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Daily Newsletter, Wednesday, 07/07/2004

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The Option Investor Newsletter                Wednesday 07-07-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Coming and Going
Index Trader Wrap: Brokers are center stage


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     07-07-2004            High     Low     Volume Advance/Decline
DJIA    10240.29 + 20.95 10266.61 10199.29 1.61 bln   1704/1086
NASDAQ   1966.08 +  2.65  1976.92  1960.78 1.75 bln   1394/1596
S&P 100   544.25 +  0.92   546.23   542.46   Totals   3098/2682
S&P 500  1118.33 +  2.12  1122.37  1114.92
RUS 2000  572.03 -  0.38   575.84   571.49
DJ TRANS 3150.08 + 33.59  3151.55  3116.45
VIX        15.81 -  0.44    16.47    15.59
VXO        15.75 -  0.42    16.37    14.50
VXN        22.26 +  0.15    22.39    21.89
Total Volume 3,655M
Total UpVol  1,975M
Total DnVol  1,552M
52wk Highs     153
52wk Lows      156
TRIN          0.92
PUT/CALL      0.99
*******************************************************************

Coming and Going
Jonathan Levinson

It was a laborious session that ended with light gains for the
Nasdaq, Dow and S&P, but at least the indices didn't break to new
lows.  Key support levels were tested and held, but the daily
picture does not look encouraging for bulls in the short term.

The action of the past month has succeeded in whipping both bulls
and bears in both directions.  Abby Joseph Cohen's bullish call
on the markets last week, preceding a precipitous drop by mere
hours, was countered today by Morgan Stanley's Rick Bensignor who
said that he sees the "most significant selloff" yet to come for
the year, based on the technicals.  We don't need to take
anyone's word for it, however- here are the charts:


Weekly Dow Chart


The weekly Dow candles are at the root of the ambiguity, with the
action off the year high printing either a bull wedge, a neutral
pennant or a complex top.  That's beyond useless, but it's also
the most accurate description of what I see on a pattern basis.
On a sentiment basis, we've seen record lows in Nasdaq and
Nasdaq-100 volatility, nearly 10-year lows in OEX volatility, and
very strong bullish optimism.  However, we've also seen very high
sustained put-to-call readings.  To compound the uncertainty, I
defy anyone to give me a definitive read on the weekly
oscillators here-  are they in downphase or upphase?  Once again,
the picture is ambiguous.  We've seen in recent months that when
in doubt, particularly within a range, smart traders don't force
trades.  Unless you're strongly persuaded against one side of the
this market or the other, it's safer to wait for a high volume
break of either 10500 to the upside or 9900 to the down, or to
play for reversals at those levels with stops just beyond.  The
rising support line at 10200 narrows that range considerably,
providing a higher support level to play.


Daily Dow Chart


The Dow's daily range managed to touch the upper and lower
pennant trendlines at 10266 and 10199.  Above that level is stiff
resistance from 10320-10350, and given the shape of the daily
cycle oscillators in their current bear roll, it's unlikely that
we'll see a serious challenge to that upper range without more
downside first.  Below 10200, next support is at 10100, followed
by 10060-80.


Weekly Nasdaq Chart


The same ambiguity is present on the weekly Nasdaq- bull flag,
neutral pennant or complex top- but with the pullback of the past
two weeks retesting the pennant apex in what is now a commonplace
false pennant breakout.  The oscillators are equally uncertain
here, and the working range is 1900-2025.


Daily Nasdaq Chart


The Nasdaq found support today at 1960, failing below the
descending daily trendline at a high of 1977.  The low came right
on what appears to be support on a descending triangle, and any
print below 1960 should see a move to the 1935 level.  I've
highlighted a bearish divergence between the higher price high
since early June and the lower 10-day stochastic peak, which
portends that a break of that 1960 support could do some downside
damage.

Putting it all together, we see more weakness in the shorter
daily timeframes than in the weekly, and for that reason we can
expect uncertain chop as the shorter timeframes seek longer term
direction.  The first extended move should be determinative, and
the move from last week's highs qualifies.  I'm not bullish here,
but the lack of clarity on the weekly charts is telling me to
keep an open mind either way.

The Mortgage Bankers Association reported that the Market Index
of mortgage loan applications 19.5% to 687 on a seasonally
adjusted basis from 575 the previous week.  On an unadjusted
basis, the index was higher by 19.2 but lower by 34.1% year-over-
year.   The Refi Index, with refinancings accounting for over 1/3
of all mortgage activity, rose 27.6% from the previous week,
while the government index rose 9.7%.  The average interest rate
for a 30-yr fixed-rate mortgages was down to 5.96% from 6.21% in
the previous week.

I've attached a weekly chart of 10-yr note yields (TNX).  The
downtick in rates over the past month should correlate with
continuing increases in the level of mortgage activity.  If this
cycle continues to dominate, mortgage bankers can look forward to
several more weeks of increased business.


Weekly TNX Chart


The International Council of Shopping Centers reported that
chain-store sales for the most recent week rose 0.9%, correcting
part of the previous week's 1.2% loss. This level is up 4.4% y-o-
y, but the ICSC warned that this y-o-y gain has been
deteriorating since earlier in June.  Caution seems to be the
ongoing theme in the retail sector, with WMT warning last week,
and continued concerns about the amount of consumer exposure to
debt and wage deflation.

The Treasury Department auctioned $15 billion in 5-yr notes on at
an average yield of 3.663%, generating a bid-to-cover ratio of
2.33.  Bonds were slightly higher for the day, with the ten year
note yield declining 0.8 basis points to close at 4.472%.

The morning opened bleakly with a warning from PSFT about Q2's
earnings and revenue, which are now expected at 13-15 cents per
share from the previous 21 cents.  Revenue is expected between
655M - 665M, down from 689.3M.  Despite its morning drop PSFT
recovered later in the session to close higher by 1.66% at 17.10.
EBAY got whacked on a downgrade of the entire internet sector by
Prudential to neutral weight from overweight (does that mean hold
or sell?).  Prudential noted that EBAY's overall auction listing
growth has been slowing.  The stock closed lower by 3.31% at
86.87.  China internets were also lower on a warning from NTES
based on weaker than expected sales from its wireless and other
fee-based operations.  The entire sector was lower today, with
the INX lower throughout the day to close at 188.32.

In other news, UAL reported that its load factor reached rose 4%
to 86% in June, the highest in its history. Traffic increased
almost 17% to 10.6M revenue passenger miles from 9.1 million
miles year-over-year.

NITE got smoked for more than 5% after warning that Q2 would fall
short of expectations, lowering its range to 6-11 cents per share
from 15 cents.  The broker dealer blamed the miss on low
volatility and volume in equity and options, as well as a 79M
charge attributable to the settlement of SEC and NASD
investigations.  CEO Thomas Joyce said that "The trio of rising
rates, higher oil prices and an unstable Middle East worked to
keep investors, both retail and institutional, on the sidelines."
For the day, the XBD fell to a 9 month low, losing 2.04% to close
at 120.19.

The Department of Energy reported that it expects crude oil
prices to remain high through 2005, based on low inventory levels
and persistent demand.  The DOE said:  "The chances for even a
gradual, sustained decline in crude oil prices through 2005, as
previously projected in this outlook, seem to have diminished.
Low world oil surplus capacity levels provide an extremely
limited cushion in the event of unexpected world oil market
disruptions." Despite these comments, crude oil futures were
lower throughout the day on confirmation from Ali-al-Naimi, Saudi
Arabia's oil minister, that OPEX would honor its stated intention
to up its quota by 500,000 barrels.  In the grand scheme of
things, that's a minor increase, but increased supply and the
consistency from OPEC's earlier announcements coincided with
short term overbought conditions after this week's strong runup
to generate a 1.44% decline in front-month crude oil futures by
the end of the day.

Federal Reserve Vice Chairman Roger Ferguson manned the bullhorns
in the afternoon, warning investors that the strong gains in US
productivity during past two years is unlikely to continue, but
that productivity should remain above average as new technologies
are deployed.  He noted that the economic data indicate a
pullback from last year's pace, and that while lower productivity
gains could spike employment labor costs and harm profit margins,
such threats to inflation are premature.

Gold was sharply higher, rocketing in the morning and holding its
gains for the session.  Bloomberg attributed the gains to
concerns over the banking situation in Russia.  While there's
uncertainty over the extent of the problem, the Canadian Press
reported that Russian Central Bank chairman Sergei Ignatyev was
reassuring the country that the sector was sound.   The state-
owned Vneshtorgbank is in negotiations to buy Guta Bank, which
bank suspended operations yesterday as clients arrived to find
suspension notices covering the doors of their branches.  Word
was of a liquidity crisis, affecting this and other smaller
banks, and the response today was to slash reserve requirements
from 7% to 3.5%.  Gold rose above 402, making its largest gain in
13 months.

After the bell, AA reported net earnings of 46 cents per share,
missing estimates by a penny, and income of 404M, up 86% from
$217 y-o-y. YHOO reported earnings inline with estimates at 8
cents per share for Q2, more than doubling to 113M from the
previous 51M.  Sales rose to 609M, missing estimates by 1M.  YHOO
got smoked following the release, spiking down 14.5% to 28.45 as
of this writing.  AA was lower as well despite its positive
report.

DNA reported Q2 revenues of 1.128B, up from 799.7M, earning 19
cents per share and meeting expectations.  Net profit was 170M or
16 cents per share, up from 132.3M or 13 cents per share last
year.  The stock was lower by .29% at 54.50 as of this writing.

We await initial claims for the week ending July 02 tomorrow,
estimated at 345K and down from 351K in the prior week, as well
as consumer credit for May to be released at 3PM, est. 7.5B.
Based on the terrible reception of the earnings reports after the
bell, the configuration of the daily indicators and Abby J-C's
bullish call from last week, I'm bearish here, but keeping an
open mind due to the ambiguity of the weekly indicators.  If in
doubt, exercise patience, and whatever you do, do it with stops.
The markets could well gap below today's support at tomorrow's
open, and if so shorts can use today's closing prices as a
reference for the placement of stops.


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

Brokers are center stage

Mixed sector action and fractional gains were today's story,
where despite some mixed earnings guidance from company's like
PeopleSoft (NASDAQ:PSFT) $17.13 +1.84%, which warned on upcoming
quarterly earnings, saying Oracle's unwanted advances negatively
impacted results, the major indices finished flat.

Oh, but there could be some trouble brewing at the 120 level,
where the Securities Broker Dealer Index (XBD.X) 120.19 -2.03%
threaten to give a triple-bottom sell signal on its point and
figure chart, where in the context of financials, and their
impact on market psychology, if not price action (INDU/SPX/OEX),
this group was spotlighted in our June 21 Index Trader Wrap, and
moves to center stage.

I'm not looking to point out every negative, or every positive,
but the XBD.X looks as if it might have one more leg lower.

If so, I don't see that being a near-term bullish sign.

Some points of order.

Once again, fellow analyst Jonathan Levinson made a point in this
afternoon's Market Monitor that program trading at the NYSE was
70% of last week's volume.

Heck, just last week a trader named Joe sent me an e-mail noting
that 70.5% of shares traded on the NYSE the week prior, with
61.6% of the volume being accounted for by 5 of the top program
trading firms!

Joe made a lot of points in his e-mail, which I really haven't
had the time to review, but program trading is certainly a high
percentage of daily trade volumes, and may be one reason the
major indices have gone nowhere fast in recent months.

Where are these higher PERCENTAGE figures coming from?  Are
computer and institutions taking over?

In a way they are, but put it in context of the lighter volumes
we've been seeing this summer, as traders like you and I struggle
through the summer doldrums.

Laughing.... this weekend I went to the barber to get my hair
cut.  I sat in the chair.... pump, pump, pump the chair lifted to
bring my head up to proper haircutting level.  When the barber
was done... speeeeeeewwwwwww.... the air was let out of the
hydrolics as the chair came right back down where it started
from.

Trying to trade the indices that past couple of months has been
somewhat similar to getting your hair cut you might say.

I didn't go through the roof, I didn't fall through the floor.

As Joe said in his e-mail.... "Except for me, anyone else doing
any trading??  There couldn't be too many of us.  The above
numbers are just for program trades - 15 stocks over $1 million
value.  Just think about all the non-program trades that these
guys executed."

Well Joe, I've been thinking about it, and that's why I've taken
another, and more detailed look at the XBD.X tonight.  We're
going to also dig into DorseyWright and Associates' "Wall Street"
sector bullish %, and then bring it back full circle to the S&P
500 Bullish % ($BPSPX) from Stockcharts.com.

Don't YOU think a broker would have a pretty good idea of what
his TRADE VOLUME was from the retail customer (you and I)?
Certainly some of the bigger brokers derive revenue/income from
areas other than brokering trades for you and I.

I tell you what Joe.  With Ameritrade (NASDAQ:AMTD) $10.11 -4.71%
trading a 10-month low today (a component of the XBD.X), I begin
to sense that its price action, along with high percentage
dominance of program trading, that Joe might well be a highly
coveted consumer by some of the online brokers, where at least
Joe is doing some trading!

U.S. Market Watch - Daily Intervals



Some highlights I've made in this evening's U.S. Market Watch.

I'm showing the 5-day percentage gain/loss column.  Time flies,
but it has been 5 trading sessions since the FOMC raised its
target for Fed Funds to 1.25% from 1.0%.

While not truly reflective of Treasury prices, or decline in
yield, Treasury yields have dropped (buying of this interest rate
sensitive security), which would go against all common sense.
However, as I began discussing months ago, the RATE that yields
rose by a strong bout of selling from March to mid-May most
likely was "overdone" on thought of the Fed being more AGGRESSIVE
with rate hikes.  Recent economic data has cooled as a result of
higher Treasury yields, which can impact consumer spending
habits.

As RAPID INFLATION concerns have abated, combined with some
cooling off of economic indicators, the dollar has declines with
the U.S Dollar Index (dx00y) 87.67 down 1.93%.  Remember, we
thought the dollars rise might have been foreigners (is that
politically correct?) buying dollars in front of Fed tightening.
When the Fed raised just 25 basis points, the momentum trade
ended quickly.

Certainly the CRB Index (cr00y) 272.55 +1.96% in 5 sessions may
be showing some of the "reflation" that can follow lower Treasury
yields, where consumer's cost of borrowing eases.

We saw some of this in today's Mortgage Bankers Association data.
See 11:00 AM EDT intra-day update.
link

The S&P Banks Index (BIX.X) 347.83 +0.56%, which was the first
equity-based index in our WEEKLY Pivot Matrix to see a trade at
its WEEKLY Pivot (to the upside) shows some relative strength the
past 5 sessions with a modest 0.41% gain.  Many regional banks
will derive revenue from mortgage loan originations, or
refinancing activity.

As the major equity indices continue to gyrate, gold stocks as
well as gold and base metals also begin to "reflate" as Treasury
yields have fallen.

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



In the June 21 Index Wrap, we looked at the XBD.X bar chart on a
daily interval chart, where today's close would have the XBD.X
below our upward "cheater's trend" and unlike the other major
indices, the XBD continues to find sellers more formidable than
buyers at the downward trend, which so happens to coincide with
the 50-day SMA.

Note:  Since breaking BELOW its 50-day SMA on March 10, 2004, its
managed to CLOSE above this intermediate-term trend twice, and
just fractionally so (04/01 and 04/02).

I've overlaid some various bullish percent readings from
Dorsey/Wright and Associates "Wall Street" bullish %, so we get
the feel of RISK levels and strength/weakness during a cycle.

A simple observation based on conventional retracement overlaid
was how "easy" it was to buy the XBD.X above 82.50, then sell it
on the break below 133.50.

Let's take a quick look at Dorsey/Wright's "Wall Street" bullish
% (BPWALL), where they group together a bunch of brokerage-
related stocks on a point and figure chart.  Remember, to build a
bullish %, all you're doing is making two stacks of charts.  One
stack contains charts where the PnF chart shows a BUY signal
intact on the chart, while the other stack of charts are those
that show a SELL signal intact on the chart.  Just imagine that
the following chart is a percentage of those stocks that
currently have a BUY signal associated with there chart.  For the
sake of simplicity, lets imagine there are 100 charts, and
roughly 43, or 43% of those charts currently show a buy signal
still intact with the chart.  In March of this year, 90% of the
stocks were on a buy signal and everything was REAL bullish.  Too
bullish.

Bullish % for Wall Street (BPWALL) - 2% box scale



I don't want to go through every little detail in the above
chart, but look at the broader "pattern" as this is where I will
bring in THIS sector, as it relates to the S&P 500 Index (SPX.X)
and S&P 100 Index (OEX.X), as well as their bullish % charts.

If I were to analyze this chart, as well as the prior weekly bar
chart of the XBD.X, I would say that XBD.X 117 is an IMPORTANT
level of near-term support (120 is a heads up to further
technical weakness and supply O outstripping demand X).  Now
associate a BREAK at XBD.X 117, an implications if Dorsey's "Wall
Street" bullish % (BPWALL) reverses back lower.  It would
currently take a BPWALL reversal lower to 36%, for this sector
bullish % to reverse back lower to "bear confirmed."

What I'm trying to do tonight is I'm really trying to find A
SECTOR that could give us a FINITE clue for strength/weakness to
the major indices.

Now... the INTERNALS as depicted by the BPWALL have shown some
internal improvement (some buy signals were generated of late,
where the bullish % reversed up), but the OUTWARD appearance of
the XBD.X, doesn't have the "patient" looking too healthy.

The REASON I would not be a gung-ho short with an XBD.X trade at
120, is that a trade at 120.00 (Hmmmm.... why didn't it trade
120.00 today?) could be a "bear trap" on the point and figure
chart of the $XBD.X (you can get a free chart of the XBD.X at
www.stockcharts.com) where a "bear trap" on a point and figure
chart is a triple bottom sell signal that goes 1 box below, then
QUICKLY reverses back higher.  With the BPWALL rising just a
little bit, and showing some sign of improving strength (not a
lot, but some) a bear looks around, and understands where he/she
has been, and where they are at with the bullish %.

So.. when you look at both the S&P 500 Bullish % ($BPSPX) and S&P
100 Bullish % ($BPOEX) at www.stockcharts.com, or read each
morning's 09:00 AM EDT update at the bottom, you should really be
able to begin to understand my focus on the Brokerage Index and
the Wall Street Bullish % ($BPWALL), as this would be a sector to
at least be monitoring ONCE AGAIN for pending weakness, which
could lead to further weakness for the SPX/OEX, and INDU, which
also has some broker exposure.

I'm running late, but I really wanted to try and bring in a
sector bullish % and the brokers tonight, as they aren't looking
overly bullish at the close.

Let's quickly run through today's internals, but also visualize
the NH/NL indications, also in the context of the bullish %, and
how the shorter-term (5-day NH/NL ratios) are starting to weaken
again.

Market Snapshot / Internals - 07/07/04 Close



The NASDAQ Composite (COMPX) 1,966.08 +0.13% managed to hold onto
a 2.6 point gain by the close, but it must have been a struggle
for bulls where by the close decliners edged out advancers by a
narrow 8 to 7 margin.  Despite the fractional gains for this very
broad market average, we're starting to see a deceleration, if
not anti-lock-braking in shorter-term bullish leadership, where
the NASDAQ's 5-day NH/NL ratio falls 8.5% today as the number of
new lows outnumbers new high.  This shorter-term 5-day average
observation begins to pull on the 10-day ratio, where it would
currently take a 10-day percentage reading of 62.00% for the
NASDAQ's 10-day NH/NL ratio to reverse back lower to "bear
confirmed" status.

The percentage gain for the also very broad NYSE Composite
($NYA.X) 6,518.71 +0.33% was best among the major averages, where
there was at least some sign of internals strength holding in
today's session.  A few number of new highs, but a growing number
of new lows really gives the look of an inchworm, where the head
and the tail are coming together, and the thorax, or midsection
gets compressed.  Shorter-term bullish leadership depicted by the
5-day ratio fell 3%, while NYSE 10-day NH/NL ratio slipped 1.6%
after today's session.  It would currently take a reading of
76.00% for the NYSE 10-day NH/NL to reverse lower to "bear
confirmed" on its chart.

As we get a "feel" for the abatement in bullish leadership in the
NH/NL indicators, begin to think, or realize what impact the
brokers may have on things as the teeter at some very important
near-term support levels.

Pivot Analysis Matrix -



As I went through the intra-day charts to mark the session's
highs and lows, I found little conviction among bulls or bears.
The dip at the morning, when little follow through was found,
seemed to be snapped up, as if bears said... OK, in a range-bound
trade, I'm taking what I can get.  The BIX.X really looked like
it was going to lead strength to the close, but with just more
than an hour left in today's trade, the BIX.X faded from its
session high to the close, as did the other major indices.

In after-hours trade, the QQQ last ticked by at $35.67, where
earnings from Yahoo! Inc (NASDAQ:YHOO) $32.60 -1.85% and forward
guidance had the stock falling to $28.75.

This will most likely have the QQQ facing early resistance
tomorrow morning at DAILY S1 and WEEKLY S2.

My thought on closing is if we're going to find any strength
tomorrow, then it would be the financials, where the BIX.X did at
least get trade at WEEKLY Pivot.

The brokers may well be the "swing sector" as both the SPX/OEX
closed rather "neutral" at DAILY Pivots, but weaker at MONTHLY
S1s.

Jeff Bailey


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The Option Investor Newsletter                Wednesday 07-07-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: GCI
New Call Play: PD
Dropped Calls: EBAY
Dropped Puts: OMC, NTES
Watch List: Biotech, Miners, Brokers and more


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

GCI - put play -
  Lower stop from $86.05 to $84.51
  Prepare to EXIT near $80.00.


*************
NEW CALL PLAY
*************

Phelps Dodge - PD - close: 78.75 chg: +3.69 stop: 75.49

Company Description:
Phelps Dodge Corp. is the world's second-largest producer of
copper, a world leader in the production of molybdenum, the
largest producer of molybdenum-based chemicals and continuous-
cast copper rod, and among the leading producers of magnet wire
and carbon black. The company and its two divisions, Phelps Dodge
Mining Co. and Phelps Dodge Industries, employ more than 13,500
people in 27 countries. (source: company press release)

Why We Like It:
Fundamental or technical, bulls have a reason to run with PD.
Fundamentally the company is doing well because the improving
global is raising demand for copper.  There's actually concerns
over a copper shortage with the Chinese and U.S. economies both
picking up steam (granted both appear to be slowing somewhat at
the moment).  PD also looks more attractive as it just paid off
the remaining debt on its Candelaria mine.  Technically we like
it for its bull-flag breakout today on stronger than average
volume and its bullish P&F chart.

The $80.00 mark is probably going to be short-term overhead
resistance but we believe that PD can probably reach the $85.00
level before its July 27th earnings report.  The latter is
especially true if copper prices continue to climb like they did
today.

Suggested Options:
We like the August $75 and $80 calls and that gives us time to
ride them into PD's earnings report in late July.

BUY CALL AUG 75 PD-HO OI= 471 Current Ask $6.20
BUY CALL AUG 80 PD-HP OI=1412 Current Ask $3.30

Annotated Chart:




Picked on July 07 at $ 78.75
Change since picked:  + 0.00
Earnings Date       07/27/04 (confirmed)
Average Daily Volume:    2.6 million
Chart =



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

eBay Inc - EBAY - close: 86.87 change: -2.97 stop: 87.50

It was not a good day for Internet stocks and EBAY was unable to
shrug the selling pressure as it has done so many times in the
past.  Before the opening bell Prudential downgraded the entire
Internet sector to "neutral" and specifically singled out EBAY
with its own downgrade to "neutral".  The news sent EBAY gapping
lower to open at $87.80 and it flirted toward our stop at $87.50
but failed to trigger it as EBAY traded in a tight 80-cent range
through most of the morning.  Then as investors started growing
even more cautious about YHOO's after-market earnings report the
selling pressure renewed and EBAY finally stopped us out at
$87.50 but still closed above its simple 40-dma.  The good news
here is that we're stopped out.  After the close YHOO doubled its
earnings from a year ago but only met expectations for 8 cents a
share and came in just under revenue expectations.  Investors
immediately sold the news with YHOO falling more than 10% in
after hours trading and EBAY dropping almost $7.00 in the after-
hours session.

Picked on June 27 at $ 90.72
Change since picked:  - 3.85
Earnings Date       07/21/04 (confirmed)
Average Daily Volume:    8.3 million
Chart =



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

Netease.com - NTES - close: 33.28 chg: -4.43 stop: 41.76

The Prudential downgrade of the Internet sector didn't hurt us
here, it helped!  But wait there's more... NTES issued a revenue
warning before the bell.  The company said preliminary Q2 revenue
numbers from "wireless value-added and other fee-based premium
services, net of applicable business tax,"...will be 37% to 41%
below the Q1 levels.  NTES gapped down to $32.62 and the selling
pressure pushed it to an intraday low at $30.22 before
rebounding.  This is beyond our initial target at $35.50 and the
P&F target at $33.00.  The options we listed exploded upward in
value.  The August 45s moved from $7.30 to $12.20, the August 40s
jumped from $3.90 to $7.70 and the August 35s rose from $1.60 to
$4.10 (with an intraday high of $4.90).   In the MarketMonitor
this morning we suggested readers close the play for a profit.
Now we're taking our own advice and closing the play.

Picked on July 01 at $ 39.38
Change since picked:  - 6.10
Earnings Date       07/26/04 (unconfirmed)
Average Daily Volume:    1.7 million
Chart =


---

Omnicom Group - OMC - close: 69.85 change: -3.05 stop: 76.01

Target achieved.  We initiated OMC as a put back on June 20th at
$77.14.  Our initial target was the $72-71 range.  This morning
as OMC dropped toward what looked like potential round-number
psychological support at $70.00 we told readers in the
MarketMonitor to consider exiting for a profit.  Later still when
OMC broke through support at $70.00 and traded toward $68 we
reiterated our comments in the Monitor to close the play.  The
drop today was produced on five times the average volume
indicating some serious selling but the cause has been somewhat
elusive.  One reader wrote in and said that OMC had been
mentioned on CNBC during the Squawk Box program and the hosts has
suggested OMC was somehow tied to the COCO scandal.  We've been
unable to confirm that.  Another issue creeping up were some
comments by Merrill Lynch saying new accounting rules could cause
some earnings dilution in OMC but we can't confirm that either.
When we initiated the play we listed the July 80 puts at $3.70
and the July 75 puts at $1.15.  Today the July 80s are at $10.50
and the July 75s are at $5.50. If you're not willing to exit now
consider tightening your stop to just above the afternoon highs
near $70.51.

Picked on June 20th at $77.14
Change since picked:   - 7.29
Earnings Date         4/27/04 (confirmed)
Average Daily Volume =   1.09 mln
Chart =



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

Biotech, Miners, Brokers 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.
___________________________________________________________________


Biogen IDEC - BIIB - close: 62.77 change: +1.08

WHAT TO WATCH: BIIB has been out performing many of its peers in
the biotech sector and the current consolidation looks like a bull
flag pattern.  We'd consider new bullish positions if BIIB can
push through resistance at the $64.00 mark.  Earnings are expected
on July 22nd.

Chart=


---

Engineered Support - EASI - close: 57.12 change: -0.40

WHAT TO WATCH: The defense sector has been one of the few pillars
of strength in this market but both the DFI index and EASI have
pulled back from their recent highs in the last couple of
sessions.  EASI has been rising in a narrow channel since its May
lows and right now it's near the bottom of that channel.
Normally we'd be looking for bullish entry points but its MACD
looks bearish.  Bulls might want to watch for a move over $58.00
while bears can look for a drop through $55.00.

Chart=


---

Rio Tinto - RTP - close: 100.64 change: +1.99

WHAT TO WATCH: We mentioned RTP in the MarketMonitor this
afternoon as a way to play the bullish rally in gold stocks.  The
XAU gold & silver index rallied almost 4% today and broke through
resistance at the 90 level.  Likewise RTP rallied through
resistance at the psychological, round-number $100 mark and its
simple 200-dma.  Be prepared for some volatility since RTP trades
as an ADS on the NSYE exchange (that means it tends to gap open
every morning as it adjusts to trading in London).  An immediate
bullish target would be $105 but its P&F chart points to $112.

Chart=


---

Morgan Stanley - MWD - close: 49.88 change: -0.85

WHAT TO WATCH: The entire brokerage sector has been sinking
lately on rising interest rate fears and abysmal trading volumes.
Low trading volume weighs heavily on the bottom line for the
entire group.  MWD has broken through round-number, psychological
support at the $50.00 mark and looks poised for an extended leg
lower.  Its P&F chart is bearish and points to a $39 target but
it's currently challenging P&F support.  Watch the XBD index for
a breakdown through support at the 120 level.  Bears might want
to target the $45 level in MWD.

Chart=



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

LEH $71.27 -2.19 - Lehman Brothers slipped 2.98% and broke
through six-week old support at the $72.00-72.50 level today.  If
you squint your eyes it looks like a head-and-shoulder pattern,
which would point to a $65 target.

GS $90.57 -1.63 - Goldman Sachs has been all over the map with a
bear trap and a bull trap in the last few weeks.  Now it looks
like the bears may be back in control as it slips toward the
bottom of the $90-95 trading range.  A breakdown under $90.00 and
it could be a short again.

MER $51.11 -1.41 - Merrill Lynch actually has one of the most
bearish P&F charts in the group.  Today's new relative low on
very high volume doesn't bode well for the broker.

NEM $41.12 +1.73 - Newmong Mining added more than 4% on strong
volume and broke through resistance at $40.50 today.  Shares are
testing resistance at the 100-dma but its P&F chart looks very
bullish.  Don't be surprised to see this one push through its
200-dma.


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