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Daily Newsletter, Thursday, 06/24/2004

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The Option Investor Newsletter                Thursday 06-24-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Pause To Reflect
Futures Markets: See Note
Index Trader Wrap: See Note
Market Sentiment: Traders Still Cautious


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      06-24-2004           High     Low     Volume   Adv/Dcl
DJIA    10443.81 - 35.80 10487.46 10433.56 1.72 bln 1662/1566
NASDAQ   2015.57 -  5.40  2032.21  2013.78 1.69 bln 1623/1473
S&P 100   555.71 -  2.09   558.77   555.30   Totals 3285/3039
S&P 500  1140.62 -  3.44  1146.34  1139.94
W5000   11104.21 - 28.10 11159.24 11098.64
SOX       470.73 -  5.60   479.42   469.24
RUS 2000  579.05 -  1.10   583.06   578.92
DJ TRANS 3127.26 - 12.00  3144.88  3124.30
VIX        14.81 +  0.83    14.97    14.16
VXO (VIX-O)14.39 +  0.76    14.64    13.95
VXN        19.36 +  0.38    19.61    19.07
Total Volume 3,681M
Total UpVol  1,492M
Total DnVol  2,086M
Total Adv  3774
Total Dcl  3429
52wk Highs  363
52wk Lows    81
TRIN       1.19
NAZTRIN    1.30
PUT/CALL   0.66
************************************************************

Pause To Reflect
by Jim Brown

After a very strong breakout on Wednesday the markets paused
to reflect today and managed a very orderly profit taking
session. The Dow tried twice to move higher and grab the
brass ring at 10500 but fell about a dozen points short on
the attempt. Considering the two day rally off the lows it
is not surprising traders paused to wonder not only how they
reached these levels but why given the current events.

Dow Chart


Nasdaq Chart


Sox Chart



The economic reports produced another mixed picture of
conflicting signals sending ten year bond yields back down
to 4.64%. The Jobless Claims crept up once again to near
the 350K level with a notch at 349,000 for last week. There
were comments from analysts that Reagan's funeral prevented
workers from applying for benefits in the prior week thus
shifting more applications into this week. Sounds reasonable
to me but we will have to wait for next Thursday's release
to see if they were right.

The Help Wanted Index for May rose to 39 from 38 in April.
Considering the recent gains in employment those same
analysts are suggesting that this indicator is no longer
valid instead of accepting that new employment may have
slowed as we move into summer. Had it soared to 45 or so
you can bet they would have been pounding the table to
raise the estimates for the June nonfarm payrolls due out
next Friday. The tea-leaf readers want the surveys to
conform to their economic outlook not change their outlook
to match the indicators. Since this indicator is based on
newspaper advertising it is probably outdated with the
onslaught of online job shops. Outdated yes but not yet
insignificant.

Another surprise came from a big drop in Durable Goods of
-1.6% for May when consensus estimates were for a gain of
+1.1%. This marks the second consecutive month that Durable
Goods have fallen with the April drop at -2.6%. This two
month drop of -4.2% sent the bond market soaring on the
outside chance the Fed will see the economy as still too
soft to raise rates. While I think that possibility is far
too remote to consider the ten-year yields did drop to a
five week low and with only four days remaining to the
Fed decision. The drop in Durable Goods suggests one of
the key points in the economic recovery, business spending,
may be slowing once again. This is a very broad indicator
and a continued slowdown in most components is troubling
to say the least. I think this has a good chance of coming
back to bite us very soon if the Jobs report next Friday
shows a letup in hiring.

The blowout number for the day was New Home Sales which
soared to 1,369,000 units and more than 200,000 more than
estimates. This is a May number and it was the largest one
month increase since April 1993. I am sure readers remember
I have written about this before and we expected the late
spring numbers to explode. Once the rate increase was more
or less guaranteed builders would provide higher incentives
to attract buyers and those buyers still on the fence would
bite the bullet and take the plunge trying to get in while
they could still afford it. We have seen repeated reports
that ARM loans have exploded as buyers try to reduce pmts
as much as possible to offset rising rates and to leverage
the largest amount of house they could buy on current
incomes. With housing prices rising +15% or more a year
in many areas the window of opportunity for a favorable
purchase is closing. I have a son that owns a mortgage
loan business and his closings have risen substantially
in just the last month. Also, remember that New Home Sales
are counted when the contract is signed and deposit made
and not when they are closed. The jump in sales is simply
a rushed decision to buy and lock in loan rates and it may
be well ahead of the actual date of possession. Builders
are now racing to build the homes they have already sold.
Builders have been offering a capped rate mortgage for
closings up to 12 months away in order to lock in buyers.
The builder will eat the difference and add it to the cost
of sales. Regardless of the current rate of sales you can
bet builders will start fewer homes next winter with the
prospects of rates being 2% higher in summer 2005. Keep
control of the inventory and you control prices.

It was not the economic reports that had the most impact
on the markets at the open. It was news from Iraq as we
draw nearer to the June-30th changeover. Overnight attacks
killed 69 and injured over 300 in Iraq as terrorists try
to further complicate the change in power. With six days
left you can expect this carnage to continue with attacks
against the new regime more than likely as the clock ticks
down. Where a change in U.S. Presidents normally focuses
on accomplishments in the first 100 days of office the
major goal for the incoming Iraq regime will be staying
alive for 100 days. If today's attacks are any indication
the body count over the next week could be huge.

Still the markets managed to hold their gains until about
1:PM and the eventual sell off was minimal. The Dow tried
very hard to attack the 10500 level but could only manage
10487. Very respectable in my opinion. The closing drop
to 10450 is still a level not seen in over two months
until yesterday. The resistance explosion on Wednesday
came on the back of a very big buy program that triggered
massive short covering. Seems there were many traders
short in front of the Fed/Iraq events and for good reason.
Somebody pulled the buy program trigger at exactly the
right time to upset that apple cart with a massive move
over the 10430 resistance level.

If you recall my comments from Tuesday night this event
was not unexpected. We closed just below 10400 on Tuesday
and I speculated that a +100 point move would not be
unreasonable and I saw a bullish bias building. The 10500
level was my target. "Should we see a Dow move over 10430
we could see an acceleration of buying that just might
overcome the resistance areas to the 10500 level." (Tuesday)
The 10486 high on Wednesday and 10487 high on Thursday
was close enough for me.

The Nasdaq rebound far exceeded my expectations and it
continued today with a spike to 2032, well over the top
of the recent range and over the 2020 resistance. It makes
you appreciate how strong the Wednesday short covering
really was. The A/D volume was 5:1 in favor of advancers
and the new 52-week highs were the strongest since April
12th. The spike came after an upward creep to that prior
resistance so the spring was compressed and ready to go.
The two-day rebound on the Nasdaq saw very little profit
taking with only a -5 point day but we did slip back under
the 2020 resistance level. We are poised to go either way.
The SOX lead the Nasdaq bounce and it also led the decline
today with a -5.61 drop beginning right at 1:PM. The SOX
is resting on 470 support and well under strong resistance
at 490. There could be another opportunity for a bounce
here but odds are better for a sideways move into next
week.

For Friday we have the final Q1 GDP, which is expected to
be +4.4% and inline with the last revision. After the bad
Durable Goods today it could move the market if we see a
substantial downward revision. Consumer Sentiment is also
due Friday at 95.5 and inline with the initial June number
at 95.2. This is one indicator that could see a jump. With
the Iraq prisoner problem behind us and no material economic
challenges in the rate/job market consumers should be happy
and enjoying the summer sun. We also see Existing Home
Sales where the consensus is for a decline to 6.53M units.
After the New Home number today that may be low.

For Friday I am not expecting any major upward move. With
the potential for an escalation in violence in Iraq as the
days tick away there is more potential for profit taking
ahead of weekend event risk than for another rally. With
the Fed meeting in two days those making bets should have
already made them or the cautious ones might wait until
Monday. We are watching the countdown on multiple time
bombs and as the fuses grow short the potential for gains
diminishes. My best target for a resumption of any summer
rally is next Thursday. I would look at any dips before
the 30th as buying opportunities.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


***************
FUTURES MARKETS
***************

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



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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_062404_1.asp


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****************
MARKET SENTIMENT
****************

Traders Still Cautious
-J. Brown

"No" was the answer to yesterday's question if there would be any
follow through on Wednesday's technical breakout.  The long-await
rush of money that is supposed to be sitting on the sidelines
failed to appear.  Investors remain cautious and for good reason.
News out of Iraq this morning was deadly.  A new series of
attacks and car bombs left 100 some people dead and hundreds
wounded as we approach the June 30th deadline.

Stocks traded mostly sideways through out the session before a
last hour sell-off.  Yet for the most part stocks held on to the
majority of their gains from the previous two sessions.   Today's
big winners, aside for a surge in gold, were the housing stocks.
The May New Home Sales numbers unveiled a 15% jump in sales to a
new record.  This sparked a fire under the homebuilders but the
flames began to cool midday and most builders significantly
tempered their gains by the close.  This is good news because
reaffirms that the economy is strong, consumers are still strong
and a wave of new home sales usually means more retail sales as
Americans rush out to buy new merchandise for their new homes.

Once again market pundits are suggesting that we will continue to
trade sideways until the end of next week.  I know you're tired
of hearing about it but Wall Street remains focused on the June
30th interest rate decision, the Iraq handover and the July 2nd
June payrolls report.  After that is the long July 4th holiday.
If the holiday proves to be uneventful then we can move
unhindered into the Q2 earnings season.

A couple of noteworthy items to cool any bullish cravings you
might have.  The volatility indices (VIX, VXO, VXN), while moving
higher today, remain near their lows and at bearish levels.
Meanwhile, the ARMS index and a few of its key moving averages
are also approaching bearish levels.  Now we know these can
always get more oversold but traders need to be careful when
considering new bullish positions.


-----------------------------------------------------------------

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  8871
Current     : 10443

Moving Averages:
(Simple)

 10-dma: 10387
 50-dma: 10253
200-dma: 10139



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  962
Current     : 1140

Moving Averages:
(Simple)

 10-dma: 1134
 50-dma: 1119
200-dma: 1096



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1180
Current     : 1488

Moving Averages:
(Simple)

 10-dma: 1473
 50-dma: 1447
200-dma: 1438



-----------------------------------------------------------------

CBOE Market Volatility Index (VIX) = 14.81 +0.83
CBOE Mkt Volatility old VIX  (VXO) = 14.39 +0.76
Nasdaq Volatility Index (VXN)      = 19.36 +0.38

-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume

Total          0.66        861,415       572,208
Equity Only    0.49        698,962       341,775
OEX            1.20         14,827        17,831
QQQ            0.27        137,077        36,783


-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          67.0    + 1     Bear Confirmed
NASDAQ-100    43.0    + 2     BULL ALERT
Dow Indust.   66.7    - 3     Bear Confirmed
S&P 500       64.4    + 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: 0.91
10-dma: 0.97
21-dma: 0.93
55-dma: 1.04


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
points.


-----------------------------------------------------------------

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1357      1585
Decliners    1465      1457

New Highs     161        89
New Lows       30        28

Up Volume    725M      751M
Down Vol.    976M      848M

Total Vol.  1726M     1674M
M = millions


-----------------------------------------------------------------

Commitments Of Traders Report: 06/15/04

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 traders remain net bearish but they have added to
their long positions.  Small traders have also added to their
long positions but it's the jump in their shorts that is most
noteworthy.


Commercials   Long      Short      Net     % Of OI
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%)
06/15/04      428,905   444,197   (15,292)   (1.8%)

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
05/25/04      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%
06/15/04      169,595   115,336    54,259    19.0%

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... what are commercial traders trying to tell us.  Their
short positions have grown steadily over the past four weeks.
Likewise the small traders' long positions have grown each
week for the last four weeks.


Commercials   Long      Short      Net     % Of OI
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%)
06/15/04      440,867   522,546    (81,679)   (8.5%)

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

Small Traders Long      Short      Net     % of OI
05/25/04       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%
06/15/04      216,759    147,247    69,512    19.1%

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


NASDAQ-100

Commercial traders remain bullish on the NASDAQ but their
confidence is waning.  Likewise small traders are staying
true to their nature and doing the opposite with a decrease
in shorts.


Commercials   Long      Short      Net     % of OI
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%
06/15/04       78,542     54,341    24,201   18.2%

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
05/25/04       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%)
06/15/04       15,794    35,880   (20,086)  (38.9%)

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

DOW JONES INDUSTRIAL

Hmm.. we have some interesting moves here.  Commercial traders
have gone from net bearish to net bullish while small traders
have oved from net bullish to net bearish on the Dow Jones.
You know who normally wins these conflicts - it's the
commercials.


Commercials   Long      Short      Net     % of OI
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%)
06/15/04       30,438    24,766    5,672      10.3%

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
05/25/04        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%
06/15/04       13,942    20,953   (7,011)   (20.1%)

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 06-24-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: OSIP
Call Play Updates: AHC, DHR, MERQ, EASI, ETN, GDW, PD
New Calls Plays: CAT
Put Play Updates: CCMP, KSS, INSP, MO, OMC, SLAB
New Put Plays: ESRX


****************
PICKS WE DROPPED
****************

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.


CALLS:
*****

None


PUTS:
*****

OSI Pharma - OSIP - close: 68.62 chg: +0.41 stop: 70.01

Ouch!  We've been stopped out in OSIP when it pierced the $70.00
mark this morning.  On Tuesday we were cautious because OSIP was
rising on rumors that DNA was considering OSIP as a takeover
play.  Then on Wednesday, with the market in breakout mode, the
BTK biotech index surged through resistance at its 40-dma and its
200-dma.  Today the BTK continued to rally into the morning and
that was enough to push OSIP over the edge.  The move also
produced a new buy signal on OSIP's P&F chart, which actually
turned the combined sell signal-to-buy signal into a bear trap
pattern (yeah, no kidding).  Unfortunately, if you look at the
BTK today it appears to be failing under its simple 50-dma.

Picked on June 20 at $ 65.63
Change since picked:  + 2.99
Earnings Date       05/11/04 (confirmed)
Average Daily Volume:    4.4 million
Chart =



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and Alan Knuckman specialize in live assistance of stock*,
option* and futures traders. The combination of the proven Man
Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for
success.

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********************
PLAY UPDATES - CALLS
********************

Amerada Hess Corp. - AHC - cls: 77.51 chng: -1.27 stop: 73.85

As we mentioned in our initial writeup on AHC, we expected that a
breakout above the $75 level would generate some significant
follow through and indeed it did.  After clearing that hurdle on
Tuesday, the stock soared to next resistance in the $78-79 area
yesterday.  After such a strong move a bit of profit taking was
due and that's precisely what materialized today, with the stock
retracing just about a third of this week's bullish move.
Traders that missed the breakout entry are now looking for higher
support to buy on the pullback and the 50% level near $76.50
looks like a good target.  We really shouldn't see a drop all the
way back to $75 at this point and are expecting the uptrend to
continue, possibly as early as next Monday.  A rally into the
$82-83 area should be used for harvesting gains on the play.
We're keeping our stop at $73.85 for now.

Picked on June 17th at       $74.15
Change since picked:          +3.36
Earnings Date               4/28/04 (confirmed)
Average Daily Volume =     1.10 mln
Chart =


---

Danaher Corp. - DHR - close 50.16 change: -0.58 stop: 48.00

Monday's breakout over $49 was just the beginning for our DHR
play, as the stock continued its bullish move, rising almost to
the $51 level this morning before the inevitable profit taking
arrived.  The pullback was a bit stronger than we would have
liked, but it was encouraging to see the stock find support just
above $50 and consolidate in a tight range for the remainder of
the session.  While aggressive traders can consider buying the
current dip, based on the way the stock has traded recently,
we're expecting a pullback to test the $49 breakout level as
newfound support.  That will make for the ideal continuation
entry point, as the 10-dma ($49.16) ought to continue to act as
support.  Traders looking for momentum entries can still consider
a move over $51, as that still leaves ample room to our $53-54
target zone for a quick momentum play.  Note that our $48 stop
should now be protected by the 20-dma at $48.15.

Picked on June 20th at       $48.74
Change since picked:          +1.42
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =     1.58 mln
Chart =


---

Mercury Interact. - MERQ - cls: 50.38 chng: +0.39 stp: 48.50*new*

Wednesday's strong rally lifted most stocks higher and MERQ
wasn't left out of the bullish party, rising to test the $50
resistance level. Solidifying that move, the stock continued its
ascent today, reaching almost to the $51 level before settling
back for only a small fractional gain.  Despite the afternoon
pullback, MERQ still closed at its best level since mid-January
and the next objective will be for a move to fill that January
gap up in the $52-53 area.  While aggressive traders can hold on
for a test of the January highs near $54, we're suggesting
harvesting profits in the $52-53 area.  With the proximity of
that exit target, it only makes sense to tighten our stop.  Let's
raise that stop to $48.50, which will be below the 20-dma
($48.39) by tomorrow.  A pullback and rebound from above the 10-
dma ($49.00) can still be used for new entries, but we're leaning
more towards just managing existing positions here, rather than
aggressively chasing new entries.

Picked on June 6th at        $47.56
Change since picked:          +2.82
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =     2.11 mln
Chart =


---

Engineered Support Sys - EASI - cls: 58.67 chg: -1.03 stop: 55.50

The DFI defense index has hit yet another new all-time high in
the last two days.  Climbing in its shadow is EASI.  The stock
tried for the second time to breakout over resistance at $60.00
but with the markets slipping back in profit taking today it
couldn't do it.  We are expecting an eventual breakout but shares
may retest the $57.00 level again.  At this time we're not
suggesting new bullish positions. Yesterday we raised our stop
loss to $55.50.

Picked on June 20 at $ 56.22
Change since picked:  + 2.45
Earnings Date       05/25/04 (confirmed)
Average Daily Volume:    297 thousand
Chart =


---

Eaton Corp - ETN - close: 62.85 chg: -0.93 stop: 59.95

ETN surged to a new all-time high on Wednesday and confirmed the
breakout over key resistance at $62.00.  The stock is short-term
overbought so today's 1.45% pull back is just mild profit taking.
Actually, it wouldn't surprise us to see ETN slip back to test
the $62.00 mark again.  Traders should be ready to take advantage
of the dip or buy the bounce.  Remember that our target is the
$70 range.  No change in our stop loss.

Picked on June 18 at $ 62.05
Change since picked:  + 0.80
Earnings Date       04/14/04 (confirmed)
Average Daily Volume:    1.0 million
Chart =


---

Golden West Fncl - GDW - close: 108.80 chg: -0.10 stop: 107.00

GDW came very close to breaking out over resistance and hitting
our trigger to go long at $110.01 this morning.  GDW hit $109.89
before slowly slipping back toward unchanged as the market
suffered some profit taking on yesterday's gains.  We will
continue to wait for the breakout for now but our patience won't
last too much longer.  Keep an eye on the banking indices.  The
BKX needs to push through resistance near 98.00-98.50 while the
BIX index did hit a new three-month high but failed to hold it.

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 =


---

Phelps Dodge - PD - close: 76.08 chg: +0.96 stop: 71.75 *new*

Hmm... it may be time to consider taking some profits here.  The
July $70 calls have moved from $3.80 to $7.00 and the July $75s
have surged from $1.50 to $3.30 since we added PD to the play
list.  Shares of PD are up eight days in a row without a break.
We're encouraged that PD has broken out above the $75.00 level
and its simple 100-dma but nothing moves straight up.  PD remains
a few points shy of our target in the $80.00 range so patient
traders willing to handle a dip or two can hold on.  We would
expect a pull back into the $74-75 range before mounting another
charge toward the $80.00 region.  Remember, there's no rule that
says you can't sell and jump back in on a dip or just raise your
stops (probably higher than ours).  In the meantime we're going
to raise our stop loss to $71.75.   Investors are probably
encouraged by news from PD that one of its mines has paid off all
outstanding debt.  Here's an excerpt from their press release:
"[Phelps Dodge] has taken another major step in its stated
program of lowering the company's debt, reducing interest expense
and managing the maturity profile of its long-term commitments.
Effective June 21, 2004, Compania Contractual Minera Candelaria,
the company's 80-percent-owned copper mining operation in Chile,
completed the full prepayment of its senior debt and executed the
termination and release of the existing financing obligations and
associated security package with the bank group. Candelaria joins
the company's 82-percent-owned Cerro Verde mining operation in
Peru as a debt-free source of low-cost, South American copper
production."

Picked on June 20 at $ 71.68
Change since picked:  + 4.40
Earnings Date       04/28/04 (confirmed)
Average Daily Volume:    2.6 million
Chart =



**************
NEW CALL PLAYS
**************

Caterpillar, Inc. - CAT - close 79.10 change: +1.21 stop: 76.00

Company Description:
Caterpillar Inc. operates in three principal lines of business:
Machinery, Engines and Financial Products.  The Machinery segment
designs, manufactures and markets construction, mining,
agricultural and forestry machinery.  The Engines segment
designs, manufactures and markets engines for Caterpillar
machinery, electric power generation systems; on-highway vehicles
and locomotives; marine, petroleum, construction, industrial,
agricultural and other applications, and related parts.  The
Financial Products segment consists primarily of Caterpillar
Financial Services Corporation (Cat Financial), Caterpillar
Insurance Holdings, Inc. (Cat Insurance) and their subsidiaries.
Cat Financial provides a range of financing alternatives for
Caterpillar machinery and engines, solar gas turbines, as well as
other equipment and marine vessels.  Cat Insurance provides
various forms of insurance to customers and dealers to help
support the purchase and lease of Caterpillar's equipment.

Why we like it:
After an impressive run to new all-time highs early in the year,
CAT was way overdue for a bout of profit taking and when the
broad market began to weaken, it headed south with the rest of
the herd, finding support in the $73-74 area.  Another run at the
highs was turned back just below the $85 resistance level and
thus ensued another trip down to the $73-74 support level.  Since
then, the stock has been market time between $73-76, waiting for
the bullish support line on the PnF chart to rise to meet price
and either give a strong rebound or signal a major breakdown.
Last week saw the stock drop right to the $74 level (the site of
the PnF bullish support line and we've seen a very strong rally
off of that level this week.  The first obstacle to be scaled was
resistance at the $78 level, and that breakout generated a fresh
PnF Buy signal.  With the PnF chart already bullish with an
upside target at $86, this latest breakout looks like a nice
point of confirmation.

Note that this week's breakout through $78 took price through the
50-dma ($76.88), 100-dma ($77.33) and 200-dma ($76.76), all in
the same day (yesterday) and it was followed by another strong up
day today (+1.55%) in spite of the broad market consolidation
action.  CAT looks like it wants to run back to test its highs
from earlier in the year and we want to go along for the ride.
Aggressive traders can enter on a continued bullish push above
$79.50, while the more conservative approach would be to enter on
a pullback near the $77.50-78.00 area.  Following the breakout
through all those longer-term moving averages yesterday, we
should now see strong support building near the $77 level,
providing additional protection for our stop, initially placed at
$76, which is just under yesterday's intraday low.

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

Longer Term: Aggressive longer-term traders can use the August
$85 Call, while the more conservative approach will be to use the
August $80 Call.  Our preferred option is the August $80 strike,
as it is currently near the money and should provide sufficient
time for the play to move in our favor.

BUY CALL JUL- 75 CAT-GO OI=3320 last traded @ $4.60
BUY CALL JUL- 80 CAT-GP OI=4511 last traded @ $1.15
BUY CALL AUG- 80*CAT-HP OI=8201 last traded @ $2.55
BUY CALL AUG- 85 CAT-HQ OI=9115 last traded @ $0.90

Annotated Chart of CAT:



Picked on June 24th at       $79.10
Change since picked:          +0.00
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =     2.34 mln
Chart =



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Cabot Micro. - CCMP - close: 28.51 chg: -0.43 stop: 30.00

We have good news to report on CCMP.  The stock continues to
under perform its peers and resistance at the $29.00 level and
the simple 40-dma has held.  The next move for CCMP "should" be
down.  Traders looking for new positions might want to use
today's drop from the 40-dma as an entry point.  Conservative
traders can tighten their stop to $29.51.  We're going to leave
ours at $30.00 for one more day.  Fortunately, the company didn't
have anything to say at the growth (company) conferences this
week that actually moved the stock.

Picked on June 13 at $ 29.46
Change since picked:  - 0.95
Earnings Date       04/22/04 (confirmed)
Average Daily Volume:    3.7 million
Chart =


---

Kohl's Corp - KSS - close: 43.60 change: -1.49 stop: 45.50*new*

It wouldn't be a bad idea to consider taking some profits in KSS
either.  The stock is very quickly approaching our target in the
$41-42 range.  So far the July 50 puts have jumped from $3.50 to
$6.60 while the July 45 puts have ballooned from $0.85 to $1.95
since we added KSS to the put list.  Honestly we're surprised
that KSS hasn't produced much of an oversold bounce yet.  It
tried on Tuesday-Wednesday but failed at its 5-dma.  Today's 3.3%
decline is a breakdown back under the psychological $45.00 mark
and its simple 50-dma.  We're going to lower our stop loss to
$45.50 but more conservative traders concerned about protecting
profits might want to consider a stop loss near $44.75.

Picked on June 06 at $ 47.45
Change since picked:  - 3.85
Earnings Date       05/13/04 (confirmed)
Average Daily Volume:    3.7 million
Chart =


---

Infospace, Inc. - INSP - close: 35.17 change: +0.09 stop: 36.00

There's a big reason why we initiated coverage of INSP with a
breakdown trigger and that reason is clearly evident on the daily
price chart.  The stock launched higher from just above our $32
trigger and is now challenging triple resistance at the 20-dma
($35.35), 100-dma ($35.32) and 50-dma ($35.59).  If there's any
chance for the H&S top formation to play out in the near term,
than price must roll over below this strong resistance level.  A
breakout will more than likely activate our $36 stop, and we'll
happily step aside without having been lured into a position.  If
we do get the rollover, make sure to wait for our trigger to be
hit before playing.

Picked on June 22nd at        $33.83
Change since picked:           +1.34
Earnings Date                7/28/04 (unconfirmed)
Average Daily Volume =      1.07 mln
Chart =


---

Altria Group - MO - close: 48.45 change: -0.02 stop: 49.50

After languishing below resistance near $48 for well over a week,
MO finally caught a bit of a lift with the broad market advance
yesterday and it held that fractional gain throughout today's
consolidation session.  The stock has now moved slightly above
the dual 10-dma/20-dma resistance near $48, but while that was
taking place, the daily Stochastics has reached all the way into
overbought territory and is hinting at a rollover at the 30-dma
($48.39).  This play still looks quite attractive for rollover
entries near current levels, targeting an initial drop to the
$44-45 area.  With our initial stop at $49.50, that presents a
solid risk to reward ratio.

Picked on June 15th at        $47.55
Change since picked:           +0.90
Earnings Date                7/20/04 (unconfirmed)
Average Daily Volume =      6.67 mln
Chart =


---

Omnicom Group - OMC - close: 76.14 change: +0.17 stop: 79.75*new*

Continuing with its breakdown, OMC confirmed the longer term H&S
pattern on Tuesday and then fell right to that $75 support level,
where we suspected some support would be found.  The weakness of
the rebound from that level (so far) is quite encouraging and now
we'll be looking for a rollover from the $77 level over the next
few days to get the next leg of the downtrend moving.  Note that
the broken H&S neckline and the 10-dma ($77.42) are converging to
bolster that resistance level.  As if that wasn't enough, there
is very stiff overhead resistance at broken support in the
$78.00-78.50 area.  With the drop below $76, the bearish PnF
chart is now working with a downside target of $69, although it's
possible that we'll see significant support start to build in the
$70-71 area.  Lower stops to $79.75 tonight, which will be above
the 50-dma ($79.80) by tomorrow.

Picked on June 20th at        $77.14
Change since picked:           -1.00
Earnings Date                4/27/04 (confirmed)
Average Daily Volume =      1.09 mln
Chart =


---

Silicon Labs. - SLAB - close: 47.17 change: +0.63 stop: 48.50

While the initial breakdown under entry trigger certainly looked
favorable earlier this week, the strong rebound has got to be
causing even the staunchest of bears a little heartburn.  The
stock found a low on Tuesday just under $43 and then bounced
strongly yesterday, closing just over the 10-dma ($46.52).  The
real cause for concern arrived today though, with the stock's
early rise coming within 2 cents of hitting our $48.50 stop.
Fortunately, the Semiconductor bulls lost their nerve near midday
and SLAB plunged back near the $47 level, wiping out nearly all
the intraday gains by the close.  The big question is whether the
breakdown was a bear trap or if today's failed rally was a bull
trap.  Obviously we can't know that right now, but we have a
couple metrics to guide us along the right path.  Should our stop
be triggered, it would be on a break above today's high and that
stop should be honored.  On the other hand, aggressive traders
could look at a break back under the 10-dma as a possible
continuation entry into the play, with the $43 level a clear
point of support on the way down to our $40 target.  Keep one eye
on the SOX for indications as to sector strength or weakness.

Picked on June 20th at        $44.99
Change since picked:           +2.18
Earnings Date                4/26/04 (confirmed)
Average Daily Volume =      1.15 mln
Chart =



*************
NEW PUT PLAYS
*************

Express Scripts - ESRX - close: 76.07 chg: -0.33 stop: 77.51

Company Description:
Express Scripts, Inc. is one of the largest pharmacy benefit
management (PBM) companies in North America. Express Scripts
provides integrated PBM services, including network pharmacy
claims processing, mail pharmacy services, benefit design
consultation, drug utilization review, formulary management,
disease management, medical and drug data analysis services, and
medical information management services. Express Scripts is
headquartered in St. Louis, Missouri.(source: company press
release)

Why We Like It:
We like ESRX because the stock is starting to fade after a strong
run from under $55 to $80.00 between October 2003 and April 2004.
Technically everything is turning bearish.  ESRX broke its five-
month rising channel in early May but managed another rally back
to resistance at $80.00.  When ESRX failed to breakout over $80
again this turned into a bearish double-top pattern.  Then on
June 14th Wachovia downgraded the stock from "out perform" to
"market perform" and ESRX gapped down under its simple 50-dma to
test mild support at $75.00.  Shares of ESRX have since rallied
back to fill the gap at $78.00 and are now rolling over again.
Its daily technicals (MACD, RSI and stochastics) are all bearish
while its weekly chart also shows a new MACD sell signal.  Its
point-and-figure chart is bearish with a $64 price target.  The
company had a chance to announce positive stock-moving news at
the William Blair & Co 24th Annual Growth Stock conference this
morning but whatever they presented failed to inspire investors.

We're going to suggest using a TRIGGER at $74.95, which would be
a breakdown under the round-number psychological $75.00 mark and
its simple 100-dma.  Once triggered we'll target a move toward
the 200-dma currently at $68.50; of course by the time we reach
the 200-dma it may be a bit higher.  Our initial stop loss will
be $77.51.

Suggested Options:
There are only three weeks left for July options so we're going
to suggest the August puts.  Our favorite is the August 75s but
the 70s look good too.

BUY PUT AUG 75 XTQ-TO OI= 1498 Last traded @ $2.60
BUY PUT AUG 70 XTQ-TN OI= 1000 Last traded @ $1.15

Annotated Chart:



Picked on June xx at $ xx.xx <-- see Trigger
Change since picked:  - 0.00
Earnings Date       04/27/04 (confirmed)
Average Daily Volume:    733 thousand
Chart =



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The Option Investor Newsletter                  Thursday 06-24-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Homes to Technology
Option Spreads: A Trilogy - The Covered Call Exposed – Part 1
Traders Corner: One Pattern (WEDGE) – One Indictor (OBV)
Traders Corner: Lights, Camera, Action!


**********
WATCH LIST
**********

Homes to Technology

___________________________________________________________________

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.
___________________________________________________________________


Meritage Corp - MTH - close: 70.31 change: +1.31

WHAT TO WATCH: Both stock volume and option volume is pretty low
on MTH but careful traders might still be able to profit on the
stock's strength.  MTH mimicked most of the homebuilders by
shooting to new relative highs on the surprising New Home Sales
report this morning.  The breakout over its 100-dma and the
$70.00 mark looks great.  The pull back from $72.00 doesn't look
so hot.  Depending on your trading style investors can look for a
bounce from $69.00 or a breakout over $72.00 to initiate new
bullish positions.  Its Point & Figure chart shows a new triple-
top breakout buy signal and an $87 price target.  We would
probably target the $77.50 region.

Chart=


---

Broadcom Corp - BRCM - close: 45.00 change: -0.56

WHAT TO WATCH: We mentioned BRCM in the MarketMonitor today.  The
specialty chipmaker has recently broken out above crucial
resistance at $44.00 on strong volume.  The move also produced a
bullish P&F chart breakout with a $62.00 target.  We think
traders could initiation bullish positions now or on any bounce
above the $44.00 mark and target a move to round-number
psychological resistance at $50.00.  Earnings are a month away on
July 20th.

Chart=


---

Sony Corp - SNE - close: 37.78 change: +0.16

WHAT TO WATCH: SNY has been consolidating under resistance at
$37.50 and its simple 200-dma for the last month.  Its trend of
higher lows finally blossomed into a breakout today above its 50-
dma and the 200-dma.  Bulls might want to consider buying a
bounce from $37.50 or a breakout over $38.00 and target a move to
$42, which looks like point-and-figure chart resistance.

Chart=


---

eBay Inc - EBAY - close: 88.74 change: +0.39

WHAT TO WATCH: Yes, we're still holding EBAY to the watch list.
Yesterday the stock not only broke through minor resistance at
$88.00 but broke out of its bull flag pattern.  The flagpole on
the pattern suggest an upside target of $100.00.  More aggressive
traders could go long at current levels (anything above $88.00)
while more conservative traders can wait for a new high and a
breakout over $90.00. We are expecting some sort of earnings run
ahead of its July 22nd announcement.

Chart=



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

QCOM $68.68 +0.78 - QCOM failed again at resistance but is still
within striking distance of breaking out above the $70.00 mark.

RIMM $61.03 +0.80 - RIMM is back above the $60 mark but still
under resistance at $62.00.  Look for a potential pre-earnings
ramp up ahead of its June 29th report.

ONXX $41.98 +0.78 - The recent rebound in ONXX has produced a
technical breakout on its daily chart and P&F chart.  We would
target a move to its 40 & 50-dma's near $46.50 or the resistance
near $49-50.

VAR $78.90 -0.80 - Here we go.  VAR looks ready to drop toward
support at $75.00 and its simple 200-dma.

YHOO $34.11 +0.14 - Bulls should be encouraged that YHOO not only
held on to all its gains from yesterday but hit new highs.

DE $69.24 -0.06 - Rival CAT is breaking out so we expect DE to
follow soon with its own breakout over resistance at $70.00.


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Option Spread Strategies
************************

A Trilogy - The Covered Call Exposed – Part 1
By Mike Parnos , Investing With Attitude

When you embark upon your first adventure into options trading,
there are those who will tell you that “covered call writing” is
the safest strategy.  Most brokerage firms allow novice option
traders to trade covered calls in their IRA accounts because of
it’s “safety.”   Little do they know.

There are a variety of ways to trade covered calls.  This deserves
some attention.  Not all who read this column are ready for the
more advanced strategies that I usually discuss here.   The most
basic theories of therapy involve going back to one’s childhood --
where impressions and life-long habits are formed.  So, let’s get
the road on the show . . .

Once upon a time there was an investor.  All of his life he was
taught that if you bought a stock and held onto it forever, the
stock would go up, he’d make a lot of money and live happily ever
after.  It was the American dream.  As we’ve come to learn, those
dreams and Mother Goose have a lot in common.  They’re fairytales.
The harsh realities of the market have resulted in a rude
awakening from dreamland.  The Internet bubble, the recent bear
market, and an abundance of corporate improprieties, have
systematically demolished hordes of retirement accounts.  They
“buy-and-holders” are still “holding.”  Old habits die hard.
Only, what they’re holding isn’t hard anymore.

Covered Call: The Stock
For our example, we’ll say you currently own 1,000 shares of
Juniper (JNPR) currently trading at $21.30.  How you came to own
this stock is anybody’s guess.  Maybe you bought and held, maybe
you inherited it, maybe you won the lottery.  It’s not really
important.  The question is – how can you best use this asset to
make money?  You have a neutral to bullish outlook on JNPR.  You
project that it will trade flat or possibly up a little in the
next few months.  If your projection is just wishful thinking and
you have nothing to base your opinion on, you have no business
owning a stock, let alone trying to trade options.

Covered Call: The Option
Well, if you’ve read my previous columns, you know that there is a
bottomless pit of speculators out there.  “Speculators” is the
nice word.  “Gamblers” is more accurate.  There is, and will
always be, someone out there who is willing to buy an option –
betting that JNPR will rise substantially in the next month.  He
wants to buy the right to buy JNPR from you at $22.50 anytime
between now and June expiration (about 4 weeks).  For that right
he’s willing to pay you $1.50 per share.  That translates into
$1,500 worth of dead presidents into your pocket.

The speculator is buying the JNPR June $22.50 call option.  He’s
buying the “right,” but not the “obligation,” to buy the stock
from you at $22.50.  He’s expecting that JNPR is going to
appreciate well beyond $22.50.   If he’s buying the stock at
$22.50 and the option costs him $1.50, his breakeven is $24.00.

The nice part about all this is that the $1,500 he’s paying you is
yours to keep – regardless what happens to the stock.  It shows up
in your brokerage account the very next business day.  What you
have to be willing to accept is the fact that, if JNPR does happen
to move up, you’ve agreed to sell it at $22.50.  You will not
participate in any gains above and beyond $22.50.

More Profit Than You Think
Once you’ve accepted the fact that you and your 1,000 shares may
soon experience a separation, you can focus on the potential
profit in the trade.  If JNPR finishes above $22.50, there are two
ways you will profit.
1) You took $1,500 when you sold the call.  That’s a good start.
2) If your stock is called away at $22.50, you will have made
another $1,200 in profit from the appreciation of the stock price.
Remember, this all started with JNPR trading at $21.30.   When the
stock is sold, you get the $1,200 difference.

You took, in $1,500 from the sale of the option plus another
$1,200 profit from the sale of the stock – a total of $2,700.
That’s a better than 13% return for about a month.  If you used
margin to purchase the stock, it would be about a 26% return.

If JNPR finishes below $22.50, you will still own the stock and
may be able to sell another call for July.

The Good, The Bad & The Ugly
You now know the good.  Get ready to learn about the bad and the
ugly.  The main risk in covered call writing is the fact that you
do own the stock.  And, contrary to popular optimistic thinking of
the masses, the shares of JNPR could go down just as easily as it
can go up.  The $1.50 taken in from the option purchase provides a
little cushion – a damn little cushion.

The same principles apply to covered call selling as to all other
trading and/or investment strategies.  The main principle, and the
toughest one to live with, is that you must have an established
exit point – and the self-discipline to act on it when necessary.
Of course, that means having to admit that you’re wrong when JNPR
turns south instead of going up.

How do you figure out your exit point?  There are a few ways.
1) Use a specific dollar stop.  Your account management techniques
tell you that you have a maximum limit of a $2,000 loss per
position.  That would dictate that you have to close out your
entire position by selling your stock and buy back your short JNPR
$22.50 option when it costs you a total of $18.90 ($18,900).

2) Check for support levels.  There may be a support level at
$20.50.  Maybe there’s a 50-day moving average at $19.55.  You can
establish an exit point if one, or both, of these support levels
are violated.

Another Way To Play Covered Calls
This strategy alternative is for more aggressive traders.   What
the hell, as long as you own the shares of stock anyway let’s have
some fun.  One thing that we know is likely is that JNPR will move
up and down 2-3 points a few times during the next month.  When
JNPR moves down, the value of the $22.50 call decreases.

After two weeks, JNPR falls to $19.60.  The value of the June
$22.50 call may be $.40.  You can buy it back and play the bounce
back up from the $50 day moving average at $19.55.   Then, you
wait until JNPR moves back up to about $22.25 and sell the $22.50
again, this time for $1.00.  That’s an extra $.60 ($600) taken in
during the option cycle.  This may happen two or three times
during the four weeks if the market gets volatile.  That could
increase the premium taken in by a total of $1.20.  Again, there’s
no guarantee that any of this will happen.  Some traders, who
can’t keep their hands in their pockets, like to trade “within
their trade” to try and generate more premium.

The Bottom Line
Can you guess what I’m going to say?  If you buy a stock, you’re
exposed for the entire value of the stock, all the way down to
zero.  If you combine stock ownership with selling a call against
the stock, you may be able to generate some monthly cashflow.  The
likelihood is that, if you guess right about the direction, the
stock will be called away.  If you guess wrong, the stock will go
down and you will take a few hits of that “hopium” drug and sit
there “hoping” the stock comes back up.  It won’t and you’ll end
up still owning the stock at $15.

Selling Calls On Tanking Stocks
Why can’t you sell a call when the stock is at $15?  Well, you
can, but there won’t be any premium in the $20 or $22.50 July
calls.  If you sell a $15 or $17.50 call, you’ll be locking
yourself into a loss on the stock– which is a no-no.

A Marriage Made In . . . ?
Fact: Many brokerage firms only allow covered-call selling in
IRAs.  Fact: There are still countless buy and holders who are
still holding stocks in their IRA.  It’s fate.  It’s inevitable
that the twain will meet.  The money or the stocks will eventually
disappear and the novice traders will have more bad things to say
about options.   They will continue to live in denial.  It wasn’t
their fault. They’ll blame the options -- when they simply don’t
know how to use them.  When all is said and done, the only way to
own a stock is to buy a protective put as insurance to protect
against catastrophic events.  Check out one of my previous columns
in which I discuss the “collar” in great detail.

JULY NEW POSITIONS
Position #1 – SPX Iron Condor – 1140.65
We sold 10 July SPX 1170 calls and bought 10 July SPX 1180 calls
for a credit of about: $1.10 ($1,100).  Then we sold 7 July SPX
1075 puts and bought 7 July SPX 1060 puts for a credit of about:
$1.20 ($840).  The total net credit of was $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 – 579.05
We sold 10 July RUT 600 calls and bought 10 July RUT 610 calls for
a credit of about: $1.00 ($1,000). Then we sold 10 July RUT 530
puts and bought 10 July RUT 520 puts for a credit of $1.30
($1,300).  Our total net credit was $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 – 1140.65
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.

We sold 3 SPX July 1125 puts and bought 3 SPX July 1100 puts for a
total credit of about: $6.30 ($1,800).

Our 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
necessary.

Position #4 – SOX (Semi-Conductor Index) – Iron Condor – 470.73
We sold 10 SOX July 490 calls and bought 10 SOX July 500 calls for
a credit of about: $1.10 ($1,100).  Then we sold 10 SOX July 420
puts and bought 10 SOX July 410 puts for a credit of about: $1.30
($1,300).   Our 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.


ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $37.05
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 – 555.71
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
investment.
Our current position:  We own 3 OEX December 2006 540 calls @ $81
(x 300 = $24,300).  Our cash position as of May expiration was
$4,390 plus unused $1,700 = $6,090.  From the June option cycle,
we are able to officially add $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.
____________________________________________________________

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
strategies.


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

One Pattern (WEDGE) – One Indictor (OBV)
By Leigh Stevens
lstevens@OptionInvestor.com

In my most recent Index Trader column I cited examples of two
things in bellwether stock Microsoft (MSFT), one of which – On
Balance Volume (OBV) – was a tip off ahead of time, for a rally
that was coming.

The other thing I mentioned about MSFT - that of an upward
sloping wedge pattern and which I cited as a bullish pattern –
WRONG!.  Not usually or normally!! So, besides my confession of
sloppy technical/pattern analysis, I will discuss what bullish
and bearish Wedge patterns normally signify.

Let's go to the MSFT daily chart, but updated after 4 more days
of trading from when I called the rising pie shaped pattern that
I outlined below, a "bullish" rising wedge.  The chart patterns
give conflicting messages here so to speak.  The upside
penetration of the down trendline was bullish – however, you'll
also note that the stock appears to be stalled in the area of the
prior highs which should make us alert to a possible top.

The upward sloping or bearish wedge, that is normally bearish in
its implications for future price action, may be the tip off to
what comes next; e.g., a downside reversal, at least back to 27-
27.50 – stay tuned!




An advance warning of the good-sized rally that developed in June
was the rising On Balance Volume Indicator or OBV line, which is
cyan in color.  The part outlined in the circle is the key time
period – as prices trended mostly sideways, OBV turned up and
started trending higher.

Let me go to some explanations of each – the wedge pattern and
the On Balance Volume Indicator.  Wedge patterns have
significance for both Stocks AND Indices.  On Balance Volume or
OBV has significance for all stocks but not for all Indices –
actually only for the Nasdaq 100 tracking stock QQQ as it has
daily trading volume or a number of shares traded.

WEDGE PATTERNS –
Wedge patterns are usually "reversal" patterns – meaning the
existing trend is susceptible to a trend reversal. One such
pattern, while not seen all that often, but which tends to be
predictive for a bottom or top is the "wedge".

The wedge pattern of a "rising" bearish type is usually seen
after an uptrend has been underway for a while which is somewhat
the case as an overall uptrend was underway for at least 3 months
in the example of Microsoft above.

[Sometimes, not as often, a wedge formation will suggest a
potential trend reversal even before the emerging trend has gone
on very long; e.g., only a month.]

BULLISH FALLING WEDGES AND BEARISH RISING WEDGES -

In a rising wedge, prices move gradually higher but form
converging trendlines and a  "narrowing in" pattern of higher
highs and lower lows, such as seen in the rising wedge pattern in
the chart above and below.  The chart below is from 2002 and
shows the daily chart of the Dow Index (DJX) chart leading up to
late-August '02.



Subsequent to the period shown above – by October – the Dow
dropped to as low as 7,200 - to 72 in terms of DJX.

There is a "measuring" rule of thumb for a downside objective
also - prices should decline to the start of the formation, or
the lowest prior low as a "minimum" downside objective.

To create a wedge, there should be at least 2-3 upswing highs and
downswing lows that comprise the points through which the
trendlines are drawn – the more points than this minimum number
the better, in terms of drawing two well-defined converging
lines.

A wedge pattern can also form over a very lengthily period such
as I showed in my (Essential Technical Analysis) book and as
recreated below –




What is being suggested in the rising, bearish wedge is that
buying is being met with stronger and stronger selling as prices
edge higher.  When prices fall below the lower up trendline that
of a rising wedge pattern, a trend reversal is suggested – prices
may rebound to the trendline again, but will typically not get
back above it.  Place a liquidating buy stop just above the
broken trendline, if a short position is established on the
downside break.

A declining or falling wedge is typically a bullish pattern as it
suggests that selling is being met with increasing buying.
Eventually, this sets the stage for an upside reversal as can be
seen in our next chart.

The first recent example (left) in the QQQ chart is the most
obvious wedge in the shape of the pattern – one with good
"definition". The related tip off for a possible upside reversal
was also seen in the decline to the 200-day moving average and
not penetrated on a closing basis (suggesting support) -




The objectives implied by the wedge - prices should advance to at
least the start of the formation, or back to highest prior peak
as a "minimum" upside objective, has been met in both examples
above.

An example of a bullish falling wedge that I used in my book –




THE ON BALANCE VOLUME (OBV) INDICATOR –

I started this Trader's Corner with an example (first chart –
top) with using a recent volume and price trend in QQQ.

A past example of what you can sometimes pick up using On Balance
Volume Indicator versus the Volume Indicator is seen in the
following charts, showing a period in 2002 -

QQQ in this first chart was in a strong up trend that was not
being "confirmed" with a rising daily volume trend -




The normal way of displaying volume is by selecting "Volume" as
an Indicator on charting applications - volume is displayed as a
histogram or as vertical bars that show the volume total for that
day (as read from the right hand numerical volume scale).

On Balance Volume or OBV is also a type of volume indicator or
volume-RELATED technical study or formula; an indicator being any
mathematical calculation that is applied to a financial
instrument’s price and/or volume information.

To next see what OBV looks like, take a look of this Indicator as
overlaid on the QQQ daily chart volume bars below –




On Balance Volume keeps a cumulative running volume figure that
adds ALL the volume on an up day and subtracts ALL the trading
volume on down days.  If there is more trading volume on up days
then there is on down days, OBV rises, as can be seen in the
lower portion of the daily chart on the QQQ chart above.

OBV provided an early and ongoing indication that the buying
interest in the Nasdaq 100, as reflected in QQQ, was stronger
than the selling activity. For this reason OBV can alert us to
"accumulation" or steady buying of a stock; i.e., there is buying
"on balance" in the stock. It may not be the case that daily
volume spikes dramatically, but is typical of institutional/fund
buying and their gradual accumulation. A big fund can move prices
more than is desirable if it does all its buying (or selling) at
once.

OBV CONSTRUCTION -

To construct the OBV indicator, a running total of volume is
kept.  Assume that we start with a stock that traded a million
shares on day 1 and is a neutral starting point - we have to
start somewhere.  If the stock closes higher the next day and
trades 750,000 shares, day 2’s volume figure is added to the
first day and assigned a positive number because our running
total is a positive number; OBV is now a +1,750,000.

[NOTE: OBV would be a negative number if our example stock closed
lower on day 2, on 1,500,000 shares: OBV would be –500,000.]

Going back to the example - on day 3 the stock closed lower on
500,000 shares and we subtract that day’s volume from our
cumulative OBV total: on day 3, OBV is +1,250,000.  When the
stock is unchanged in price on day 4, we leave OBV unchanged at
+1,250,000.

This calculation process continues on into the future.  If we
graph the points, the resulting line will start moving upward or
downward following the direction of the price trend of the stock
for which OBV is being calculated.

We are primarily concerned with the DIRECTION of OBV - is the
(OBV) line moving UP or DOWN? If the direction is up, the OBV
line is bullish, as there is more volume on up days than on days
when the stock price is down.  A falling on-balance volume line
is bearish, as more stock is being traded on down days than on up
days.  If both price and OBV are moving up together, it is a
bullish sign portending higher prices.  If both price and OBV are
moving down together, this is a bearish indication for still
lower prices ahead.

However, if prices move higher during a period of time when OBV
lags or moves lower, this is a bearish divergence indicating
diminishing buying activity and warns of a possible top or trend
reversal.

Conversely, of course, if prices are moving lower but OBV is
trending higher, this is bullish divergence. This is not unlike
other divergences such as when prices are trending lower, but
with rising RSI lows; and, vice versa for a bearish divergence
with prices moving higher without a corresponding new high in the
RSI oscillator.

Good Trading Success! using Wedges and OBV


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

Lights, Camera, Action!
by Mark Phillips
mphillips@OptionInvestor.com

The moment the entire investing community is apparently waiting
for will finally arrive next week, with the FOMC delivering their
verdict on interest rates.  It is widely expected that they'll
kick the Fed Funds rate up by 25 basis points and then market
participants will react to the news in typical volatile fashion.
Once the dust settles, we'll be able to better gauge which way the
wind is blowing, but as we've been discussing these past several
weeks, that first rise in interest rates will be the starter's gun
we've been waiting for.

We've spent a lot of time analyzing the Housing sector and several
of the more prominent stocks in the sector in excruciating detail
over the past few weeks and as of last week's article, we finally
settled on CTX and LEN as our two most likely candidates to
provide a long-term bearish play in the sector.  Recall that we're
looking for trades that are going to last months and our
preference is to use LEAP Puts as our trading vehicle.

I don't want to repeat any of what we've already covered, as
there's plenty of new data to consider this week.  For those of
you looking for a refresher or just joining our discussion, I
invite you to peruse the portion of the discussion that has
already taken place at the following links.

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

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

The Action Point Draws Near
http://www.OptionInvestor.com/traderscorner/tc_060904_1.asp

Two Weeks And Counting
http://www.OptionInvestor.com/traderscorner/tc_061704_1.asp

As noted above, our relative strength studies of our initial five
candidates showed us that CTX and LEN were the two weakest of the
LEAPable stocks in the sector.  Today, we'll focus our attention
on these two stocks, looking at both their PnF and candle charts,
trying to determine what the most favorable action points will be.
Keep in mind though, we are employing a top down strategy and
before initiating a trade on either of these two stocks, we need
to see the bearish confirmation signs in the $DJUSHB that we've
already outlined.  Remember, from all of our studies, the sector
is still bullish -- we're looking for a solid trade to materialize
once that bullish trend is broken.

Alright, first up, let's look at CTX and see what it has to offer.
Let's start out with the easy stuff.

CTX Daily Candle Chart



As we might expect from the fact that the sector is still looking
bullish, CTX appears to be putting in a near-term bottom.  This
simply bolsters one of our initial assumptions, that we don't want
to take a position as soon as the interest rates start to rise.
We'll need to exercise patience and wait for everything to line up
in our favor.  Keeping in mind that this is a longer-term play
we're trying to define, let's slide over to the weekly chart and
see if it provides any greater clarity.

CTX Weekly Candle Chart



Indeed it does!  I think the most telling aspect of this chart is
the dashed line depicting the longer-term trend.  Now that it's
been broken, I would expect it to offer firm resistance on the
next test.  That may take a few weeks to set up.  Wouldn't it be
interesting if we saw a rollover from the underside of that
trendline about the time price reaches the $55 area?  It could
really get exciting if price then proceeded to break below the
neckline of that potential H&S pattern, which would give us a
downside target near $26!  That's not a prediction, just a
speculation on a chart setup that might or might not come to pass.
Alright, let's put some of the subjectivity aside and take a look
at the ultimate arbiter of supply and demand, the PnF chart.

CTX Point & Figure Chart - Standard Scale



This standard scale chart shows just about what we might expect,
with two failed bearish signals, one in January and the next one
in May.  Both of those Sell signals were reversed and bears that
tried to play the downside in the stock prematurely likely got
burned.  Take note of the fact that price bottomed near $44 both
times, which coincides nicely with horizontal support on our
weekly chart.  But as we've been discussing, we want to filter out
these spurious PnF Sell signals by picking the right scale.  We've
done this for our sector analysis, so we ought to be able to do it
for our stock analysis as well, right?  I'll spare you the
iterative process and just present the "correct" solution I came
up with.

CTX Point & Figure Chart - 1.6-point Box Scale



After a few false starts, I found that the 1.6-point box size was
the right scale to choose for CTX.  Note how it eliminates all the
spurious Sell signals, but still gives us the same threshold for a
confirmed bearish signal?  We haven't had a Sell signal in this
stock since 2001, so if we see a trade below $43.20, that should
be the real deal.

So there we have it.  CTX needs to trade below the $43.20 level
for a confirmed bearish signal.  Ideally, we'd have that occur
after another credible bounce to put in the right shoulder of the
potential H&S topping formation, but we can deal with that
possibility later on.  I'm not one to quibble over 20 cents, so
for our purposes, I'll call $43 our downside trigger for a play on
CTX, keeping in mind that we need cooperation from the $DJUSHB as
well, giving us its own PnF Sell signal and in the process a
breakdown in its RS chart as compared to the $SPX.

Now let's turn our attention to LEN, and we'll start right out
with the daily chart there as well.

LEN Daily Candle Chart



After taking another quick look at the chart of the $DJUSHB and
seeing that it is still in a bullish configuration, specifically
in a relative strength standpoint, we weren't surprised to see the
bullish tone on the CTX chart and we see a very similar situation
here with LEN.  The stock is breaking over the 3-month descending
trendline and a trade at $47 will bring us a solid breakout over
horizontal resistance.  In order to see a pattern of weakness
developing, we've obviously got to use a different viewpoint --
how about that weekly chart?

LEN Weekly Candle Chart



I expected to see a chart transitioning from bullish to bearish,
but the similarities between CTX and LEN are really a bit stunning
to me.  They have both broken below the long-term rising trendline
and the first serious test of that trendline (if we can get it)
will more than likely have a large H&S topping pattern in play.
Should the H&S pattern confirm on LEN, then we're likely looking
at a downside target $26, which lines up nicely with that
congestion zone at the far left of the chart above.  I wonder what
the PnF chart has to say?  Anybody want to place any bets on
whether we have any false Sell signals that need to be filtered
out?  GRIN

LEN Point & Figure Chart - Standard Scale



I don't know about you, but that's about what I expected to see.
Note the series of Sell signals since the first of the year, each
of which was a bear trap?  That's definitely not the type of
pattern that is going to inspire confidence in playing the
downside in this stock, now is it?  One thing I'll make note of
though is that LEN is actually on a PnF Sell signal right now
(until it trades $47) and has a downside target of $27.  That's
pretty close to the potential $26 H&S target, don't you think?
But let's see if we can get a cleaner view by eliminating some of
these spurious Sell signals.

LEN Point & Figure Chart - 1.7-point Box Scale



I had to play with the scaling a bit more on LEN to get things to
look right and remove that pattern of successive failed Sell
signals.  In the end, a scale of a 1.7-point box size did the
trick, leaving us with only the current Sell signal.  Isn't it
interesting that the current bearish price objective is $27.20,
which is very close to the $27 target on the standard scale chart?
Note that we would have to see a monster rally to above $56 to
turn this PnF chart bullish, so I think we have a chart scale we
can put some stock in.

Do you remember my comment from last week's article that I thought
CTX and LEN looked roughly equivalent in terms of bearishness, but
that I favored LEN as a better downside candidate due to the RS
chart patterns we were looking at?  I think our analysis here
bears that out, as the stock is already on a PnF Sell signal on
its modified scale chart.  The congruence of price targets in the
$26-27 area for the various scales of PnF charts and the as-yet
unproven H&S topping formation is another positive factor.

So where do we go from here?  We've essentially finished our
analysis and are ready to take action, when the price action
confirms our bearish thesis.  For those aggressive traders that
want to get in on the action ahead of a breakdown in the $DJUSHB,
I think it should be clear that LEN is the better target of
opportunity, due to the fact that it is bearish in almost every
way in which we can look at it.  For CTX, we've defined a price
trigger for playing the downside, but there, I'd want to
definitely see the sector having turned bearish before playing.

Keep in mind that all of the different chart views we've talked
about over the past several weeks should be revisited periodically
in the weeks ahead to make sure that nothing fundamental has
changed in either the sector RS, the RS of CTX and LEN relative to
the sector and their peers and the actual price/PnF charts of our
two chosen stocks.

For those of you that care to follow along from this point
forward, we'll be tracking both of these stocks as LEAPS Put plays
in the LEAPS column beginning this weekend.  We'll regularly look
at the technicals and define/modify entry strategies in the weeks
ahead and then we'll monitor price action as the plays progress,
looking for any problems along the way to (hoped for) profits.

One final note.  I know this has been a long and convoluted
process for many of you to follow.  But at the same time, I hope
you (especially those of you that are new to our service)
understand that this is the sort of analysis that should be
employed on every trade candidate.  While it took several weeks to
go through the discussion together, note that this process would
take about 20 minutes once we know what to do and in what order to
do it.  I hope you've found the process both educational and
helpful!

Best Trading Wishes!

Mark


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