
volatility – the lines then suggest where an extreme will be
reached based on a more volatile and stronger recent price trend.

As with envelope lines, they can be used on everything from
intraday to daily to weekly charts, although I find that the most
common use seems to be with daily charts.


John spoke at the Market Technicians Association (MTA), which we
both belonged to, back in February 2002 - a major theme of this
talk related to the "diversity" of people's use of his indicator.
For example:

WHAT MARKETS - Boli bands are being used in all markets, ranging
from stocks, index options, index futures, commodities, currencies,

TIME FRAMES - Ranging from years, quarters, months, weeks, days,
hours, minutes and with "tick" charts.

DIVERSITY - This BB indicator is being used to detect the
beginning and end of trends, to highlight the potential for
reversals, to assess "continuation" patterns, to identify
overbought/oversold conditions and to place stops.

CHART PATTERN IDENTIFICATION - John cited an increasing use of
his indicator in helping spot or clarify chart patterns. For
example, a Head & Shoulder's (H&S) top or bottom has a typical
Bollinger Band "signature", or a pattern for the Bands that is
Similar, but slightly different than the actual H&S pattern.

Using again the chart from above –

The use of Bollinger bands in defining a pattern can be seen in
the above chart of QCOM where the Bands made a good outline or
"definition" of something that looked like and a Head and two
peaks that looked even more like "shoulders" – although the right
one has a bit of a "spike" to it. There was especially good
definition of the Head.

They are a "tool", not a "system". Tools, as is well known, can
be employed in different ways and the ability to use them
skillfully varies quite a bit - my use of woodworking tools will
NOT produce finished cabinets, but my carpenter brother can do
that with the same tools.

Bollinger bands are highly adaptive as it is volatility that
drives the width of the bands. This means that they can be
deployed successfully in many different types or phases of
markets.  As an interest in volatility has grown, using Boli bands
is an easy way to include volatility in the trading
decision process.

NOT SO WELL KNOWN - John's defaults were derived from studies of
the U.S. stock market using daily data over a period of many
years. The default length for the moving average is 20 periods or
20 "bars".  The default for the bandwidth is two standard
deviations.  John makes greatest use of the Bands on daily or
weekly charts. Sometimes he uses them on hourly charts for trade
execution, or on monthly charts to gain a long-term perspective.

BEST USE - By definition, prices are "high" (on a relative basis)
at the upper band and "low" at the lower band. Armed with this
information, you can compare price action to the action of the BB
indicator to help you arrive at trading decisions.

If prices are high and the indicator confirms this, you have a
"confirmed" high.  If prices are high and the indicator fails to
confirm this, you have an "unconfirmed" high, which is suggesting
that the stock or index has more "room" on the upside. John
indicated that this use or purpose was the goal he had in mind
when he developed his trading tool.


1. As with moving average envelops, prices can and do "walk" up
or down the Bollinger Bands.

2. The average used was designed to best detect the
"intermediate" trend; e.g., 2-3 weeks or longer.

3. Unlike moving average envelopes, at least the way I use them,
closes above or below the Bollinger Bands can suggest
"continuation" signals for the trend rather than "reversal" type

4. If the (centered) moving average is lengthened, the number of
standard deviations needs to be increased; e.g., from 2 at 20
periods, to 2.1 at 50 periods. Likewise, if the average is
shortened, the number of standard deviations should be reduced;
e.g., from 2 at 20 periods to 1.9 at 10 periods.

5. The moving average used is a "simple" moving average because a
simple moving average is used in the standard deviation process,
so the same type of average is logically consistent.

6. A "touch" to the upper or lower line is just that - a tag or
touch. These are not, in and of themselves, a buy or sell

Good Trading Success! using Bollinger bands


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