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Daily Newsletter, Thursday, 07/01/2004

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The Option Investor Newsletter                Thursday 07-01-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Nonetheless
Futures Markets: See Note
Index Trader Wrap: Semiconductors weigh on tech, oil approaches $39
Market Sentiment: Fear of the Weekend


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      07-01-2004           High     Low     Volume   Adv/Dcl
DJIA    10334.16 -101.30 10448.09 10274.51 1.78 bln 1380/1850
NASDAQ   2015.55 - 32.20  2045.53  2006.67 1.77 bln  938/2124
S&P 100   549.01 -  4.86   554.43   545.85   Totals 2318/3974
S&P 500  1128.94 - 11.90  1140.84  1123.06
W5000   11024.15 -114.80 11140.79 10975.26
SOX       467.03 - 18.10   485.09   462.59
RUS 2000  582.43 -  9.09   591.52   582.43
DJ TRANS 3172.01 - 32.39  3212.45  3160.17
VIX        15.20 +  0.86    15.57    14.41
VXO (VIX-O)15.08 +  1.09    15.99    14.40
VXN        20.06 +  0.69    20.68    19.59
Total Volume 3,883M
Total UpVol    726M	
Total DnVol  3,112M
Total Adv  2686
Total Dcl  4466
52wk Highs  261
52wk Lows    86
TRIN       2.75
NAZTRIN    1.91
PUT/CALL   0.93
************************************************************

Nonetheless
by Jim Brown

The key word in the Fed announcement was "nonetheless"
and not "measured pace" and that difference was felt in
the market action on Thursday. Post Fed trading was less
than inspiring as a new flurry of earnings warnings
produced a cloud over the markets. Adding to that cloud
was a weaker than expected ISM and stronger than expected
Jobless Claims. Cracks were forming in the bullish
sentiment on multiple fronts.

Dow Chart - Daily


Nasdaq Chart - Daily


SPX Chart - Daily


SOX Chart - Daily



The morning began badly with stronger than expected Jobless
Claims which came in at 351,000 with last weeks numbers
revised up to 350,000. This makes three of the last four
weeks at 350,000 or higher and suggests the employment
picture is not as strong as economists would like. The
four week moving average rose to 347,000 and the highest
level since April 17th. With the June employment data due
out tomorrow the markets were not excited about the 350K
level being breached so frequently.

Offsetting the Jobless Claims was a stronger report from
the Monster.com Employment Index which rose to 136 in
June from 128 in May. This was a +6.3% increase and the
jobs were spread across most geographic sectors. Management
and Administration positions were the strongest with the
Sales and Production components barely budging. This data
is not adjusted for seasonality as are all the other
employment surveys and it is difficult to determine if
it was a seasonal bounce or a real change in hiring. This
index represents the change in jobs advertised and not
jobs filled.

The key report for the day was the ISM for June and at
61.1 it still represents an expanding economy but it was
the lowest level seen since last October's 57.0. The high
of 63.6 was posted in January and the number has been
moving lower since. There was a small bounce to 62.8 in
May but June's -1.7 drop erased all the gains. The problem
for June was in the New Orders and Backlog components. New
Orders dropped from 62.8 to 60, down from the 73.1 high
in December. Order Backlog fell to 58.5 from 63.0 in June
and the 66.5 high in April. New Export Orders fell nearly
-4 points from 60.6 to 56.7. Employment fell from 61.9
to 59.7. Good news came from a drop in Prices Paid from
86.0 to 81.0 but bad news came from a nearly +2 point
jump in inventory levels to 51.1.

The conclusions drawn from the ISM are not very exciting.
Orders are down, inventory is up with employment dropping
again. This appears to be confirmation of the many smaller
reports from earlier in the month suggesting the economy
is cooling. What this means in English is we are no longer
expanding at a red hot pace but more of a lukewarm crawl.
The lack of any inflation in the prices could be due to
the continued slack in the economy and the inventory
buildup. This is good news for the Fed but troubling
news for traders. With the market priced to perfection
a slowing of growth at the same time the Fed is raising
rates is a recipe for disaster.

It might sound like the ISM was all negative and that is
far from the truth. The ISM has now been over 60 for eight
months and that is the first time in over 20 years. The
economy is still expanding only that pace of expansion
has slowed over the last four months. The odds are good
that string will be broken next month.

The problem for the markets today came from multiple fronts.
The Fed statement was one area of concern. While everyone
expected the Fed to raise rates again before year end they
would prefer that it occur in an orderly measured pace.
The Fed added the clause "Nonetheless, the Committee will
respond to changes in economic prospects as needed to
fulfill its obligation to maintain price stability." While
the "measured pace" term was still used in the preceding
sentence the "nonetheless" qualification removed it from
consideration. The Fed tried to ride the fence and ended
up with splinters. They tried to appease the markets but
just had to have the last word. That last word worried
the markets that there is still a danger of a repeat of
the 1994 runaway rate hikes. If the economy was still
expanding at a faster rate this statement may not have
been a real problem. The ISM confirmation of weakness in
prior reports that the expansion is slowing only served
to highlight the phrase.

Another challenge for the markets was some window undressing
before the holiday weekend. Those who bought stocks last
week in anticipation of a Fed celebration rally were quick
to bail out when that rally did not occur. Remember all
the talking heads that predicted a market relief rally
if the Fed would just go ahead and raise rates and remove
the uncertainty? They were conspicuously absent today as
the market imploded.

Also impacting the averages was another flurry of earnings
warnings and lowered guidance. Many tech companies confessed
to lower earnings prospects and the Nasdaq took it on the
chin with a -32 point drop. Leading the big cap indexes
down was very disappointing auto sales and further evidence
of the slowing economy in general. GM reported sales fell
-15% and much more than anticipated from their warning
last month. Ford said sales fell -8%. Both companies said
they were working to increase sales. Translated that means
the incentives offered in the showroom was going up once
again. The average incentive today is just over $4000 with
some vehicles well over $5000. The problem with autos is
the lack of demand. They have been giving them away for
three years now with zero percent and buy one, get one
gimmicks and there is no pent up demand. Used car prices
have fallen off the planet and junkyards are crushing
newer cars than ever before and on a regular basis. We
have discussed the lack of future car buyers for the
last two years as each round of incentive increases was
implemented. Short of putting car keys in Wheaties boxes
the car companies are going to have a tough time moving
inventory for the next several months. The new model
year will be their best hope.

Cardinal Health was the biggest loser of the day and lost
-$7 billion in market cap and -$17 off their stock price
when they issued a high profile earnings warning. Three
funds collectively lost over $1 billion on the news. The
Fidelity Dividend Growth Fund and Fidelity Advisor Dividend
Growth along with the Vangard Health Care Fund lost big
bucks. CAH was a top holding in each. CAH was also 1.3%
of the Fidelity Magellan Fund with assets of $67 billion.
Tough to wake up to that kind of haircut as a fund manager.
All your work for the last six months wiped out in one day
by one stock.

Other earnings warnings for the day included COLT, WMAR,
PSTA, ELX, ESPD, CCUR, AMKR, MERX and SIPX to name a few.
The index with the biggest loss was the SOX after Smith
Barney downgraded the sector and AMKR warned of sector
problems. AMKR cut its estimates to +6 cents from 17-22
cents analysts had expected. They cited weakness in cell
phones and shortages of semi components. Morgan Stanley
also tanked the sector saying Intel guidance, due out
with earnings on the 13th, could be below analysts
expectations. Add in the ELX warning of slow sales and
the SOX dropped -18 (-3.72%) for the day. Needless to
say the Nasdaq did not have a chance.

The Nasdaq gave back -32 points of its gains for the
week but managed to close right on the bottom of its
current range at 2015. The Nasdaq rallied out of its
prior range (1965-2000) on the 23rd and has refused
to go back. The drop today was over by 11:30 but no
rebound appeared. The Nasdaq closed off its lows but
only barely. The key here is still the SOX and with
nearly a -4% drop there is no way the Nasdaq could
have produced a gain. The SOX fell back below the
470 support level, which had held all week and clung
to 465, the last stop before testing 450 again. If
the Intel rumor picks up speed we could easily test
450 again next week. I kept thinking all day we would
see some chip buying at the close but it never
appeared.

The Dow took a serious header off the high board and
landed face first several points below the bottom of
its recent range. The Dow traded down to 10274 and
under the 10300 level which has held for nearly four
weeks. We did see a recovery at the close back to the
prior 10330 resistance level but the rebound ran out
of steam.

As with every long holiday in recent memory the rumors
of terror threats/events were flying. It was so bad at
one point that the Homeland Security Dept had to make
a statement that they were not raising the threat level
and there were no credible threats for the coming weekend.
That is almost more scary than a credible threat because
it means there is no concentration of force to prevent
the event. It is almost as though the cops are going on
holiday as well because there is no visible enemy. There
were also several commentators suggesting the Democratic
Convention was the most likely target for a regime change
attack because the attacked party tends to get the most
sympathy. With the goal to sink Bush the commentators
thought the Boston convention was not only the easiest
target in population density but the preferred target
as well. You can bet the security will be extreme and
it will not be an easy target by the time the convention
begins.

In the end it was not the rumors that tanked the market
but the perception that the Fed was ready to aggressively
raise rates just as the economy appeared to slowing even
further. It fell on worries that earnings were going
to disappoint and on several key downgrades. Yahoo
for instance was knocked for a -2 loss on a change in
search strategy by Microsoft. Valuation downgrades are
beginning to become common place and earnings warnings
only accelerate the worry.

Still the most likely fear factor impacting the markets
today was the Employment Report tomorrow. The current
consensus estimate is still +275,000 jobs and traders
were beginning to fear a disappointment. We have seen
employment drop in almost every report except for the
Monster Index. We have seen Jobless Claims rise back to
the 350,000 level for three of the last four weeks with
the four week average at 347K. These are not positive
signs for the Nonfarm Payrolls. I have heard several
whisper numbers this afternoon in the 100-110K range.
While this would still be a positive gain it would be
a sentiment loss. The perception that employment is
accelerating would be dashed and cast more suspicion
on the strength of the recovery. A major drop in new
jobs would weaken the republican stance and give Kerry
more ammunition. The race is already a tossup and that
could give investors more election indigestion. Should
we see a minus sign in front of the number it could be
lights out for any July rally.

July is typically the best month of the third quarter
and we certainly did not get started off on the right
foot. The Dow lost -101 points and broke crucial support
intraday. The S&P also traded below 1125 support and
managed almost no rebound. Oil spiked back over $39 on
comments from Saudi Arabia that they thought it was
fairly valued in the upper $30s. What happened to the
$25-$30 target price we have been using? Inflation in
its purest form brought on by supply and demand. The
jump in oil and rates and the drop in orders and jobs
knocked the hope out of the market and the result was
an ugly day.

Normally the trend into the July-4th holiday is up with
an earnings led rally for the following week. Not looking
too good for that rebound tonight. For the market to have
any hope of repeating that trend the Nonfarm Payrolls
had better be strongly positive and at least 100K or
more. With the implied weekend terrorist threat a wimpy
number is not going to instill confidence and create an
urge to buy.

There is good news in the market but it was hidden by
the various factors above. Real rates fell to nearly a
two month low despite the Fed rate hike. The yield on
the ten-year closed at 4.564. The market had priced
in the potential for a 50 point hike as well as strong
economics. We got neither and bonds continued to climb.
This will help home sales and take some of the fear of
the Fed out of the market. This fact will surface next
week and you can count on it. We will also need some
positive earnings news in order to capitalize on the
rate drop and that could be a challenge.

For Friday I would look for a good Jobs number to start
some bargain hunting ahead of the earnings parade that
begins next week. However, don't just jump in assuming
we will go higher. We did break support intraday on
Thursday and that could be a signal of things to come.
The market will confound the most people possible and
summer trading is very tough. Wait for a real trend to
appear.

We are also playing in some fast traffic. The NYSE
reported that program trading was responsible for 70.5%
of all trades on the NYSE for the week ended June 25th.
70.5%!!! This is an all time record and something that
should indicate to us all how little retail trading is
actually being done. According to the NYSE an average
of 1.119B shares were traded each day. Since there was
only an average of 1.588B shares traded each day this
means less than 470 MILLION shares of retail trading
per day. This is a picture of the summer doldrums at
its best. Here is the link to the NYSE report:
link

In the for-what-its-worth category Abby Joseph Cohen
gave her carefully scripted market outlook on Wednesday.
She said the markets were 12-15% undervalued and we
could see a significant rally by year end. Using the
S&P as of Wednesday that +12-15% gain would put the
S&P at 1275-1311. Definitely a far cry from our 1025
support today. She also said the rally might not occur
until late November or December due to the election.
I hope she is right but I would not mortgage the kids
to bet on it. Interesting that she chose to make her
appearance during the post Fed bounce where all the
pundits were predicting a celebration rally.

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

Semiconductors weigh on tech, oil approaches $39

Sound familiar?  How about the June 17 Index wrap title.

While technology stocks were broadly lower in today's trade, it
wasn't entirely due to the Semiconductor Index (SOX.X) 467.03
-3.72% giving back half of a seven session rally.  Networkers as
depicted by the Networking Index (NWX.X) 250.22 -4.0% didn't
exactly carry their weight among technology after a brief 2-day
piercing of their rising 200-day SMA.

Non-NWX.X component Emulex (NYSE:ELX) $11.46 -19.91%, which has
been showing up on the NYSE new low list the past couple of weeks
did its part to deflate any winds that had been filling the
sector's sails of late.

Emulex's earnings warning drew comment from brokers on QLGC
$26.22 -1.39%, a NASDAQ new low setter since March, McData
(NASDAQ:MCDT) $4.63 -9.39%, another NASDAQ new low setter since
March, which broker Baird said it would continue to be a buyer of
despite ELX's warning, Brocade Communications (NASAQ:BRCD) $5.52
-7.69%, which set a new 52-week low in May.

While the "trickle down" effect from ELX was seen among
networkers, so too was its impact on chipmakers that supply hubs
and routers.

Baird did comment that ELX's slow quarter is most likely being
attributed to EMC's (NYSE:EMC) $11.14 -2.28% move during the
September quarter to a hub model switch, which is resulting in a
temporary inventory workdown at EMC's distribution partners.

Not to be silent, Adams Harkness piled on with a downgrade of
Brocade (BRCD) to "buy" from "strong buy" and now notes that
ELX's announcement indicated weakness at two OEMs, one of which
they believe to be Dow component Hewlett Packard (NYSE:HPQ)
$20.58 -2.46%, which is one of BRCD's largest customers.

While traders were ridding themselves of semiconductors and
networkers just below the 200-day SMA's, crude oil was rising
sharply on the heels of yesterday's inventory reports that showed
draws.  Pumping oil's rise was rumors that the Department of
Homeland Security planned to raise it terror alert level ahead of
the July 4th holiday.  A rumor that both Homeland Security and
the White House later refuted.

Through it all, the energy sensitive Dow Transportation Average
(TRAN) 3,172.01 -1.00% wouldn't budge below the 3,160 level
(01/04/01 relative high 3,157.44), which the TRAN broke above in
recent session.

August Crude Oil Futures (cl04q) - 25-cent box



A quick glance at Dorsey/Wright and Associates point and figure
chart of August Crude Oil Futures (qcharts: cl04q) has oil
rebounding sharply from Tuesday's lows of $35.75.  However, oil
bulls weren't quite able to get a reversing higher PnF buy signal
at $39.50 to negate the current bearish vertical count of $32.00.
I eyeballed a PINK horizontal level at $39.50, which I think any
move in oil above that level, might trigger some profit taking in
the Transports back below the 3,160 level.

Oil didn't trade $39.50 today, and the Transports didn't trade
below 3,160.  As close as 3,160.17 is to 3,160.

Market Snapshot / Internals - 07/01/04 Close



A/D lines were flat at the open, but the ISM Manufacturing Index
of 61.1, certainly spooked traders as it was the lowest reading
since October, and off of January's high reading of 63.6.

An intra-day review of the SPX had the ISM data being released at
10:00 AM EDT with the SPX at 1,139.  Just prior to a sell program
premium alert being generated, the SPX moved below its WEEKLY
Pivot of 1,135, where the sell program premium was then
generated, sending the SPX lower to 1,126.

A loan buy program premium was found at 03:41 PM EDT, which most
likely correlates to Jim Brown's Market Monitor alert at 03:40:29
that there was a mixed to "buy side" bias on initial market on
close orders.  However, both Jim's alert as well as the buy
program premium came well after the SPX had briefly (about 7-
minutes) pierced below its WEEKLY S1 (1,123.75) at 01:50 PM EDT.


U.S. Market Watch - 07/01/04 Close



I always have high ambitions of showing a bunch of charts in each
night's wrap, but never have enough time.  I wanted to quickly
revisit some notes relating to "new high" tests for some of the
indices.

The CBOE Internet Index (INX.X) 194.68 -3.12% didn't quite get a
new 52-week high yesterday, where the internets look like they
want to reload for another go.

The S&P Retail Index (RLX.X) 399.14 -0.5% did get a new high
above 413.22, but not my "round number" of 414.00.  I like to
place a formidable challenge to things! (grin)

The Transports (TRAN) hung tough above 3,160.

The Cyclical Index (CYX.X) 690.03 -1.45% haven't really come
close to challenging the 714 level, where on June 24, the best
trade was 706.41.

The Defense Index (DFX.X) 225.46 +0.55%, which was trading new
52-week highs on June 23 (221.35) did so again today.

What I want/need to do, which maybe you the trader can do, is
just slap some conventional retracement on the above mentioned
indices (somewhat stronger) and get a feel for things.  I need to
do this further, get a feel for how they're staggered, to also
try and get a better sense of their impact on the SPX/OEX.

Pivot Analysis Matrix -



I think there's potential for a pretty good bounce higher into
tomorrow's close, and here's what I think I see in the Pivot
Matrix.

The SPY traded correlative MONTHLY S1 and WEEKLY S1 today, and
just a smidge under.  Now.... here we are back around SPX 1,125.

On June 17, a Thursday, "Semiconductors weigh on tech, oil
approaches $39" the SPY closed at its session lows, but just off
its WEEKLY S1, and finished the week (Friday) with a nice gain.

Tomorrow, the trade I do LIKE is for the QQQ/NDX where I would
LIKE TO SEE the NDX make a continued move lower to that
correlative WEEKLY S1 and DAILY S2.  Now, for some reason, the
QQQ correlation shows up at $36.44-$36.42 and MONTHLY S1/WEEKLY
S1.

For a QQQ bullish trade setup on that much weakness, I would NOT
WANT to see the SPY much below its DAILY S1.

Why would/might the SPY hold in at or above its DAILY S1?  I
would think that with Treasury yields falling in recent session,
the banks, as depicted by the BIX.X might be set to firm, and
bounce after a test of WEEKLY S2 today.

I also sense a GREAT deal of bearish complacency.

Let's quickly look at the OEX with new MONTHLY Pivot retracement,
where we've got some overlapping support at WEEKLY S1 and MONTHLY
S1.  But I also want to bring back a prior "hindsight"
observation of a doji in the OEX's bar chart, where the OEX
rejected higher from that level.  Tomorrow, the OEX's DAILY S1 is
at that 545 open/close doji and me be a level where bears are
just waiting to cover some shorts, or with a little volatility
spike into the weekend, really pound out some put selling.

S&P 100 Index (OEX.X) Chart - Daily Interval



I'll take some time later tonight to find out what Index Trader
Wrap it was when I finally noted that little "doji" from June 1st
when the OEX opened and closed at 545, then broke higher from the
current overlapping MONTHLY S1 and WEEKLY S2.

Today, the OEX managed to muster back some strength to close on
our downward trend.  Hey, that makes sense.  If I'm a bear that
trades trend, sees it broken, then I'm probably not trash talking
and might be trying to get squared up if I've been overly bearish
for the past two years.

While I usually don't find a DAILY S1 by itself as being a level
for institutional buying, that little doji and rather notable
move higher would suggest that that 545 level was a level of
agreement (market agreed on open price and closing price), yet
major disagreement, as when the up move came, it had some upmph
behind it for four our five sessions.

Jeff Bailey


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

Fear of the Weekend
- J. Brown

If yesterday's post-fed afternoon rally was due to window
dressing then funds didn't take long to do a little undressing.
The day started with some disappointing economic data in the form
of higher than expected initial jobless claims and an ISM index
that came in just a tad lower than forecast.   There were a
number of factors pressuring stocks and investors used them all
as an excuse to sell.

The last 24 hours has not been positive when it comes to earnings
outlooks.  Cardinal Health, the nation's largest drug wholesale,
dropped a bomb last night with an earnings warning for the June
quarter, the year and next year.  On top of the earnings news CAH
added to its woes by revealing a new government probe into its
accounting practices.  Shares of CAH dropped like a rock with a
$17.00 haircut or 25% decline in market cap.  Emulex (ELX) was
chasing after CAH with its own earnings warning that left shares
of ELX down 20% on the session.  You would expect the brokers to
downgrade these stocks and they did but analysts were also
downgrading some recent winners like Boeing (BA) and Yahoo
(YHOO).  All in all the effect was damaging to investor
confidence regarding the upcoming Q2 earnings season.

It was a very bearish day as the SOX semiconductor index led
stocks lower with a 3.7% decline.  Only the DFI defense index and
the XNG natural gas index managed to close in the green.
Pressing down on stocks was day two in a huge surge higher for
crude oil.  Oil has risen more than 8% in the last two sessions
and completely erased its losses over the last two weeks.

Market internals were obviously negative.  Declining stocks
outnumbered advancers 17 to 10 on the NYSE and 21 to 9 on the
NASDAQ.  Down volume was more than four times higher than up
volume on both exchanges.

Wall Street will be focused on the non-farm payrolls report
tomorrow but the real fear may be the Fourth of July weekend.
Investors tend to get spooked ahead of any long holiday and the
potential for terrorist attacks.  I suspect that many traders
have already left for the holiday, which will leave us with low
volume to exaggerate any moves in the markets today and tomorrow.
If we can escape any sort of major terrorist event over the
weekend then maybe fund managers can put their new wad of
retirement cash from the quarter's end to work and do a little
buying next week.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  8871
Current     : 10334

Moving Averages:
(Simple)

 10-dma: 10392
 50-dma: 10253
200-dma: 10152



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  962
Current     : 1128

Moving Averages:
(Simple)

 10-dma: 1135
 50-dma: 1119
200-dma: 1099



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1180
Current     : 1489

Moving Averages:
(Simple)

 10-dma: 1487
 50-dma: 1451
200-dma: 1442



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

CBOE Market Volatility Index (VIX) = 15.20 +0.86
CBOE Mkt Volatility old VIX  (VXO) = 15.08 +1.09
Nasdaq Volatility Index (VXN)      = 20.06 +0.69

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.93        736,874       686,859
Equity Only    0.74        576,755       429,000
OEX            0.62         38,203        23,733
QQQ            0.78         66,351        51,684


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

Bullish Percent Data

           Current   Change   Status
NYSE          67.1    + 0     Bear Confirmed
NASDAQ-100    50.0    + 1     BULL ALERT
Dow Indust.   70.0    + 3     Bear Confirmed
S&P 500       65.4    + 0     Bear CORRECTION
S&P 100       66.0    + 2     Bear CORRECTION



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

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


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

 5-dma: 1.26
10-dma: 1.08
21-dma: 1.04
55-dma: 1.07


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


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

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1059       915
Decliners    1741      2103

New Highs     105        73
New Lows       28        37

Up Volume    358M      325M
Down Vol.   1415M     1386M

Total Vol.  1796M     1725M
M = millions


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

Commitments Of Traders Report: 06/22/04

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

It looks like commercial traders are hedging all their bets
by bringing them close to parity.  If the "smart money" doesn't
know what direction the S&P is going to go after June 30th
how are the "little folk" supposed to know? *grin*  Evidently,
the retail trader isn't listening.  They reduced their shorts
to leave them strongly bullish on stocks.


Commercials   Long      Short      Net     % Of OI
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%)
06/22/04      407,842   415,462   ( 7,620)   (0.9%)

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
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%
06/22/04      124,985    89,934    35,051    16.3%

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

Wow! Maybe commercial traders are just ignoring the large
S&P contracts and focusing on the e-minis.  They reduced their
positions in both longs and shorts but they almost cut their
longs in half.  That's VERY bearish for the market.  Likewise
small traders are lockstep in unison going the opposite direction.


Commercials   Long      Short      Net     % Of OI
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%)
06/22/04      229,290   446,974   (217,684)  (32.2%)

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
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%
06/22/04      243,444     58,389   185,055    61.3%

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 are reducing their positions in both longs
and shorts for the NDX and bringing them closer to break even.
Small traders are following suit bring their shorts and longs
close to even.  Looks like no one knows what direction the
NASDAQ is going.


Commercials   Long      Short      Net     % of OI
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%
06/22/04       40,397     37,413     2,984    3.8%

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
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%)
06/22/04        9,311     9,950      (639)  ( 3.3%)

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... oddly enough commercial traders are turning more bullish
on the Dow Industrials.  Looks like they like the upside breakout.
Small traders are more pessimistic here.


Commercials   Long      Short      Net     % of OI
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%
06/22/04       26,808    19,752    7,056      15.2%

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

Small Traders  Long      Short     Net     % of OI
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%)
06/22/04        5,626     7,798   (2,172)   (16.2%)

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 07-01-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: None
Call Play Updates: AHC, CAT, DHR, MERQ, ETN, EBAY, MMM, QCOM
New Calls Plays: None
Put Play Updates: GCI, OMC, SLAB
New Put Plays: NTES


****************
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:
*****

None


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

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

Amerada Hess Corp. - AHC - cls: 79.89 chng: +0.70 stop:
77.50*new*

Tuesday's rebound from the $75 level was just the beginning for
our play on AHC, as the stock pushed right up to and through last
week's high at $79.10.  Then in defiance of the broad market
weakness seen today, the stock pushed to new recent highs, even
spending a bit of time above $80.  Our target in the $82-83 area
is looking more and more feasible by the day.  With that target
now only $3 away, it is time to get more aggressive with our
stops.  We're raising our coverage stop to $77.50 tonight, which
is just under yesterday's intraday low and should be under the
supportive 10-dma ($76.96) by tomorrow.  While aggressive traders
can still consider new entries on either a successful bounce from
above $78 or a breakout over today's high.  But our focus is now
turning to maximizing gains from the play, rather than looking
for new entry points.  A move into the $82-83 area ahead of the
weekend should be used as an opportunity to exit the play with a
tidy gain.

Picked on June 17th at       $74.15
Change since picked:          +5.74
Earnings Date               7/28/04 (unconfirmed)
Average Daily Volume =     1.13 mln
Chart =


---

Caterpillar, Inc. - CAT - close 78.18 change: -1.26 stop: 76.00

Reflecting the schizophrenic mood of the broad market, our CAT
play has been bouncing between support near the $77 level and
resistance in the $79.50 area for over a week now.  Neither the
bulls or the bears seem able to gain a significant advantage and
that keeps the range trade alive.  We're still expecting the
stock to break to the upside, but probably not until we see one
more test of the bottom of the range first.  Investors are
unlikely to be aggressive buyers of the stock ahead of the long
weekend straight in front of us, so dip buyers ought to get one
more shot at buying a bounce off the $77 support level.  Traders
looking to buy a breakout over resistance (now at $79.60) will
likely have to wait until next week when hopefully we'll see
stronger volume and conviction.  Maintain stops at $76, which is
under all of the major moving averages.

Picked on June 24th at       $79.10
Change since picked:          -0.92
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =     2.36 mln
Chart =


---

Danaher Corp. - DHR - close 50.98 change: -0.87 stop: 50.00

We've been waiting to see where DHR would pause in its steady
ascent for a bit of profit taking and today was the day.  After
testing yesterday's highs near $52,. The stock headed sharply
lower early in the day, falling right to solid intraday support
near $50.50 and then beginning a minor rebound into the end of
the day.  There should be solid support near that level and
rebound entries from that vicinity look favorable.  We're still
looking for the stock to extend its bullish move up into the $53-
54 area, so a pullback near $50.50 would still provide ample
upside potential for new positions.  On the other hand, a
breakout over $52 resistance really doesn't leave much room for
profit, so we're not recommending breakout entries at this time.
The one potential problem for our play is that the daily
oscillators are looking a bit extended up here.  Should they roll
over into solid Sell signals, then it's a safe bet we'll see our
$50 stop tripped before our profit target is reached.

Picked on June 20th at       $48.74
Change since picked:          +2.24
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =     1.55 mln
Chart =


---

Mercury Interactive - MERQ - cls: 49.02 change: -0.81 stop: 48.50

Don't look now, but our MERQ	play is in trouble.  The broad
market weakness today certainly didn't help, and MERQ rolled over
right at the $50 level - giving the impression that that level is
once again behaving as resistance.  MERQ dropped to close at its
low of the day and just above the 20-dma ($48.94).  If that
average fails to offer support, then it’s a safe bet that our
$48.50 stop will be hit.  On the other hand, a rebound from the
20-dma can be used for new entries for aggressive traders.  That
would be the mirror image of the rebound scenario that presented
itself a couple weeks ago.  The problem that must be confronted
though, is the fact that the daily oscillators are on Sell
signals and selling volume appears to be on the rise.  Keep those
stops in place and look for the rebound.

Picked on June 6th at        $47.56
Change since picked:          +1.46
Earnings Date               7/21/04 (unconfirmed)
Average Daily Volume =     2.03 mln
Chart =


---

Eaton Corp - ETN - close: 63.68 chg: -1.06 stop: 61.85

Believe it or not but ETN weathered the market sell-off on
Thursday better than some of its peers.  That may be partly due
to its fresh breakout above mild resistance at $64.00 on
Wednesday.  Without a doubt the stock is looking a little
overbought up six weeks in a row but its P&F chart continues to
look very bullish with the breakout and $83 target.  As long as
ETN continues to channel higher we should be okay.  Right now the
bottom of its narrow channel is near $62.00 so our stop at $61.85
is in a good spot.  Traders might actually want to use today's
dip as an entry point for new positions.

Picked on June 18 at $ 62.05
Change since picked:  + 1.63
Earnings Date       07/15/04 (confirmed)
Average Daily Volume:    1.0 million
Chart =


---

eBay Inc - EBAY - close: 90.59 change: -1.36 stop: 87.50

EBAY had been fading back a little bit the last couple of
sessions to digest some of its gains from last week.  Today's
sharp sell-off in technology issues could have been worrisome for
EBAY bulls but support at the $90.00 mark held.  Traders might
actually want to take advantage of the dip and use it as an entry
point for new positions although we'd probably confirm the market
was headed higher tomorrow morning before making a purchase.  Yet
even a dip to $88.00-89.00 could be seen as an entry point if
EBAY starts to bounce back.  We'd expect EBAY to really out
perform next week if the Fourth of July holiday is a quiet one.
We're going to leave our stop loss at $87.50 for now.

Picked on June 27 at $ 90.72
Change since picked:  - 0.13
Earnings Date       07/21/04 (confirmed)
Average Daily Volume:    8.3 million
Chart =


---

3M Co - MMM - close: 88.17 change: -1.84 stop: 87.49

We were triggered in this call play on Wednesday when shares of
MMM broke through resistance at $90.00 and hit our trigger at
$90.11.  The push higher came despite news that the Supreme Court
turned down MMM's appeal to review a lower court's decision and
$68 million jury award against MMM for anti-competitive
practices.  In the lawsuit one of MMM's competitors said the
company was trying to monopolize the transparent tape business.
The $68 million fine is nothing to MMM, who currently has a cash
hoard of $1.8 billion.  Thus MMM may have weathered some bad
legal news yesterday but it couldn't hold on to its breakout when
the Dow Industrials plummeted more than 100 points on Thursday.
MMM actually broke through its simple 10-dma and pierced minor
support at the $88.00 mark intraday before small rebound in the
afternoon.  This is an ugly turn of events for our play and makes
Wednesday's breakout look like a bull trap.  We would NOT suggest
new bullish positions until MMM traded back above the $90.00
mark.  Only aggressive traders should consider buying a bound
from $88.00.

Picked on June 30 at $ 90.11
Change since picked:  - 1.94
Earnings Date       07/19/04 (unconfirmed)
Average Daily Volume:    2.5 million
Chart =


---

QUALCOMM - QCOM - close: 72.02 change: -0.96 stop: 69.00

Shares of QCOM are holding up pretty well.  The stock managed to
squeeze out another new three-year high this morning before
slowly fading backwards with the market's sell-off.  Adding to
QCOM's strength were positive comments from Merrill Lynch who
reiterated their "buy" outlook and raised their target price from
$75 to $90.  After hours news broke that QCOM's suit against
rival chipmaker Texas Instruments (TXN) is not progressing as
planned.  A judge ruled in favor of TXN regarding part of the
patent dispute.  Shares of QCOM we not trading lower in after
hours so we're unsure how the stock will respond in the morning
if at all.  We feel that traders should be on the look out for a
dip toward the $71.00-71.50 region and any bounce above $70.00
could be viewed as an entry point.  No change to our stop loss at
$69.00 for now.

Picked on June 29 at $ 71.55
Change since picked:  + 0.47
Earnings Date       07/21/04 (confirmed)
Average Daily Volume:    8.8 million
Chart =



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

None


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*******************
PLAY UPDATES - PUTS
*******************

Gannett Co - GCI - close: 83.70 change: -1.15 stop: 86.05

Good news!  GCI has finally broke through support at the $84.00
mark.  We have been triggered now that GCI traded at $83.95 with
volume about 50% above average.  The move produced a new
quadruple-bottom breakdown sell signal on its P&F chart.  We're
only targeting a quick move to the $80.00 range, which should be
support.  If GCI bounces traders might be able to enter new
positions on a failed rally under 84.50-85.00.  Congratulations
to any traders who took the roll over on Tuesday as an early
entry point.

Picked on July 01 at $ 83.95
Change since picked:  - 0.15
Earnings Date       07/13/04 (confirmed)
Average Daily Volume:    957 thousand
Chart =


---

Omnicom Group - OMC - close: 74.30 change: -1.59 stop: 77.50*new*

The rollover from resistance at the 10-dma (now $76.14) looked
pretty good early in the week, as last week's rebound in shares
of OMC failed.  But it was nothing to compare with the bottom
falling out of the stock like it did today.  OMC plunged at the
open and didn't really slow its descent until after it busted
through the March lows.  Rather than bouncing from that potential
support, OMC broke below it, then used that $74.65 level as
resistance for the remainder of the day before tipping over to go
out on its intraday low.  With today's breakdown, OMC is now
looking destined for an express ride to the $71-72 area, with the
potential for a continued drop toward the PnF bearish price
target (now $67), or even the bearish H&S price target of $65.
Rebound entries can be considered on a rollover from the $76
area, which should now be strong resistance.  Note that we've
lowered our stop to $77.50, just over the intraday peak of last
week's rebound attempt.

Picked on June 20th at        $77.14
Change since picked:           -2.84
Earnings Date                4/27/04 (confirmed)
Average Daily Volume =      1.09 mln
Chart =


---

Silicon Labs. - SLAB - close: 45.11 change: -1.24 stop: 48.50

As amazing as it seems, our SLAB play is still alive and looking
better and better.  After last week's near-miss of the $48.50
stop, the stock tipped over in sympathy with the Semiconductor
index (SOX.X) and today's 3.7% plunge in the SOX certainly helped
to drive SLAB back towards key support near $44-45.  Failed
rebounds below the 20-dma (now at $47.09) can still be used as
potential re-entry opportunities ahead of the next breakdown
below the $42.88 low from a couple weeks ago.  While momentum
entries below that mark could work, we're not overly enthusiastic
about that approach due to the way SLAB tends to bounce so
strongly after each apparent breakdown.  Shorting the rallies at
resistance appears to be the more prudent approach on this stock.
For now, we'll maintain our stop at $48.50, which is just over
the intraday highs from last week.

Picked on June 20th at        $44.99
Change since picked:           +0.12
Earnings Date                4/26/04 (confirmed)
Average Daily Volume =      1.16 mln
Chart =



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

Netease.com - NTES - close: 39.38 chg: -1.96 stop: 42.51

Company Description:
NetEase.com, Inc. is a leading China-based Internet technology
company that pioneered the development of applications, services
and other technologies for the Internet in China. Our online
communities and personalized premium services have established a
large and stable user base for the NetEase Web sites, which are
operated by our affiliate. As of March 31, 2004 we had
approximately 194 million accumulated registered accounts, and
our average daily pageviews for the month ended March 31, 2004
exceeded 341 million. (source: company press release)

Why We Like It:
Any time we play one of the Chinese Internets we like to add an
extra note of caution.  They're not for everyone as the group can
still be volatile.  Now having said that the entire niche has
been weak the last couple of sessions and today's breakdown in
NTES looks good for bearish plays.  On top of the general market
weakness today the Chinese Internets were hit extra hard due to a
downgrade by one analyst reducing expectations for the group.
Concerns over business not building fast enough and some
regulatory hurdles were to blame for the reduced outlook.

We like the technical picture for NTES.  Its daily chart shows
the breakdown below round-number psychological support at $40.00
on rising volume that is nearly double the average trading
volume.  Weekly and daily technicals like the RSI and stochastics
are bearish and its P&F chart is weak and points to a $33 target.
We do note that NTES has support near $35.50 and we're going to
make that our initial target but the stock appears to be trading
in a wide descending channel and a lower target is possible.

Earnings are expected in about three weeks but the date is not confirmed.

Suggested Options:
We're going to suggest the August puts.  Our favorites are the
40s but the 45s have relatively low time premium and the 35s are
cheap.

BUY PUT AUG 45 NQG-TI OI= 117 Current Ask $6.90
BUY PUT AUG 40 NQG-TH OI= 407 Current Ask $3.60
BUY PUT AUG 36 NQG-TG OI= 683 Current Ask $1.50

Annotated Chart:




Picked on July 01 at $ 39.38
Change since picked:  - 0.00
Earnings Date       07/26/04 (unconfirmed)
Average Daily Volume:    1.7 million
Chart =



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

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
ADVERTISING INFORMATION

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Contact Support


The Option Investor Newsletter                  Thursday 07-01-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Energy, Electronics, Drugs and more
Option Spreads: What Your Mouth Will Get You That Your Fingers Can’t
Traders Corner: A New Look At Trendlines
Traders Corner: It's That Time Again

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

Energy, Electronics, Drugs and more

___________________________________________________________________

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

Valero Energy - VLO - close: 74.81 change: +1.05

WHAT TO WATCH: Energy bulls should take note.  The sharp rise in
crude oil has helped fuel a nice bounce in VLO from its simple
10-dma.  VLO is an oil refinery and everyone knows that business
is brisk.  The stock is at its all-time highs and looks poised to
keep right on climbing.  We do suggest relatively tight stops if
you play it due to VLO's overbought status.  We'd probably target
a move to $80.00.

Chart=


---

Best Buy Co - BBY - close: 49.74 change: -1.00

WHAT TO WATCH: We've had our eye on BBY for a while.  The stock
has been trading sideways for months with most of that time spent
in a $5.00 range between $50-55.  Now shares are breaking down
under $50.00 so it's a good time to short it, right?  Maybe.  BBY
broke through support at $50.00 last month but it proved to be a
head fake.  Look for a drop through the $49.00 level and then
target a move toward $45.00.  Watch out for P&F support near $47.

Chart=


---

Analog Devices Inc - ADI - close: 44.85 change: -2.23

WHAT TO WATCH: The 3.7% drop in the SOX semiconductor index was
very bad news for tech stocks and even worse news for chipmakers.
ADI fell 4.7% and broke through support at the $45.00 level.
Volume was pretty decent on the move and we suspect that bears
might be able to target a drop toward $40.00.  Unfortunately,
there could be support at $43 and again near $42 with the lows in
December and May, respectively.  The good news is that its P&F
chart is bearish and points to a $37 target.

Chart=


---

Cardinal Health - CAH - close: 52.86 change: -17.19

WHAT TO WATCH: That's right; CAH dropped more than $17 on 18
times its average volume.  Last night the company issued a huge
earnings warning for the current quarter, all of fiscal year 2004
and FY2005.  On top of the earnings news CAH announce a
government probe into its accounting practices.  We suspect that
CAH could produce a "dead cat bounce" tomorrow and if not
tomorrow then we'd look for it in the next few weeks.  The way to
play an immediate bounce is to look for a move back above $54.00
and then use a tight stop.  We'd target the $58-59 levels.

Chart=



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

MUR: $75.45 +1.75 - MUR is another oil stock hitting new highs on
the surge in crude.

BA $49.90 -1.19 - Very aggressive bears might try and short a
break under the $49.00 mark with a target towards $45 but odds
are we suspect support in the $47.00-47.50 range.


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

What Your Mouth Will Get You That Your Fingers Can’t
By Mike Parnos, Investing With Attitude

Everyone who was worried that the market was going up too fast
raise your hand.  OK, first put down your beer.  Now, raise your
hand.

The topside of a few of our Iron Condor portfolio positions were
threatened over the last few days.  But, never fear.  The
resistance level fairy came down today, waved her magic wand, and
the market pulled back today.  So, we’re safe – for now.  Fasten
your seatbelts.  It’s going to be another fun ride.

Oh, you can put your hands down now.
____________________________________________________________

Using Your Mouth Instead Of Your Fingers
God gave us opposable thumbs – and they come in handy, especially
when it comes to using our computer mouse (and, of course,
eating).  Modern technology has given us the ability to maneuver
our way around a brokerage site to do our trading.  These days,
most of us do our trading online.  We do the research.  Check out
the option chain, get the option symbol, and type it into the
online order page.  We click “send” and our precious order
disappears into the wild blue yonder only to appear on a market
maker’s board somewhere.  Face it.  It’s magic, but it works.

That’s all fine and good, but we know how seldom things go exactly
according to plan.  It’s inevitable.  There will come times when
you have to communicate with those nice people at your brokerage
firm.   Perhaps your order didn’t get filled.  Maybe the results
weren’t reflected properly in your portfolio.  Maybe you have
questions about maintenance requirements.  Maybe the TV is broken
and you’re just lonely.  Whatever.

Plus, though it’s hard to comprehend why, there are still some
traders who actually place their orders on the telephone.  Well,
let’s devote a few paragraphs to the proper way to place your
option order on the telephone.

I mentioned earlier that the folks at the brokerage firms that
take your calls are nice folks.  Basically, they are.  Keep in
mind that they spend their entire workday answering the phones,
fielding a variety of questions and complaints.  It’s not an easy
job.  It requires a substantial knowledge base, almost as much
patience and a truckload of tolerance.  The least we can do is be
prepared to give them all the information they need to do their
job as effortlessly as possible.

Placing The Order
Here is a list of what you need before you pick up the phone to
dial.
1.  Your account number.
2.  The type of order you want to place.
3.  Are you buying to open, selling to open, buying to close or
selling to close?
4.  The number of contracts.
5.  The option symbol. (4 or 5 letters – can usually be found on
most option chains)
6.  The debit or credit amount.
7.  Is it a limit or market order? (it should be a “limit” order
90% of the time)
8.  The duration of the order.  (day order, good till cancel, all
or none)

This information gives your new phone buddy all the information
he/she needs to efficiently process the order in a timely fashion
– and I emphasize “timely” fashion.  Why?  Because, while you’re
fumbling around for the pertinent information, the market can move
against you.  That can change the option prices and render your
order obsolete.  The less time you spend on the phone, the better
chance you have of getting your order filled at the price you
want.

A Typical Phone Order
“This is George Soros, account number 8046-1228.  I’d like to put
on a bull-put spread trade on the S&P 500 index.  I want to sell
to open 10 contracts of the SPQTO puts and buy to open 10
contracts of the SPQTJ puts for a credit limit of three dollars.
This order is good for the day.”

The phone rep will then repeat it back to you, using the actual
months, to confirm that is what you meant.  Listen carefully.
This is your chance to catch any mistakes.  The phone call is
being recorded to make sure your order was placed as described and
to resolve any discrepancies that may arise.
____________________________________________________________

JULY NEW POSITIONS
Position #1 – SPX Iron Condor – 1128.94
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 – 582.43
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 – 1128.94
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 – 467.03
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 -- $37.04
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 – 549.01
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
**************

A New Look At Trendlines

In my last article on macro support and resistance I talked about
a book called "DeMark on Day Trading Options." I have never
completely read this book but after the support and resistance
article I decided to take another look and see what else I could
find. There is a chapter on TD Lines and how to draw trendlines
and it looked like something I could really get my teeth into so
I forged ahead. The methodology is called TD Lines and is
copyrighted by T. DeMark

DeMark states that trendlines are one of the most widely used
technical analysis tools but thinks they are also the most widely
abused tool. Since there are no industry standards for drawing
trendlines, two different traders can end up drawing two
different trendlines on the same market because they are drawn
according to a trader's discretion. Where a trendline is placed
is often due to a trader's bias or even at the whim of a traders
emotion state. It is for this reason DeMark thinks they are
unreliable and difficult to reproduce. DeMark thought it would be
nice to have some way of normalizing this tool and take out all
the arbitrariness of it and introduce a level of objectivity and
consistency to drawing trendlines. In this article I intend to
examine his mechanical process that removes the possibility of
drawing a trendline according to a  bias or drawing a trendline
differently from any other trader. I will also discuss how, once
those trendlines are drawn you can use a list of criteria to
determine if breaks are valid or not.

But before we get started lets define a trendline, one of the
most basic but one of the most valuable tools in our toolbox, as
defined by John Murphy:

An Up Trendline is a straight line drawn upward to the right
along successive reaction lows
A Down Trendline is a straight line drawn downward to the right
along successive reaction highs

The first thing we must do is find the two most recent swing lows
or highs. DeMark calls these TD points. A TD Point Low (swing
low) is a low that has a higher low one bar before it and one bar
after it. A TD Point High (swing high) is a high that has a lower
high one bar before it and one bar after it.

DeMark does not call trendlines just plain Jane (only I can say
that) trendlines, he calls them TD Demand Lines and TD Supply
Lines.

TD Demand Line - an upward sloping line between the two most
recent TD Point Lows where the most recent low is higher than the
previous low. The line is drawn through the lows of TD Point
Lows.

TD Supply Line - a downward sloping line between the two most
recent TD Point Highs where the most recent high is lower than
the previous high. The line is drawn through the highs of TD
Point Highs.

Once a more recent TD Point Low or High has formed a new line is
drawn and it becomes the active trendline.

Let's take a look at how to draw these trendlines with an
example. Here is the SPX since May 26th with the TD Demand Lines
drawn.




I have numbered the TD Point Lows. The RED trendline connects 1
and 2, the blue connects 2 and 3 and the yellow line connects 4
and 5. The yellow line is the active TD Demand Line now.

Here are the TD Supply Lines on the same chart.



Red connects 1 and 2 the only TD points that can be connected
because the definition is connect TD Point Highs where the most
recent high is lower than the previous high.

Now that we have our trendlines drawn we can move on and
introduce criteria that will tell us if a break of a trendline is
a valid break and not.

Here is a chart of RIMM with two TD Point Highs (May 5th and
13th) marked and a TD Supply Line in magenta.




Any one of the following qualifiers will validate a TD Supply
Line breakout.

1. The price bar prior to an upside breakout must be a down
close.  If there is an upside breakout of a TD Supply Line check
to see if the previous day's close was lower than the day before.
This is all you need to validate an upside breakout. Using the
example above this qualifier was not fulfilled because the bar
prior to breakout bar did not have a down close.

2. The upside breakout bar's open must be greater than both the
active TD Supply Line and the previous price bar's close. If #1
is not met then check this one. The upside breakout bar's open
was 47.12 and its previous bar's close was 46.50 but the open
seems to be right at the Supply line. A quick check of intraday
chart and indeed the open was right at the line so I will say
this qualifier is not fulfilled.

3. The current price bar's open must be greater than both the
previous two price bars' closes, and the current price bar's TD
Supply Line must be greater than the previous price bar's high.
If #1 or #2 are not met then check this one. The upside breakout
bar's (May 18th) open is 47.12 and the previous bar's close (May
17th) was 46.50 and the close on day before (May 14th) was 46.30.
 The TD Supply Line is greater than May 17th's high. This
qualifier is fulfilled so the breakout is considered valid and
you would go long this market.

Here is what happened.



Now that you have a valid breakout you can calculate a price
objective. Here is how to do make this calculation:

1. Calculate the lowest price below the TD Supply Line. In our
RIMM example that is May 10th at 43.70.
2. Calculate the difference between the low from #1 and the TD
Supply Line immediately above the lowest price. I calculated this
to be 47.75 so the difference is 47.75 - 43.70  = 4.05.
3. This difference is then added to the breakout price, which was
47.32. So the price objective is 47.32 + 4.05 = 51.37. RIMM
easily made that level.

Let's do a TD Demand Line now. Here is a chart of TASR from April
5th to April 20th.




Any one of the following qualifiers will validate a TD Demand
Line and will give you a trading opportunity.

1. The price bar prior to a downside breakout must be an up
close.  If there is a downside breakout of a TD Demand Line check
to see if the previous day's close was higher than the day
before. This is all you need to validate a downside breakout. In
our example above the previous day's close was 59.35 and the day
before was 57.05 so this qualifier is fulfilled and you do not
need to go further but I will look at #2 and 3 for instruction.

2. The downside breakout bar's open must be less than both the
active TD Supply Line and the previous price bar's close. The
open on the downside breakout bar was 53 and higher than the TD
Demand Line so this qualifier would not have been fulfilled.

3. The downside breakout bar's open must be less than both the
previous two price bars' closes, and the current price bar's TD
Supply Line must be less than the previous price bar's low.
Downside breakout bars open is 53 and previous bars open was
58.84 so far so good. Next we compare downside breakout bar's
open to two bars ago and that was 48.84 so this qualifier is not
fulfilled either.

Now that you have a valid breakout (#1 was fulfilled) you can
calculate a price objective. Here is how to do make this
calculation:

1. Calculate the highest price above the TD Demand Line. In our
TASR example that is April 19th at 64.15.

2. Calculate the difference between the high from #1 and the TD
Demand Line immediately below the highest price. I calculated
this to be 52.36 so the difference is 64.15 - 52.36  = 11.79

3. This difference is then subtracted from the breakout price,
which was 53.56. So the price objective is 53.56 - 11.79= 41.77.
TASR made that level the next day.

If you trade a breakout of a TD Supply Line here is a list of
scenarios where the trade should be cancelled.

1. The bar immediately following the breakout opens below the
breakout price.
2. The bar immediately following the breakout opens below the
close of the breakout bar AND closes below the breakout price.
3. The bar immediately following the breakout fails to exceed the
high of the breakout bar.

If you trade a breakout of a TD Demand Line here is a list of
scenarios where the trade should be cancelled.

1. The bar immediately following the breakout opens above the
breakout price.
2. The bar immediately following the breakout opens above the
close of the breakout bar AND closes above the breakout price.
3. The bar immediately following the breakout fails to exceed the
low of the breakout bar.

Demark suggests disqualified breakouts (none of the qualifiers
are fulfilled) can be traded also but in the opposite direction.
A disqualified breakout of a TD Supply Line could be shorted and
a disqualified breakout of a TD Demand Line could be bought. Of
course these trades will not have price projections.

The DeMark TD Lines and qualifiers can definitely make trend
following much more objective if you can follow all the rules. I
found this all confusing until I actually wrote about it and
followed a couple of examples. There is nothing easy about
DeMark's books.

Remember trade your plan and plan your trade.

Jane Fox


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

It's That Time Again
By Mark Phillips
mphillips@OptionInvestor.com

It's just about this time every year that I start getting a steady
stream of reader email asking various questions about LEAPS, but
all centered around one key issue.  When will the next cycle of
LEAPS (2007 in this case) be issued and what is the process.
Nobody asks this question about regular short-term options,
because the process is fairly straightforward and happens the same
way each and every month.  But with LEAPS, we only get new strikes
once a year, and the process is a bit more convoluted.

Now to be entirely honest, I started getting these questions
several weeks ago and normally I do this article (it's become an
annual affair now) right after May expiration.  As regular readers
know, I've been rather involved over the past several weeks
though, getting that tome on the Housing sector completed.  So in
my typical "better late than never" manner, I wanted to cover this
issue before all of the 2007 LEAPS have been released.

May expiration ushers in the process of changing the front year
LEAPS (in this case 2005) to regular option symbols, and this is
quickly followed by the issuance of the new out year LEAPS (in
this case 2007).  Since the process whereby this happens is less
than straightforward, I think it is worth taking the time for a
little review.  Old-timers will recall that I cover this topic
about this time every year, as we can all use a refresher due to
the fact that we really don't think about it during the course of
the year.

There always seems to be a fair amount of confusion surrounding
this process, both why it is necessary and how the process works.
Since I've actually been through it a few times, let me see if I
can clear things up.

In the past, all of the changes took place at once, but a few
years ago, the CBOE had to stagger their approach due to the huge
volume of options that are now traded.  Now the process takes
place over a period of just over 2 months, beginning the week
before May expiration and ending about a week after July
expiration, with roughly a third of the Leap-able stocks receiving
their 2007 LEAPS shortly after each expiration event.

If you are like me the first time I encountered this process, you
are scratching your head and asking what this conversion’ is and
what it means to a LEAP trader.  Fortunately the answer is fairly
simple.  Since the CBOE only carries LEAPS for 2 years at a time,
before the 2007 LEAPS can be issued, the 2005 LEAPS must be
converted to regular cycle Call (or Put) options expiring in
January of 2005.  This conversion refers to the simple process of
changing the symbol from a LEAP symbol to a regular option symbol.

In the case of AIG, the 2005 $80 LEAP Call changed to a January
2005 $80 Call (AIG-AP) on June 14th.  There is no change in the
way the option trades when it is converted, except that it is now
referred to as a Call (with a different symbol), rather than a
LEAP.  There is no change to the 2006 LEAPS at this time except
that they now become the front-year LEAPS. Next year at this time,
the 2006 LEAPS will undergo a similar conversion process as the
2008 LEAPS become available.

The LEAPS expiration (conversion to regular Call Options) occurs
in 3 cycles.  The cycle 1 2005 LEAPS are converted to regular
options on the Monday prior to May expiration (in this case, May
17th) and then the Cycle 1 2007 LEAPS are issued on or near the
same day.

Extending that process out to the Cycle 2 LEAPS, the 2005's
converted to regular options on Monday, June 14th and the 2007's
were issued forthright.  Finally, the Cycle 3 2005 LEAPS will
convert to regular options on Monday, July 12th, with the 2007
LEAPS making their appearance on or about the same day.

I know you are all champing at the bit, wondering how do you find
out if a given stock is on Cycle 1, 2 or 3.  I'm way ahead of you,
and after speaking with a very helpful gentleman at the CBOE, I
found that there is a quick shortcut we can use to make the
determination.  Pull up an option chain on the stock in question.
It will have option chains listed for July and August, as these
are the 2 front months at the current time.  The next month that
is listed gives us the clue as to which Cycle the stock belongs
to. If the next month is October, then it is on Cycle 1.  Note
that this is the case with MSFT, which already finished its
conversion process.  If the next month listed in an option chain
(after July and August) is November, then the stock is Cycle 2
(conversion process in June).  Finally, if September options are
the third month listed in the option chain, then the stock resides
in Cycle 3.

Wasn't that easy?  No scrolling through endless lists of equities
and LEAP symbols looking for the one in question to find out what
cycle it belongs to.  All we do is bring up the option chain and
the months listed tell us which Cycle it belongs to.  And with the
dates provided above, you should be able to determine precisely
when any stock you are interested in will begin and complete its
conversion process.  One note I should make is that this trick
only works like this AFTER May expiration.  If we had been looking
at this prior to May expiration (before all the July contracts had
been issued), then the month/cycle relationship would be a little
different, and perhaps make a bit more sense.  Prior to May
expiration, stocks with July contracts would have been Cycle 1,
those with August contracts would be Cycle 2 and those with
September contracts would be Cycle 3.  Hopefully I haven't made
that too confusing!

Should you want to determine if a stock has LEAPS available, the
CBOE provides a comprehensive list of all optionable stocks at
http://www.cboe.com/TradTool/Symbols/SymbolDirectory.asp.  Then
selecting the link for LEAPS near the top of the page will give
you a list of all equities with LEAPS available.  So if you ever
question whether a stock has LEAPS available, this is the central
repository for that information.  Of course, you can always just
pull up an option chain and see if there are options listed out to
2005 and 2006 (and now 2007), and that will give you the answer.

I know this has been a rather dry article, but hopefully it gives
you a roadmap for determining when to expect the issuance of the
new 2007 LEAPS for any stock in which you happen to be interested.

Happy Exploring!

Mark


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