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Daily Newsletter, Monday, 06/21/2004

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The Option Investor Newsletter                   Monday 06-21-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Broken Record
Futures Wrap: See Note
Index Trader Wrap: Semiconductors stalled, with brokers in spotlight


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     06-21-2004            High     Low     Volume Advance/Decline
DJIA    10371.47 - 44.94 10440.05 10363.36 1.40 bln   1340/1487
NASDAQ   1974.38 - 12.35  1995.06  1972.43 1.38 bln   1338/1687
S&P 100   552.36 -  2.45   556.29   551.92   Totals   5678/3174
S&P 500  1130.30 -  4.72  1138.05  1129.64
RUS 2000  568.74 -  1.80   571.85   568.15
DJ TRANS 3065.24 -  3.43  3078.46  3054.43
VIX        15.26 +  0.27    15.62    14.96
VXO        14.63 -  0.12    15.24    14.42
VXN        19.73 -  0.29    21.01    19.70
Total Volume 3,083M
Total UpVol  1,125M
Total DnVol  1,807M
52wk Highs     209
52wk Lows      109
TRIN          1.45
PUT/CALL      0.83
*******************************************************************

Broken Record
by James Brown

All the financial media, including this column, is starting to
sound like a broken record.  The markets are just not moving as
investors wait for the June 30th deadline for the Iraq handover
of "power" and the interest rate decision by the Federal Reserve.
The challenge for traders is the lack of volume and volatility.
The stock market is stuck going sideways and we could easily
remain here for the next seven sessions.

Monday's market actually started bullish as stocks pushed higher
on several merger and acquisition announcements and up beat
comments from Dow-component Intel.  Unfortunately, the positive
glow began to fade on news that three British boats and their
eight soldiers were all captured after straying into Iranian
waters on a narrow river between Iran and Iraq.  The majority of
the session was spent trading sideways. Not counting the first
and last hour of the day the Dow Industrials were stuck in a 30-
point range.  The NASDAQ traded in a 9-point range and the S&P
500 traded in a 3-point range.  Then suddenly in the last 90
minutes of the day all three indices broke down through their
intraday ranges and began to sink into the closing bell.

Overseas indices didn't fair much better and most closed near the
unchanged mark.  The Japanese NIKKEI was the exception with a
218-point gain but this failed to erase all of Friday's 225-point
loss.  The Hang Seng index closed down almost 10 points to 11,845
after its recent breakdown below the 12,000 mark.  The German DAX
lost just over 10 points to 3989.  England's FTSE dipped 3.6
points to 4502 and the French CAC lost less than a point to 3740.
Like their U.S. counterparts the world indices all appear to be
waiting for the June 30th deadline and the onset of the Q2
earnings season.

Here at home the Dow Jones Industrials lost 45 points to close at
10,371.  The venerable index could be headed to the bottom of its
two-week trading range at 10,300.  The NASDAQ looks weaker with
its 12-point loss to close at 1974.  The NASDAQ composite is only
a couple of points above its simple 200-dma and appears to be
headed toward its June lows near support at 1960.  Technical
traders will notice the fresh MACD sell signal.

Market internals were mixed most of the day but turned bearish by
the close.  Declining stocks outnumbered advancers nearly 15 to
13 on the NYSE and about 17 to 13 on the NASDAQ.  Down volume was
almost 50% stronger than up volume on the NYSE while down volume
was almost double up volume on the NASDAQ.  Overall volume was
extremely low and ranked as one of the lowest volume days of the
year with less than 2.75 billion shares trading on both
exchanges.  The downturn in the last two hours of trading made
for a market wide decline with only four sectors: airlines,
retail, natural gas and utilities; closing in the green.

Chart of the Dow Industrials:




Chart of the NASDAQ Composite:



It shouldn't come as a surprise that the markets are churning
sideways ahead of the June 30th handover in Iraq.  The White
House has warned us for months that violence and terrorist
activities would rise sharply ahead of the deadline.  Last week
we heard about the terrorists in Saudi Arabia kidnapping and
beheading American Paul Johnson.  According to reports this
weekend Saudi security forces killed terrorist leader Abdul Aziz
al-Muqrin and three more terrorists responsible for Paul's death.
Unfortunately, there is a new kidnapping case.  Insurgents in
Iraq have captured a S. Korean man and have threatened to kill
him if S. Korean doesn't change its mind about sending 3,000
soldiers to help with Baghdad/Iraq security.

The big story in Iraq today was the capture of three British
boats and their crew by Iran.  This news put a wet blanket over
the markets and probably raised a number of eyebrows after last
week's headlines that Iran was massing troops on the Iraq-Iran
border.  Iran continues to butt heads with the U.N. over its on
going nuclear energy/weapons development program so any negative
headline involving Iran is sure to grab the markets attention.
It might be surprising that the rising "geo-political tensions"
did not send oil prices higher.  Fortunately, news that one of
Iraq's recently damaged oil pipelines was working again and
pumping 42,000 barrels an hour helped alleviate some of crude's
recent rise.  Crude futures slipped $1.23 to $37.77 a barrel and
appear to be building what looks like a bear flag pattern.  Now
if Norway, the globe's third largest oil exporter, could solve
its oil-worker strike, currently on its fourth day, we might see
oil prices truly begin to ease lower.

Speaking of lower the SOX semiconductor index edged closer to
breaking support at the 450 level in spite of bullish comments
from Intel Corp (INTC).  Intel, the world's largest producer of
semiconductors, expects that its Q2 numbers will be strong and
near the record setting pace of their Q1 report.  The report
comes from Intel CEO Craig Barrett who was interviewed by a
Spanish newspaper.  You might remember a few weeks ago that Intel
narrowed its revenue forecast to the upper half of its previous
guidance.  This surprised the market, which was expecting Intel
to guide lower.  Barrett was quoted as saying the recession in
the semiconductor industry is over.  Wall Street firm J.P.Morgan
(JPM) decided to raise its earnings estimates for Intel based on
the news.  Investors will need to keep an eye on the SOX.  If it
breaks support at the 450 level the NASDAQ will have a hard time
making any sort of recovery with the chips sinking lower.

Market analysts traditionally look at rising M&A activity as
bullish.  If companies are willing to make acquisitions it
usually means that management has a positive outlook on the
future and they're willing to spend money on improving their
competitiveness.  If that's the case then today's spat of
acquisitions looks pretty bullish for the market.

Monday's biggest deal was between banking giant Wachovia (WB) and
SouthTrust (SOTR).  WB announced it was buying SOTR in an all-
stock deal worth $14.3 billion.  This valued SOTR at a 20%
premium over Friday's close.  Unfortunately, Wall Street thought
the deal was a little expensive and issued concerns over some of
WB's expectations on what the merger might be able to do for WB's
earnings.  SOTR soared 13% while shares of WB slipped 4%.

The second biggest deal was a consolidation in the mall business.
Simon Property (SPG) announced it was buying rival Chelsea
Property Group (CPG) for $3.5 billion in cash and stock.
Finishing out the M&A news were announcements from MHR, BFD and
OXM.  Magnum Hunter Resources (MHR) declared it was buying $243
million in oil and gas properties in New Mexico from EnCana
(ECA).  MHR will be gaining 458 oil and gas wells and close to
44,000 acres of undeveloped land to explore.  Meanwhile BostonFed
Bancorp (BFD) announced it was buying Banknorth (BNK) for $195
million in cash and stock.  Finally Oxford Industries (OXM)
reported it was purchasing Ben Sherman, an English clothing
designer, for $146 million.

In other news HMO providers Aetna (AET) and Cigna (CI) announced
a major win at the Supreme court.  The court voted 9-0 on two
cases in favor of the HMO's saying patients can't sue their HMO
for refusing to pay for doctor-recommended treatments.  The
decision will help protect companies like AET and CI from the 72
million Americans currently covered by HMO's.  Consumer groups
are likely to take their cause to Congress.

After the closing bell today Priceline.com (PCLN) raised its
earnings guidance for the second quarter.  PCLN had previously
forecast 25-30 cents per share while analysts were expecting 28
cents per share.  PCLN said business is strong and they now
predict earnings in the 29 to 32 cent range.

The next couple of days are devoid of major economic reports so
stocks will be left to trade on their own news or any new
developments coming out of Iraq.  The current market forecast
calls for stocks to remain range bound until the end of the
month.  Contributing to this lack of direction will be 16 IPOs
this week sucking up capital that may have been spent elsewhere.
Traders can keep an eye on the brokerage stocks tomorrow.  Before
the opening bell we'll hear earnings reports from Goldman Sachs
(GS) and Morgan Stanley (MWD).  Estimates for GS are $1.95 per
share.  Estimates for MWD are $1.05.  In the past these companies
tend to beat estimates only to see their stocks trade down on the
news.  Now that both MWD and GS are near two-week lows there is a
chance they could pop higher instead.


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

Semiconductors stalled, with brokers in spotlight

The major indices finished near their lows of the session with
the NASDAQ-100 Tracker (AMEX:QQQ) $36.15 -0.80% giving back
fractional gains held throughout the session, where despite
positive comments from brokers on Intel (NASDAQ:INTC) $27.52
-0.43% and Motorola (NYSE:MOT) $17.54 +1.15%, the Semiconductor
Index (SOX.X) 450.77 -0.50% closed back below its upward trend
for a third-consecutive session, putting technology traders on
edge.

While we give some focus to the SOX.X, it would well be the
brokers as depicted by the Broker/Dealer Index (XBD.X) 122.87
-0.50% and earnings tomorrow morning from Morgan Stanley
(NYSE:MWD) $51.25 -0.77% that sets an important tone.  Not only
for tomorrow's session, but perhaps the remainder of the month as
investors brace for the turnover of Iraq to its new government at
the end of the month.

Market Snapshot / Internals - 06/21/04 Close




Both the NYSE and NASDAQ A/D line mirrored each other by the
close with decliners edging out advancers by a narrow margin.
Volume at both the NYSE and NASDAQ was light, where only a little
burst of selling toward the close had NYSE volume breaching the 1
billion share mark, its lightest trading volume since most
traders took an early vacation on May 28 ahead of the Memorial
Day weekend.

There was nothing too memorable about today's session, other than
the NYSE NH/NL 5-day ratio crossing above its 10-day average
ratio, where this action does suggest some shorter-term bullish
breadth returning to the NYSE.

If there is one "event" on the horizon to have new highs
continuing to build on the NYSE, I think it may have to be
tomorrow morning's earnings from Morgan Stanley (MWD), where
despite the stock's 17% decline from in early March highs,
analysts look for a "blowout" quarter, where investment banking
revenues are to offset lighter stock/bond trading volumes.
Current consensus is for MWD to have earned $1.05 in the latest
quarter.

NYSE and NASDAQ NH/NL Breadth -



The NYSE NH/NL 5 and 10-day ratios look to have hit an inflection
point low on Thursday.  With today's trade in the books, the 5-
day ratio moves above its 10-day ratio.  NASDAQ's NH/NL
indications, which showed weakness first remain weak, but an
inflection low reading for the 5-day SMA, which remains below its
10-day average ratio (still in column of O too), may be
suggesting a relative low in the making.

If so, I think current levels of trade for the SOX.X (for a
third-straight session) become rather important.

Pivot Analysis Matrix -



In PINK I've marked today's highs and lows for the SOX.X, where
Monday's correlative DAILY R1 (459.59) and new WEEKLY Pivot
(459.07) while pierced to the upside for 20-minutes in this
morning's session, found similar resistance selling as Friday.
The SOX.X then drifted lower to the close, spending the remaining
30-minutes either side of its MONTHLY S1, with the SOX.X still
the only equity index in our MONTHLY Pivot Matrix to trade its
MONTHLY S1 in June.

Semiconductor Index (SOX.X) - Daily Intervals



A quick look at Dorsey/Wright and Associates' Semiconductor
Bullish % (BPSEMI) shows this sector bullish % still reading
"bull alert" status at 23.53%, where a lower reading of 20% would
have this sector reversing back lower to "bull correction"
status, and 16% reading then back in "bear confirmed" status.

While internals are "oversold" on a longer-term basis and trying
to improve, internals are also weak and fragile.

While the 21-day SMA is hidden by a marked yellow zone of
resistance from 469-471, both the 21-day and 50-day SMA setup,
along with stochastics looks strikingly similar to that found
just prior to the SOX.X trading 433 on May 3rd.

NASDAQ-100 Tracker (AMEX:QQQ) Chart - Daily Intervals



While the QQQ looks to get pulled lower by weakness among
semiconductors, it is perhaps the resiliency among the larger cap
NASDAQ stocks that has held the SOX.X together the past three
sessions.

While there's not a broker or bank in the bunch, a negative
reaction to the financials, or MWD's quarterly earnings could
have the QQQ quickly trading its WEEKLY S2 tomorrow.  The trade
I'll be looking for is any type of near-term pop from a positive
MWD oversold bounce, where should the QQQ pop close to $36.72,
check the SOX.X.  If the SOX.X is still under its WEEKLY Pivot,
then I'd be looking short/put the QQQ with a downside target of
MONTHLY Pivot and $34.75.

A volume at price study on the QQQ (60-minute chart) spanning
January 1 to current shows $36.50-$35.25 as being rather VOID of
any volume interest.  With volume almost nonexistent in today's
session (relatively speaking) that zone from WEEKLY S2 to MONTHLY
Pivot would be a first line of defense for bulls.

S&P 500 Index (SPX.X) Chart - Daily Intervals



The S&P Banks Index (BIX.X) 348.35 -0.22% traded in a 2.5-point
range today, and despite several bank merger announcements today,
the BIX.X was rather quiet, and most likely takes any near-term
lead from the brokers.  The impact on the S&P 500 Index (SPX.X)
1,130.30, where 1,141 resistance looks to be forming, will most
likely be driven from the financials in tomorrow's session.

Since we have some levels to at least monitor in the pivot matrix
for the BIX.X, lets take a quick look at the Broker/Dealer Index
(XBD.X), which looks about as vulnerable as the SOX.X does at
this point.

Securities/Broker Dealer Index (XBD.X) - Daily Intervals



I've placed a "cheater's trend" on the XBD.X similar to that
shown on the SPX.  A "cheater's trend" is a trend I call a
"cheater's trend" because I'm drawing a trend from a recent
relative low (or high sometimes) that may be in play, but is
relatively untested longer-term.

As we begin to look at the SOX.X trend, and perhaps the above
trends in play on the XBD.X, there's some important tests of
upward trending support currently in play.

Mirror, mirror on the wall.  Who's been the strongest of them
all?

Don't forget, American Express (NYSE:AXP) $51.50 -0.88%, JP
Morgan (NYSE:JPM) $37.00 -0.61% and Citigroup (NYSE:C) $47.18
-0.67%, three Dow components, have a strong financial flavor.

Dow Industrials (INDU) Chart - Daily Intervals



AXP, C and JPM all look technically stronger relative to MWD and
the Broker/Dealer Index (XBD.X) as it relates to their 21-day,
50-day and 200-day SMAs.  So does the Dow Industrials (INDU).  In
my opinion, any real technical weakness for the INDU at this
point is a break back below 10,250.

Jeff Bailey


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The Option Investor Newsletter                   Monday 06-21-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: EASI, PD
Dropped Calls: None
Dropped Puts: None
Watch List: The Dead Zone


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*****************
STOP-LOSS UPDATES
*****************

EASI - call play -
raise stop from $53.50 to $54.50

---

PD - call play -
raise stop from $68.00 to $68.85


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

None


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DROPPED PUTS
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None


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

The Dead Zone

Avery Dennison Corp. - AVY - close: 61.90 change: +0.80

WHAT TO WATCH: Now that we're past option expiration, AVY is
making a convincing break higher, taking out strong resistance at
$61 and then blasting through both the 50-dma and then the 100-
dma.  With volume on the rise, it looks like AVY is ready to make
a serious run at the Spring highs in the $65 area.

Chart=


---

Zebra Technologies Corp. - ZBRA - close: 79.55 change: +0.09

WHAT TO WATCH: After breaking out to new highs in late May, ZBRA
has been building a nice consolidation pattern of higher lows and
lower highs.  This pattern appears like it could break any time
and we're going to bet it will be to the upside.  Look for a move
over $80.50 to get the party started.  Because of the long-term
bullish trend, our expectation is that a downside break from the
consolidation pattern is likely to be a bear trap and provide
another attractive entry point near the 50-dma.

Chart=


---

Int'l Business Machines - IBM - close: 89.49 change: -0.57

WHAT TO WATCH: After stalling near the $90-91 resistance zone for
the past couple weeks, shares of Big Blue are tipping over and
look ripe for a bearish play.  Use a trigger under the 50-dma and
target strong support in the $80-81 area.  Note that the May lows
at $85 should provide some support, but with the bearish PnF
chart, we're expecting the recent trend of lower highs and lower
lows to persist.

Chart=


---

RJ Reynolds - RJR - close: 64.33 change: +1.24

WHAT TO WATCH: After selling off with a vengeance last month,
shares of RJR are coming back just as strongly and it looks like a
near-term breakout could be in the works.  Use a trigger at $66
and target a rally to strong resistance in the $71-72 area.

Chart=



===================
On the RADAR Screen
===================

CTX $45.53 - After being soundly rejected at its 50-dma, CTX looks
headed lower in advance of the FOMC meeting.  It's pretty
aggressive to establish a position before the announcement next
week, but a break of the $43 support level could open up the
floodgates, letting sellers drive the stock to next firm support
near $38.

GENZ $44.00 - Still lurking just below key resistance, GENZ looks
like it could make good on its promise of an upside breakout.  Use
a trigger over $45 (which is a new PnF Buy signal) and target
resistance near $50-51.


*******************
FREE TRIAL READERS
*******************

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.

We would like to have you as a subscriber. You mar
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you mar go to our website at

www.OptionInvestor.com

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

 "Contact Support"

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

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


**********
DISCLAIMER
**********

Please read our disclaimer at:
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