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Daily Newsletter, Tuesday, 07/13/2004

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The Option Investor Newsletter                 Tuesday 07-13-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Earnings Deadlock
Market Sentiment: Intel vs. Bastille Day
Watch List: Education, Drugs and Heavy Machinery

Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      07-13-2004           High     Low     Volume   Adv/Dcl
DJIA    10247.59 +  9.40 10257.10 10230.63 1.49 bln 1596/1635
NASDAQ   1931.66 -  5.30  1945.17  1930.59 1.52 bln 1454/1588
S&P 100   544.00 +  0.30   544.84   543.03   Totals 3050/3223
S&P 500  1115.14 +  0.79  1116.30  1112.99
W5000   10854.69 +  5.67 10869.10 10837.81
SOX       449.42 -  0.80   445.35   436.61
RUS 2000  562.69 +  0.45   564.93   562.24
DJ TRANS 3079.74 - 11.90  3092.07  3079.43
VIX        14.46 -  0.50    16.20    14.28
VXO (VIX-O)15.68 -  0.39    16.20    15.33
VXN        21.42 -  0.31    21.80    20.62
Total Volume 3,233M
Total UpVol  1,396M	
Total DnVol  1,730M
Total Adv  3461
Total Dcl  3668
52wk Highs   93
52wk Lows   160
TRIN       0.96
NAZTRIN    2.04
PUT/CALL   0.79
************************************************************

Earnings Deadlock
by Jim Brown

Traders fought to a deadlock today as they waited for
Intel earnings after the close. All the major indexes
added together were still within a dozen points of the
flat line with the SPX, OEX, SOX, RUT all failing to
gain/lose a full point. It was definitely a day spent
waiting instead of trading.

Dow Chart - Daily



Nasdaq Chart - Daily




The day did not start off well with Chain Store Sales flat
with the prior week. Year over year growth fell to only
+3.4% and the lowest level since last August. We are now
entering some tough comparisons from 2003 and we do not
have a tax rebate cycle this year to pour extra cash into
the system. This coupled with the high gas prices are
likely to keep pressure on retailers into the holidays.

Further bad news came from the Richmond Fed Manufacturing
Survey which fell to 14 from 22. New Orders fell to 1 from
12 and Order Backlog fell to -12 from -1. This was a very
negative report and while the headline number was still
positive it showed a significant slowing in manufacturing
activity in the Richmond area. All components showed
declines except in future employment. Confusing analysts
was a drop in current employment of -8 points to only
one, but the index of expected employment jumped +7 to
nine. Orders down, shipments down, backlogs down but
future employment expectations spiking to the upside.
This definitely confused investors. The report was the
exact opposite of the Kansas City Fed Survey reported
on Monday where the headline number jumped to 51 from
35. This continuing contradiction in the economic numbers
is keeping traders off balance as well as analysts.

The big news for the day was not economic. The markets
wandered aimlessly in a narrow range while waiting for
Intel to announce earnings after the close. Intel did
announce inline earnings but that was the only thing
in line. They missed slightly on revenues and lowered
their gross margin estimates to 60% from 62% with margins
for Q2 falling to 59.4%. The margin decline is critical
for Intel as this is the yardstick analysts use to gauge
its performance. With revenue in the $8 billion per qtr
range it is easy to see a huge move in revenue with no
corresponding move in earnings. Intel give their margin
estimates so analysts can make assumptions on earnings
based on the various revenue projections. Essentially
it gives them the yardstick to measure the quarter.

With gross margins falling and revenue a little light
it suggests times are getting slightly leaner for Intel.
They said the drop in margins was due to a product mix
shifting to lower priced, lower margin items. High
dollar processors were said to be soft and this means
corporate sales are not growing. Sure the gamers and
graphic artists are buying the hottest processors
available but the standard retail PC for mom/pop, home
and school is turning into the run of the mill setup
that can compete with other sticker price on dealers
shelves. With 2.4ghz Pentium4 systems selling for $399
on the Internet it is not tough to see why Intel margins
are shrinking.

Another challenge was a jump in inventory for Q2 by
+15.3% after a +11% jump in Q1. Intel is building
products that are not jumping off the shelves and
that brings up concerns of slowing consumer trends
from yet another angle. Any way you look at it an
increase in inventory of more than 25% since January
means sales are not occurring as planned. This coupled
with the lowered margins is what pushed INTC down -1.36
in after hours. Andy Bryant said in an interview they
were seeing some pricing pressures in processors and
it would take them 1-2 quarters to work off the extra
inventory. On the bright side he said they were seeing
normal seasonal trends and he expects business to
continue to grow. Personally I think Intel is a great
company and they will continue to post increasing
earnings but there may be a buying opportunity ahead.
I remember several times in the past where Intel got
ahead of itself and inventory built to levels where
it had to write down massive amounts of obsolete chips.
Obsolete to Intel can be a very short period due to
their rapid development cycle. "Old" processor chips
today may be 6-9 months old with multiple newer chips
in production and others in the pipeline. Intel does
not wait until they are scrap to write them off. They
aggressively manage inventory and write off unsold
chips quickly while they still have life at some price.
I believe this is coming and could show as soon as Q3.

Intel could begin an aggressive price cut strategy to
dump the chips and that will again lower their margins.
This will initially pressure the stock price. Intel is
trading at $24.90 in after hours and under $25 is below
prior support at $26. I suspect we will see an attempt
to trade $24 and that is the last real support level
before $20. I think it is a buy at $24 for long term
investors but it is a REAL bargain at $20. I would jump
on INTC leaps at any price between $20-$24 and average
cost into a multi contract position. The next three
months may be dead money but then long term is the
key here.

Juniper also announced earnings after the bell and beat
analysts estimates by a mile. Juniper posted +8 cents
compared to estimates of +4 cents and raised guidance
for the future. Juniper was up +2.02 in after hours
at $24.21 and well over the $21.99 close. They also
announced a buyback of $250 million in stock. This
is the way earnings are supposed to work.

Going the other direction was Merrill Lynch which
posted earnings that rose +10% but fell short of
expectations. Merrill missed estimates due to weak
trading results but showed gains in management fees
and mutual fund commissions. Merrill said the firm
lowered its risk profile from trading in Q2 after
low market volume and low volatility made it more
risky to trade. Welcome to the club! Merrill said
on their call "it was a difficult trading month
(June) and we made a conscious decision to reduce
trading." With a $1 billion profit for the quarter
the decision to reduce risk was probably a good call.
They also announced another stock buyback of $2 bil.
MER sank to a 52-week low and closed at 49.80. Next
support is $45 and then $40 but I would be very
surprised to see much more of a drop. A stock that
is making $1+ billion per quarter and buying back
$2 billion in stock, its second buyback of this size
this year, will find buyers pretty quickly. This is
another stock that should be in everybody's portfolio
once the election is history.

Red Hat turned into a dunce cap today after they said
they would have to restate financial results for the
last three years. RHAT said they do not expect a
"material" effect on annual revenue or cash flow but
traders immediately took the stock to the woodshed
for a -22% whipping. RHAT dropped -$4.62 to close
at $15.72. Red Hat was booking a full month of revenue
for any monthly subscription started during the month.
Under the new revision they will book revenue on a
daily basis depending on when the subscription began.
They estimate less than 3% of their revenue will be
impacted by the change. The portion of the month that
was not actually earned although collected will be
deferred until the end of the contract. It does not
go away it just gets deferred. The problem is not
in the restatement but in confidence in the company.
The companies outlook has not changed and with a
record number of corporations finally looking at
moving from the Microsoft dominated operating system
market to a significantly cheaper alternative the
future is bright.

This must be my day for bargains because I view all
the stocks above, INTC, MER, JNPR and RHAT as long
term holds in any portfolio. The buying opportunities
in three of them are gifts to traders looking to buy
stocks on the cheap. The real problem here is looming
in our future and it is not stock related. It is event
related and we have a full calendar ahead. We have the
Democratic convention on July 26th, Olympics Aug 13th
to 29th, Republican convention on August 30th and
finally the election in November. In the middle of
that stretch there are the two weakest months of the
year in Sept/Oct. The potential for a terrorist attack
at one of those events may not be as high as in the
past but the potential for thousands of news articles
discussing the risk is about 100%. While I would want
to recommend to investors to buy those four stocks
on weakness today there is always the potential for
another dip ahead.

These fear factors are keeping investors on the
sidelines with no urgency to buy. Volume has dried
up faster than summer rain in Arizona. Volatility
does not exist and we continue to be range bound but
we could see a break in that range any day now. The
Dow has been stuck in a range under 10250 since
July 6th and that is exactly where we closed today.
The market was primed and waiting for an Intel
earnings win to send us higher. Futures are down
about -4 points in overnight trading and it appears
we will open down tomorrow. Our support is 10175 and
the 200dma so the minor Intel problem may not attract
enough selling interest to break us out of the range
but just send us back to the bottom.

SOX Chart - Daily



The Semiconductor Index is right on the verge of a
major crash. It has found support in the 440 range
since May and we have tested it several times. The
Intel news sent the vast majority of chip stocks down
in after hours and this suggests the SOX will break
this 440 support at the open. This is not good news
for the Nasdaq or the Russell.

The Nasdaq has more risk with a close today at 1931.
The Nasdaq has initial risk to 1900 but the Juniper
win could help offset the Intel weakness. The current
Nasdaq pattern has moved from range bound to more of
a decline but that could have been in anticipation
of the Intel report. How the Nasdaq and the SOX react
tomorrow to the Intel guidance will be a key but not
the answer to the next few weeks of trading. The next
major impact to the market could come from IBM on
Thursday. If IBM does not trip then tech investors
may start focusing on the positive comments from the
blue chip giants and the bargain hunting could begin.

I just expect that bargain hunting to be muted for
the next month regardless of the earnings news. Even
if everybody began beating estimates I doubt we would
see a breakout move before Labor day. That keeps me
thinking there is the potential for a low volume
slide ahead and a better buying opportunity for all
those stocks I listed above. Patient money is safe
money and I plan on being very patient over the next
six weeks.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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

Intel vs. Bastille Day
- J. Brown

It was another snoozer of a session on Wall Street.  Everyone was
waiting for Intel's earnings report after the closing bell.  Even
a sour earnings report from Merrill Lynch, who missed estimates
by 3 cents, couldn't spark any volatility - except in the broker-
dealer index.

Overall investors almost seemed fatigued.  We've wait so long for
the Q2 earnings season to show up and now earnings, which are
expected to come in pretty high, won't really matter as Wall
Street focuses on guidance for what could be a lousy third
quarter.  Of course that's the way it normally works as the
market discounts future events.

By the closing bell market internals revealed just how slow it
was.  Advancing issues tied declining issues at 1400 each on the
NYSE while decliners slipped past advancers 15 to 14 on the
NASDAQ.  Overall volume numbers were relatively light at less
than 3.0 billion shares trading on both exchanges.  Traders chose
to rotate out of tech stocks ahead of Intel's earnings tonight
and IBM's earnings on Thursday.  Money also poured out of airline
stocks as the XAL dove more than 4%.  Tuesday's biggest winners
were in the DJUSHB home construction index and the HMO healthcare
index, both up about 2%.

Now what's this talk about Bastille Day, France's equivalent to
our own July 4th?  It's probably just coincidence but the Stock
Trader's Almanac has pegged July 14th as the market's best bet
for a rally.  According to the Almanac, by Hirsh Press, seasonal
trends over the past 20 years point to July 14th as having the
best odds for a gain in the S&P 500.  Currently those odds are
about 86.6%.

Now the question is who will win tomorrow: Intel or Bastille Day?
Intel reported earnings that were inline with estimates but came
in light on revenues and issued negative comments about their
gross margins slipping.  One would normally expect this sort of
news to depress stocks tomorrow, especially tech stocks.  On the
other hand Intel did issue a slightly positive forecast for its
Q3 revenues.  Plus, Juniper Networks (JNPR) announced earnings
after the close and they blew past the estimates!  Hmm.. it could
be another close tug-of-war tomorrow but you have to admit the
NASDAQ looks a little oversold, down 120 points in the month of
July and traders seemed to be expecting bad news from Intel
anyway.  If you're a contrarian Bastille Day could be a winner!



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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  8996
Current     : 10247

Moving Averages:
(Simple)

 10-dma: 10279
 50-dma: 10230
200-dma: 10189



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  960
Current     : 1115

Moving Averages:
(Simple)

 10-dma: 1121
 50-dma: 1117
200-dma: 1102



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1204
Current     : 1428

Moving Averages:
(Simple)

 10-dma: 1462
 50-dma: 1448
200-dma: 1444



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

CBOE Market Volatility Index (VIX) = 14.46 -0.50
CBOE Mkt Volatility old VIX  (VXO) = 15.68 -0.39
Nasdaq Volatility Index (VXN)      = 21.42 -0.31

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.79        636,712       505,934
Equity Only    0.63        515,012       326,622
OEX            1.45         25,964        37,641
QQQ            1.03         52,976        54,348


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

Bullish Percent Data

           Current   Change   Status
NYSE          65.6    + 0     Bear Confirmed
NASDAQ-100    48.0    + 0     Bull Alert
Dow Indust.   66.7    - 3     Bear Confirmed
S&P 500       61.6    - 1     Bear Correction
S&P 100       64.0    - 1     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: 1.22
10-dma: 1.59
21-dma: 1.29
55-dma: 1.15


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    1402      1447
Decliners    1400      1522

New Highs      60        29
New Lows       30        91

Up Volume    819M      482M
Down Vol.    633M      976M

Total Vol.  1475M     1500M
M = millions


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

Commitments Of Traders Report: 07/06/04

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.

S&P 500

Commercial traders continue to sit tight without much change
in their bearish sentiment.  Retail traders aren't changing
their bullish tune much either but they have grown a bit more
optimistic


Commercials   Long      Short      Net     % Of OI
06/15/04      428,905   444,197   (15,292)   (1.8%)
06/22/04      407,842   415,462   ( 7,620)   (0.9%)
06/29/04      405,273   413,351   ( 8,078)   (0.9%)
07/06/04      402,952   416,526   (13,574)   (1.7%)

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
06/15/04      169,595   115,336    54,259    19.0%
06/22/04      124,985    89,934    35,051    16.3%
06/29/04      129,978    94,535    35,443    15.7%
07/06/04      132,423    90,748    41,675    18.7%

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

Now we are seeing some money shuffling in the e-minis.
Commercial traders have reduced their shorts and raised their
long positions but remain overwhelmingly bearish.  Small traders
have pared back their bullish sentiment.


Commercials   Long      Short      Net     % Of OI
06/15/04      440,867   522,546    (81,679)   (8.5%)
06/22/04      229,290   446,974   (217,684)  (32.2%)
06/29/04      258,443   447,505   (189,062)  (26.7%)
07/06/04      287,442   423,583   (136,141)  (19.1%)

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
06/15/04      216,759    147,247    69,512    19.1%
06/22/04      243,444     58,389   185,055    61.3%
06/29/04      236,492     47,780   188,712    66.3%
07/06/04      219,321     58,567   160,754    27.9%

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


NASDAQ-100

Commercial traders remain somewhat bullish on the NASDAQ 100
but only by a small margin.  Small traders are much more
bearish on technology.


Commercials   Long      Short      Net     % of OI
06/15/04       78,542     54,341    24,201   18.2%
06/22/04       40,397     37,413     2,984    3.8%
06/29/04       41,078     37,194     3,884    4.9%
07/06/04       42,245     37,343     4,902    6.2%

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

Small Traders  Long     Short      Net     % of OI
06/15/04       15,794    35,880   (20,086)  (38.9%)
06/22/04        9,311     9,950      (639)  ( 3.3%)
06/29/04        7,437    11,904    (4,467)  (23.1%)
07/06/04        9,345    16,527    (7,182)  (27.8%)

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

Commercial traders continue to snooze with little change
in their Dow Jones Industrials positions.  Small traders
have reduced their bearish attitude some but remain
negative.


Commercials   Long      Short      Net     % of OI
06/15/04       30,438    24,766    5,672      10.3%
06/22/04       26,808    19,752    7,056      15.2%
06/29/04       27,278    20,512    6,766      14.1%
07/06/04       27,214    20,775    6,439      13.4%

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
06/15/04       13,942    20,953   (7,011)   (20.1%)
06/22/04        5,626     7,798   (2,172)   (16.2%)
06/29/04        4,930     7,682   (2,752)   (21.8%)
07/06/04        5,969     8,227   (2,258)   (15.9%)

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

Education, Drugs and Heavy Machinery

___________________________________________________________________

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.
___________________________________________________________________


Apollo Group - APOL - close: 91.00 change: +0.97

WHAT TO WATCH: We mentioned APOL as a bullish candidate in the
MarketMonitor today and we came very close to adding APOL to the
call list tonight.  The stock has rebounded sharply from its June
lows after scandal broke out among some of APOL's rivals
regarding falsified records and a government investigation, of
which APOL was not involved with.  The recent trend of higher
lows has blossomed into a new MACD buy signal and its bullish P&F
chart has produced a new ascending triple-top breakout buy signal
with a $99 price target.  We would probably consider new
positions on a push through the $91.50 mark.

Chart=


---

Wyeth - WYE - close: 35.50 change: -0.40

WHAT TO WATCH: Bears may want to give WYE another whiff.  The
constant stream of lower highs has produced another failed rally
at its simple 40-dma.  The stock's P&F chart is bearish with
descending triple-bottom breakdown sell signal and a $30.00 price
target.  Traders could probably initiate positions here with a
stop loss above the simple 40-dma and target the $30 region were
it not for the July 21st earnings report.  We would not hold over
the report.

Chart=


---

Countrywide Financial - CFC - close: 71.26 change: +0.01

WHAT TO WATCH: We're impressed by CFC's ability to churn sideways
compared to the broader market weakness but then mortgage rates
have dropped significantly from the June highs.  The question now
is which way will CFC breakout from its current trading range?
Bulls can watch for a move through $72.50 while bears can wait
for a drop through $69.00.  Earnings are expected on July 22nd.

Chart=


---

Caterpillar - CAT - close: 79.26 change: +1.04

WHAT TO WATCH: Dow-component CAT made another attempt at breaking
out over resistance at $80.00 today.  The stock looks poised for
a run higher and bulls will likely target resistance near $85.00.
Unfortunately, earnings are too close for us due out on July
22nd.  Take a look at its P&F chart and you'll see why we're so
interested.  Shares tested support on its P&F chart and rallied!

Chart=




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


JBL $23.34 +0.07 - Intel's earnings and revenue disappointment is
likely to weigh on the chip stocks tomorrow.  JBL already has a
bearish P&F chart pointing to an $18.00 target.

ESRX $74.44 +0.87 - ESRX has been trading in a $3.00 range
between $72 and $75 for the last several days.  Traders could
target $80 on a breakout or watch for a test of the $70 mark and
200-dma on a breakdown.


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The Option Investor Newsletter                  Tuesday 07-13-2004
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: ATK, ITT, PD, SUN, WFMI
New Calls Plays: AET
Put Play Updates: DISH, IRF, SLAB
New Put Plays:


****************
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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success.

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

Alliant Tech - ATK - close: 66.10 chg: +0.88 stop: 62.99*new*

The DFI defense index has begun to bounce off its recent lows
near 750 and ATK has stretched its winning streak to six days in
a row.  Today's move pushed it through the $66 level and bulls
can be encouraged by the better than average volume on the
previous four sessions.  We remain bullish on the stock but new
positions may be better considered on a pull back.  Meanwhile in
the news ATK announced it will "buy privately held PSI Group, the
world's largest provider of pressure tanks for satellites and
launch vehicles" (Reuters).  ATK said the deal will be accretive
to earnings. We're going to raise our stop loss a $1.00 to $62.99.

Picked on July 11 at $ 65.03
Change since picked:  + 1.07
Earnings Date       08/05/04 (confirmed)
Average Daily Volume:    335 thousand
Chart =


--

ITT Industries - ITT - close: 83.06 chg: -0.94 stop: 80.95

ITT experienced some profit taking today after its Friday-Monday
rally.  In the news ITT announced that its Board of Directors had
approved a 17 cent cash dividend payable on October 1st, 2004 to
shareholders on record as of August 27th.  We would look for a
bounce in the $82.50-83.00 range as an entry point for new
bullish positions.  No change in our stop loss.

Picked on July 11 at $ 82.86
Change since picked:  + 0.20
Earnings Date       07/23/04 (confirmed)
Average Daily Volume:    532 thousand
Chart =


---

Phelps Dodge - PD - close: 79.47 chg: +0.25 stop: 75.49

The slow drift higher in PD continues.  Shares of this copper
miner have been trying to breakout over the $80.00 mark but just
haven't been able to muster up enough strength to do it yet.
Fortunately, we do see a short-term trend of higher lows suggest
the breakout could happen soon.  Traders can choose to buy dips
to $78.00 or wait for the breakout over $80.00.  More
conservative traders might want to adjust their stop toward the
$76 level.

Picked on July 07 at $ 78.75
Change since picked:  + 0.72
Earnings Date       07/27/04 (confirmed)
Average Daily Volume:    2.6 million
Chart =


---

Sunoco - SUN - close: 66.09 change: +0.04 stop: 62.99

We have good news to report.  The recent consolidation in SUN had
drifted back toward previous resistance now new support at the
$65.00 level.  It was an important test and investors stepped in
to buy the dip near support.  We agree that the rebound back
above the $66 level looks like a new entry point for bullish
positions.  Just remember that SUN is due to report earnings next
Thursday on July 22nd and we do not plan to hold over the event.

Picked on July 08 at $ 66.67
Change since picked:  - 0.58
Earnings Date       07/22/04 (confirmed)
Average Daily Volume:    973 thousand
Chart =


---

Whole Foods - WFMI - close: 90.85 change: -1.07 stop: 90.50

It's not looking good for our momentum-rebound from support play.
There has been no follow through on WFMI's hammer-candlestick on
Friday.  Instead the stock has very slowly withered back toward
the $90.00 level.  We're honestly surprised that we've not been
stopped out yet.  We would not suggest new positions until WFMI
rebounded back above the $92.25-92.50 level.  More aggressive
traders can lower their stop to just under the $90.00 mark and
look for a bounce from round-number support.  However, we would
point out that the intraday chart shows stronger support at the
$89.00 level, not at $90.  We expect to be stopped out tomorrow.

Picked on July 11 at $ 92.31
Change since picked:  - 1.46
Earnings Date       07/28/04 (confirmed)
Average Daily Volume:    801 thousand
Chart =



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

Aetna - AET - close: 86.43 change: +1.43 stop: 81.99

Company Description:
As one of the nation's leading providers of health care, dental,
pharmacy, group life, disability and long-term care benefits,
Aetna puts information and helpful resources to work for its
approximately 13.3 million medical members, 11.2 million dental
members, 8.1 million pharmacy members and 12.4 million group
insurance members to help them make better informed decisions
about their health care and protect their finances against
health-related risks. Aetna provides easy access to cost
effective health care through a nationwide network of more than
618,000 health care professionals, including over 370,000 primary
care and specialist doctors and 3,783 hospitals.
(source: company press release)

Why We Like It:
AET has been out performing many of its peers the last few days
and shares look poised to breakout over resistance at $86.50.
The company recently announced it would receive a $740 million
tax refund and management said it would use some or all of the
money to buy back stock.  CIBC followed up on the news saying
they would be big buyers of the stock here.  We like the P&F
chart, which is bullish and points to a $105 target.  This is
somewhat of a relative strength-breakout play and a potential
earnings run play with AET expected to announce Q2 earnings on
July 29th.  We are going to use a TRIGGER at $86.55 to open the
play for us.  This way we can sit on the sidelines until AET
finally breakouts to new two-month highs.  The MACD has produced
a new buy signal so more aggressive players may want to go long
now.  The $90.00 level could act as overhead resistance but we're
going to target a move toward the $92 area.


Suggested Options:
We are going to suggest the August 80s, 85s and 90s even though
we do not plan to hold over the July 29th earnings report.

BUY CALL AUG 80 AET-HP OI=6055 Current Ask $7.70
BUY CALL AUG 85 AET-HQ OI= 530 Current Ask $4.10
BUY CALL AUG 90 AET-HR OI=6533 Current Ask $1.70

Annotated Chart:



Picked on July xxth at $xx.xx <-- see TRIGGER
Change since picked:   + 0.00
Earnings Date        07/29/04 (confirmed)
Average Daily Volume =   1.44 mln
Chart =



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

EchoStar Comm. - DISH - close: 28.92 chg: -0.14 stop: 31.01

We'd like to say so far so good but the drift lower in shares of
DISH has been a slow one.  We are encouraged that DISH is moving
our direction but we expected a faster decline.  There hasn't
been any stock-moving headlines to report and we're not changing
our stop loss at $31.01.

Picked on July 09th at $28.99
Change since picked:   - 0.07
Earnings Date        08/11/04 (unconfirmed)
Average Daily Volume =    2.5 mln
Chart =


---

Int'l Rectifier - IRF - close: 34.96 chg: +0.56 stop: 37.25

Merrill Lynch's Monday morning downgrade of the semiconductor
industry sent IRF gapping lower under round-number support at the
$35.00 mark.  Today IRF tried to produce an oversold bounce and
traded back to $35.59 before slipping lower again.  The close
below the $35 level today is pretty encouraging.  Now that
Intel's numbers are out and investors are choosing to sell the
news we're seeing some after hours weakness in IRF.

Picked on July 6th at $37.00
Change since picked:  - 2.04
Earnings Date       07/29/04 (unconfirmed)
Average Daily Volume =  1.07 mln
Chart =


---

Silicon Labs. - SLAB - close: 41.77 chg: +0.31 stop: 44.01

SLAB, like IRF and most of the chip sector, was weaker on Monday
after the MER downgrade but SLAB couldn't quite make it to our
target of $40.00.  Plus, SLAB managed a strong enough intraday
rebound to produce a hammer-styled candlestick that could have
been a one-day reversal pattern.  Fortunately, there was no
follow through on the pattern today.  We are no longer suggesting
new bearish positions this close to our target and we're growing
more cautious as the downward momentum seems to slow.  It's okay
to take profits here and exit if you're so inclined.

Picked on June 20th at $44.99
Change since picked:   - 2.86
Earnings Date        07/26/04 (confirmed)
Average Daily Volume =   1.14 mln
Chart =



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

None


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The Option Investor Newsletter                  Tuesday 07-13-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Spreads & Straddles: Earnings Season Begins In Earnest!
Premium Selling Plays: Naked Puts & Calls
Traders Corner: Nested Keltner Channels Made Easy


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Auto-Trade Market Monitor Signals
Personal Service and Education


**Services available for Foreign Traders including Canada**

http://www.OneStopOption.com

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*******************
SPREADS & STRADDLES
*******************

Earnings Season Begins In Earnest!
By Ray Cummins

The major equity averages traded in a small range Tuesday as
investors moved to the sidelines ahead of Intel's quarterly
profit report, due for release after the closing bell.

The Dow Jones Industrial Average ended up 9 points at 10,247
on strength in pharmaceutical components Pfizer (NYSE:PFE) and
Johnson & Johnson (NYSE:JNJ).  The NASDAQ Composite slipped 5
to 1,931 as traders sold chip stocks ahead of Intel's report.
The S&P 500 Index finished unchanged at 1,115 as advances in
automotive, insurance and retail shares offset losses in gold
and airline stocks.  Advancers outpaced decliners by 17 to 15
on the New York Stock Exchange, but the trend was reversed on
the NASDAQ, where decliners edged past gainers 15 to 14.  Big
Board volume totaled 1.0 billion shares, while the technology
exchange saw 1.2 billion shares change hands.  In the treasury
market, the benchmark 10-year note fell 1/32, while its yield
rose to 4.49%.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF CURRENT POSITIONS - AS OF 07/11/04
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.


PUT-CREDIT SPREADS

Stock   Pick   Last   Month L/P  S/P Credit   CB     G/L   Status

AMZN    50.95  48.32   JUL   42  45   0.30   44.70   0.30   Open
YHOO    31.87  30.11   JUL   25  27   0.30   27.20   0.30   Open
CFC     69.15  69.90   JUL   60  63   0.35   63.03   0.35   Open
QCOM    69.86  70.56   JUL   60  65   0.45   64.55   0.45   Open
SWIR    33.83  35.85   JUL   25  30   0.90   29.10   0.90   Open
CTSH    24.25  24.81   JUL   20  22   0.27   22.23   0.27   Open
NUE     69.54  73.48   JUL   60  65   0.75   64.25   0.75   Open
SII     53.26  55.94   JUL   47  50   0.30   49.70   0.30   Open
RJR     65.90  65.92   JUL   55  60   0.35   59.65   0.35   Open
URBN    60.80  58.01   JUL   50  55   0.40   54.60   0.40   Open
AMZN    53.71  48.32   JUL   47  50   0.30   49.70  (1.38) Closed
PLT     42.39  40.01   JUL   35  40   0.50   39.50   0.50   Open?
FRE     63.57  64.06   AUG   55  60   0.55   59.45   0.55   Open
GILD    67.42  65.33   AUG   55  60   0.60   59.40   0.60   Open
POT     98.08  96.21   AUG   85  90   0.60   89.40   0.60   Open
UOPX    89.09  90.72   AUG   75  80   0.60   79.40   0.60   Open

L/P = Long Put  S/P = Short Put  CB = Cost Basis  G/L = Gain/Loss

The position in Ishares Russell 2000 Index (IWM) was not available
at the recommended price.  Photon Dynamics (NASDAQ:PHTN) and Maxim
Integrated Products (NASDAQ:MXIM) suffered the fate of most chip
stocks and the bullish plays on those issues have previously been
closed to limit potential losses.  Amazon.com (NASDAQ:AMZN); at $50,
has also become an "early-exit" victim in the wake of the mediocre
profit outlook from Yahoo! (NASDAQ:YHOO) and Plantronics (NYSE:PLT)
is definitely on the "watch" list.


CALL-CREDIT SPREADS

Stock   Pick   Last   Month  LC  SC  Credit   CB     G/L   Status

APPX    34.03  25.79   JUL   45  40   0.50   40.50   0.50   Open
INSP    34.71  32.46   JUL   45  40   0.65   40.65   0.65   Open
WMS     28.75  30.18   JUL   35  30   0.65   30.65   0.47   Open?
GS      90.21  90.05   JUL  100  95   0.70   95.70   0.70   Open
SYMC    42.42  41.09   JUL   50  45   0.65   45.65   0.65   Open
FRX     56.32  51.65   JUL   65  60   0.60   60.60   0.60   Open
CTX     47.34  43.77   JUL   52  50   0.30   50.30   0.30   Open
SINA    35.60  26.82   JUL   45  40   0.45   40.45   0.45   Open
CECO    44.45  44.89   JUL   55  50   0.55   50.55   0.55   Open
RYL     75.80  72.60   JUL   85  80   0.60   80.60   0.60   Open
LLTC    36.74  37.04   AUG   42  40   0.30   40.30   0.30   Open
XLNX    31.53  31.36   AUG   37  35   0.25   35.25   0.25   Open
MERQ    46.17  45.08   AUG   55  50   0.65   50.65   0.65   Open
SMH     34.58  35.37   AUG   42  40   0.30   40.30   0.30   Open

L/C = Long Call  S/C = Short Call  CB = Cost Basis  G/L = Gain/Loss

WMS Industries (NYSE:WMS) remains a candidate for early exit and
positions in Genzyme (NASDAQ:GENZ), which is currently profitable,
and the Oil Service Holdrs (AMEX:OIH), have previously been closed
to limit potential losses.


DEBIT STRADDLES

Stock   Pick   Last   Exp.   Long  Long  Initial   Max     Play
Symbol  Price  Price  Month  Call  Put    Debit   Value   Status

GRMN    32.60  35.84   JUL    35    30     2.15    2.35   Closed
SNDK    22.90  20.93   JUL    22    22     3.40    3.60   Closed
GDT     56.02  53.35   JUL    55    55     4.80    4.50   Closed
DNA     54.60  51.35   JUL    55    55     4.25    5.10    Open?
OVTI    15.50  13.41   JUL    15    15     2.70    4.00    Open?
MDC     64.77  60.50   JUL    65    65     4.00    5.00    Open?

Positions in Garmin (NASDAQ:GRMN), Sandisk (NASDAQ:SNDK) and
Guidant (NYSE:GDT) have been closed in the name of "capital
preservation."  Genentech (NYSE:DNA), M.D.C. Holdings (NYSE:MDC)
and Omnivision (NASDAQ:OVTI) have offered small profits.


CREDIT STRANGLES

Stock   Pick   Last   Exp.   Sold  Sold  Initial  Current   Play
Symbol  Price  Price  Month  Call  Put   Credit    Debit   Status

NFLX    32.31  33.43   JUL    37    27    0.55     0.50     Open

Netflix (NASDAQ:NFLX) appears comfortable in a range near $29-$35,
but it is a volatile issue and the position should be monitored
daily.


~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
NEW POSITIONS
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BULLISH PLAYS - CREDIT SPREADS

These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may also be higher than other plays in the same strategy, due to
small disparities in option pricing however, each play should be
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and trading style.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ATH - Anthem  $91.31  *** Healthy Sector! ***

Anthem (NYSE:ATH) is a health benefits company operating in the
United States, primarily in Indiana, Kentucky, Ohio, Connecticut,
New Hampshire, Maine, Colorado, Nevada and Virginia, excluding
the immediate suburbs of Washington, D.C.  The company owns the
exclusive right to market its products and services using the
Blue Cross and Blue Shield (BCBS) names, and marks in all nine
states under license agreements with the Blue Cross Blue Shield
Association (BCBSA), an association of independent BCBS plans.
Anthem's products include a mix of managed care products, such
as preferred provider organizations (PPOs), health maintenance
organizations (HMOs) and point-of-service (POS) plans, as well
as traditional indemnity products.  The company also offers a
range of administrative and managed care services and partially
insured products for employer self-funded plans.

ATH - Anthem  $91.31

PLAY (very conservative - bullish/credit spread):

BUY  PUT  AUG-80.00  ATH-TP  OI=300  ASK=$0.40
SELL PUT  AUG-85.00  ATH-TQ  OI=750  BID=$0.80
INITIAL NET-CREDIT TARGET=$0.45-$0.55
POTENTIAL PROFIT(max)=9% B/E=$84.55


__________________________________________________________________

WLP - WellPoint Health  $112.90  *** New High Coming? ***

WellPoint Health Networks (NYSE:WLP) is a managed healthcare
company that offers network-based managed care plans to the
large and small employer, individual, Medicaid and senior
markets.  Its managed care plans include preferred provider and
health maintenance organizations, point-of-service plans, other
hybrid plans and traditional indemnity plans.  In addition,
WellPoint offers managed care services, including underwriting,
actuarial services, network access, medical management and
claims processing, as well as pharmacy benefits management,
dental, vision, life insurance, preventive care, disability
insurance, behavioral health, COBRA and flexible benefits
account administration.

WLP - WellPoint Health  $112.90

PLAY (conservative - bullish/credit spread):

BUY  PUT  AUG-100.00  WLP-TT  OI=530  ASK=$0.80
SELL PUT  AUG-105.00  WLP-TA  OI=519  BID=$1.25
INITIAL NET-CREDIT TARGET=$0.50-$0.60
POTENTIAL PROFIT(max)=11% B/E=$104.50



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BEARISH PLAYS - CREDIT SPREADS

All of these positions are favorable candidates for "bear-call"
credit spreads, based on the current price or trading range of
the underlying issue and its recent technical history or trend.
The probability of profit from these positions may be higher
than other plays in the same strategy, due to disparities in
option pricing.  However, current news and market sentiment will
have an effect on these issues, so review each play individually
and make your own decision about its future outcome.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

KLAC - KLA-Tencor  $43.33  *** Chip Sector Slump! ***

KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and
yield management solutions for the semiconductor and related
microelectronics industries.  The company's large portfolio
of products, software, analysis, services and expertise is
designed to help integrated circuit manufacturers manage yield
throughout the entire wafer fabrication process, from research
and development to final mass production yield analysis.  The
company offers a broad spectrum of products and services that
are used by every major semiconductor manufacturer in the world.
These customers turn to the company for in-line wafer defect
monitoring; reticle and photomask defect inspection; CD SEM
metrology; wafer overlay; film and surface measurement; and
overall yield and fab-wide data analysis.

KLAC - KLA Tencor  $43.33

PLAY (conservative - bearish/credit spread):

BUY  CALL  AUG-50.00  KCQ-HJ  OI=1379  ASK=$0.40
SELL CALL  AUG-47.50  KCQ-HT  OI=2340  BID=$0.70
INITIAL NET-CREDIT TARGET=$0.30-$0.35
POTENTIAL PROFIT(max)=14% B/E=$47.80


__________________________________________________________________

NVLS - Novellus Systems  $29.24  *** Stuck In A Range? ***

Novellus Systems (NASDAQ:NVLS) manufactures, sells and services
semiconductor processing equipment.  The company's products are
comprised primarily of advanced systems used to deposit thin
conductive and insulating films on semiconductor devices, as well
as equipment for preparing the device surface prior to these
deposition processes.  Novellus is a supplier of high productivity
deposition and surface preparation systems used in the fabrication
of integrated circuits.  Chemical Vapor Deposition systems employ
a chemical plasma to deposit all of the dielectric (insulating)
layers and certain of the metal (conductive) layers on the surface
of a semiconductor wafer.  Physical Vapor Deposition systems are
used to deposit conductive metal layers by sputtering metallic
atoms from the surface of a target source via high DC power.
Electrofill systems are used for depositing copper conductive
layers in a dual damascene design architecture using an aqueous
solution.

NVLS - Novellus Systems  $29.24

PLAY (conservative - bearish/credit spread):

BUY  CALL  AUG-35.00  NLQ-HG  OI=2739  ASK=$0.10
SELL CALL  AUG-32.50  NLQ-HZ  OI=7263  BID=$0.35
INITIAL NET-CREDIT TARGET=$0.25-$0.35
POTENTIAL PROFIT(max)=11% B/E=$32.75



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
STRADDLES AND STRANGLES
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Based on analysis of the historical option pricing and technical
background, these positions meet the fundamental criteria for
favorable volatility-based plays.
__________________________________________________________________

No straddles or strangles today...

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SEE DISCLAIMER - SECTION 1

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


*****************************************
PREMIUM-SELLING PLAYS: NAKED PUTS & CALLS
*****************************************

All of these issues have robust option premiums and favorable
technical indications.  However, current news and events as
well as market sentiment, will have an effect on these stocks
so review each position thoroughly and make your own decision
about its outcome.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF CURRENT POSITIONS - AS OF 07/11/04
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.


MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE

The Maximum Yield (listed in the summary and with "naked" option
selling plays) is the greatest possible profit available in the
position.  This amount, expressed as a percentage, is based on
the initial margin requirement as determined by the Board of
Governors of the Federal Reserve, the U.S. options markets and
other self-regulatory organizations.  Although increased margin
requirements may be imposed either generally or in individual
cases by various brokerage firms, our calculations use the widely
accepted margin formulas from the Chicago Board Options Exchange.
The "Simple Yield" is based on the cost of the underlying issue
(in the event of assignment), including the premium from the sold
option, thus it reflects the maximum potential loss in the trade.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

NAKED PUTS

Stock   Strike  Strike  Cost   Current   Gain    Max    Simple
Symbol  Month   Price   Basis   Price   (Loss)  Yield   Yield

CVTX     JUL    15.00   14.60   15.47    0.40   5.63%   2.74%
DITC     JUL    17.50   16.80   21.45    0.70   8.40%   4.17%
SYNA     JUL    17.50   16.85   17.18    0.33   3.80%   3.86%
PTIE     JUL     7.50    7.15   7.79     0.35   9.89%   4.90%
BCC      JUL    35.00   34.25   34.49    0.24   1.64%   2.19%
JILL     JUL    20.00   19.45   22.46    0.55   6.72%   2.83%
LSS      JUL    20.00   19.50   27.18    0.50   6.07%   2.56%
OI       JUL    15.00   14.65   15.67    0.35   5.64%   2.39%
NVTL     JUL    15.00   14.65   23.83    0.35   7.34%   2.39%
PDII     JUL    25.00   24.70   29.57    0.30   3.91%   1.21%
RSAS     JUL    17.50   17.05   19.17    0.45   6.22%   2.64%
STLD     JUL    25.00   24.45   28.89    0.55   5.33%   2.25%
UPL      JUL    30.00   29.55   39.41    0.45   4.14%   1.52%
USG      JUL    15.00   14.15   18.01    0.85  13.32%   6.01%
ATI      JUL    12.50   12.20   17.80    0.30   7.44%   2.46%
BJS      JUL    42.50   41.70   46.57    0.80   4.75%   1.92%
LCAV     JUL    25.00   24.35   27.21    0.65   6.85%   2.67%
NCRX     JUL    27.50   26.80   30.14    0.70   7.30%   2.61%
NVTL     JUL    17.50   17.05   23.83    0.45   8.97%   2.64%
SSYS     JUL    22.50   22.20   23.13    0.30   4.41%   1.35%
SWIR     JUL    30.00   28.85   35.85    1.15  10.66%   3.99%
SYNA     JUL    17.50   16.90   17.18    0.28   4.19%   3.55%
YHOO     JUL    30.00   29.20   30.11    0.80   6.80%   2.74%
AMHC     JUL    22.50   21.80   27.03    0.70   9.36%   3.21%
CTSH     JUL    22.50   22.20   24.81    0.30   4.34%   1.35%
CYBX     JUL    30.00   29.25   29.31    0.06   0.82%   2.56%
ERES     JUL    22.50   21.85   26.48    0.65   9.03%   2.97%
HLEX     JUL    15.00   14.65   15.21    0.35   7.40%   2.39%
MINI     JUL    20.00   19.65   26.00    0.35   5.89%   1.78%
NFI      JUL    30.00   29.30   39.56    0.70   9.77%   2.39%
PTIE     JUL     7.50    7.25    7.79    0.25  11.96%   3.45%
RIMM     JUL    50.00   49.15   66.74    0.85   6.57%   1.73%
SGTL     JUL    22.50   22.25   24.53    0.25   4.25%   1.12%
BRCM     JUL    40.00   39.30   39.31    0.01   0.09%   1.78%
CSGP     JUL    40.00   39.60   43.85    0.40   3.49%   1.01%
DHB      JUL    12.50   12.20   14.51    0.30   8.97%   2.46%
DY       JUL    25.00   24.65   26.34    0.35   4.63%   1.42%
ERES     JUL    22.50   22.20   26.48    0.30   4.97%   1.35%
FWHT     JUL    20.00   19.60   19.83    0.23   3.96%   2.04%
GVHR     JUL    22.50   22.20   23.10    0.30   5.07%   1.35%
IMH      JUL    20.00   19.75   21.63    0.25   4.41%   1.27%
NVTL     JUL    17.50   16.90   23.83    0.60  15.07%   3.55%
PLMO     JUL    25.00   24.55   34.29    0.45   7.28%   1.83%
USG      JUL    15.00   14.70   18.01    0.30   7.05%   2.04%
BCC      JUL    35.00   34.55   34.49   (0.06)  0.00%   1.30%
CHIC     JUL    20.00   19.65   20.11    0.35   7.68%   1.78%
CENX     JUL    22.50   22.00   24.37    0.50   9.64%   2.27%
ENDP     JUL    22.50   22.15   21.38   (0.77)  0.00%   1.58%
IFIN     JUL    37.50   37.05   41.34    0.45   5.93%   1.21%
TASR     JUL    30.00   29.65   40.61    0.35   6.39%   1.18%
USG      JUL    15.00   14.70   18.01    0.30  10.67%   2.04%
VSAT     JUL    22.50   22.20   22.27    0.07   1.32%   1.35%
CIMA     JUL    30.00   29.60   33.72    0.40   6.65%   1.35%
ERES     JUL    25.00   24.70   26.48    0.30   6.05%   1.21%
ISRG     JUL    17.50   17.25   19.48    0.25   7.04%   1.45%
MU       JUL    15.00   14.70   14.40   (0.30)  0.00%   2.04%
NFLX     JUL    30.00   29.45   33.43    0.55   9.80%   1.87%
NSM      JUL    20.00   19.80   19.62   (0.18)  0.00%   1.01%
NKTR     JUL    17.50   17.15   18.33    0.35  10.49%   2.04%
SWIR     JUL    30.00   29.75   35.85    0.25   5.32%   0.84%
XMSR     JUL    25.00   24.65   26.19    0.35   6.82%   1.42%
NFI      AUG    30.00   29.20   39.56    0.80   5.99%   2.74%
NVTL     AUG    20.00   19.50   23.83    0.50   5.77%   2.56%
CBST     AUG    10.00   9.65    11.07    0.35   6.43%   3.63%
CACS     AUG    12.50   12.00   13.10    0.50   7.03%   4.17%
ARXX     AUG    12.50   12.10   13.31    0.40   5.71%   3.31%
TASR     AUG    30.00   29.15   40.61    0.85   5.67%   2.92%
PETD     AUG    25.00   24.35   27.29    0.65   4.86%   2.67%
CRDN     JUL    35.00   34.55   38.51    0.45   9.24%   1.30%
CRDN     JUL    35.00   34.70   38.51    0.30   7.43%   0.86%
NFI      AUG    30.00   29.40   39.56    0.60   4.68%   2.04%
NVTL     AUG    20.00   19.50   23.83    0.50   6.11%   2.56%
TASR     AUG    30.00   29.30   40.61    0.70   4.93%   2.39%
EYET     AUG    35.00   34.45   45.00    0.55   3.92%   1.60%
SCHN     AUG    30.00   29.00   31.59    1.00   6.53%   3.45%
MGAM     AUG    25.00   24.25   26.33    0.75   5.51%   3.09%
FRO      AUG    30.00   29.30   39.60    0.70   4.97%   2.39%
GIVN     AUG    30.00   29.45   33.00    0.55   4.21%   1.87%

Steel Technologies (NASDAQ:STTX) and Amedisys (NASDAQ:AMED)
have been closed to limit potential losses, and only those
traders interested in owning Micron (NYSE:MU) should still
be in that position.  A long list of issues remain on the
"watch" list after the recent selling pressure in stocks.


NAKED CALLS

Stock   Strike  Strike  Break  Current   Gain    Max    Simple
Symbol  Month   Price   Even    Price   (Loss)  Yield   Yield

ASKJ     JUL    45.00   45.55   32.38    0.55   6.50%   1.21%
AMLN     JUL    25.00   25.35   21.78    0.35   5.29%   1.38%
ICOS     JUL    30.00   30.45   25.15    0.45   5.26%   1.48%
OIIM     JUL    17.50   17.80   14.51    0.30   5.50%   1.69%
INSP     JUL    40.00   40.50   32.46    0.50   6.88%   1.23%
RHAT     JUL    25.00   25.60   20.49    0.60   9.08%   2.34%
XMSR     JUL    27.50   27.75   26.19    0.25   4.34%   0.90%
CECO     JUL    65.00   65.90   44.89    0.90   7.19%   1.37%
ESI      JUL    45.00   45.50   37.31    0.50   5.47%   1.10%
FMT      JUL    20.00   20.40   17.19    0.40   8.75%   1.96%
NBIX     JUL    55.00   56.10   50.18    1.10   8.21%   1.96%
SLAB     JUL    50.00   50.75   42.13    0.75   6.39%   1.48%
AGIX     JUL    20.00   20.45   16.02    0.45   9.16%   2.20%
LEND     JUL    30.00   30.55   26.19    0.50   6.63%   1.64%
TSS      JUL    22.50   22.90   21.90    0.40   8.67%   1.75%
PAYX     JUL    35.00   35.40   32.00    0.40   4.97%   1.13%
FEIC     JUL    25.00   25.35   21.38    0.35   6.89%   1.38%
WM       JUL    40.00   40.30   38.18    0.30   3.79%   0.74%
IPXL     JUL    20.00   20.40   16.75    0.40  10.18%   1.96%
PSFT     JUL    20.00   20.25   17.05    0.25   6.99%   1.23%
SLAB     AUG    50.00   51.00   42.13    1.00   5.30%   1.96%
SINA     AUG    40.00   40.85   26.82    0.85   7.85%   2.08%
ATRS     AUG    30.00   30.85   23.41    0.85   6.52%   2.76%
MRVL     AUG    27.50   27.85   23.75    0.35   3.98%   1.26%
MACR     AUG    25.00   25.40   21.84    0.40   4.55%   1.57%
ISIL     AUG    20.00   20.45   18.00    0.45   5.72%   2.20%

Although currently profitable, the position in XM Satellite
Radio (NASDAQ:XMSR) has previously been closed to limit
potential losses.


~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
NEW POSITIONS
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered puts entails considerable financial risk,
far more than the initial margin or collateral required to open
a position.  The maximum financial obligation for the sale of a
naked put is the strike price (of the underlying stock) that is
sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of puts should have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  In addition, there is one very important rule when using
this strategy: Don't sell puts on stocks that you don't want to
own!  Why?  Because stocks occasionally experience catastrophic
declines, exponentially increasing the margin maintenance and
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock's price falls.
Many professional traders suggest closing the position when the
underlying share value moves below the sold strike, or using a
"buy-to-close" stop order at a price that is no more than twice
the original premium received from the sold option.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

NEW NAKED-PUT CANDIDATES

Stock  Last    Option    Option Last Open Cost  Days Simple Max
Symbol Price   Series    Symbol Bid  Int. Basis Exp. Yield  Yield

TECH   42.15  AUG 40.00  TGQ TH 1.25   10 38.75  38   2.6%   6.3%
GPRO   44.17  AUG 40.00  PSU TH 0.90   71 39.10  38   1.8%   5.0%
ATI    18.29  AUG 15.00  ATI TC 0.25  113 14.75  38   1.4%   4.7%
CTSH   25.24  AUG 22.50  UPU TX 0.45  304 22.05  38   1.6%   4.6%
ERES   27.70  AUG 22.50  UDB TX 0.35  369 22.15  38   1.3%   4.5%
ELN    24.54  AUG 20.00  ELN TD 0.30 1613 19.70  38   1.2%   4.3%
EYET   44.50  AUG 30.00  QUJ TG 0.45  424 29.55  38   1.2%   3.9%

Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, SY-Simple Yield (monthly basis without
margin), MY-Maximum Yield (monthly basis with margin), TS-Target
Shoot.
__________________________________________________________________

TECH - Techne  $42.15  *** Next Leg Up? ***

Techne (NASDAQ:TECH) is a holding company that through its two
wholly owned operating subsidiaries, Research and Diagnostic
Systems, and R&D Systems Europe, makes and sells products for
the clinical diagnostics market and the biotechnology research
and clinical diagnostics market.  R&D Systems is a specialty
manufacturer of biological products such as purified cytokines,
antibodies and assay kits, as well as whole blood hematology
controls and calibrators.

TECH - Techne  $42.15

AUG 40.00 TGQ TH LB=1.25 OI=10 CB=38.75 DE=38 TY=2.6% MY=6.3%


__________________________________________________________________

GPRO - Gen Probe  $44.17  *** The Rally Resumes! ***

Gen Probe (NASDAQ:GPRO) is engaged in the design, manufacture
and marketing of rapid, accurate and cost-effective nucleic acid
probe-based products used for the clinical diagnosis of human
diseases and for screening donated human blood.  The company has
received FDA approvals for more than 50 products that detect
various infectious microorganisms.  In February 2002, the FDA
approved the Biologics License Application for the biochemical
test used to screen donated blood for human immunodeficiency
virus and hepatitis C virus.  This assay is utilized to screen
approximately 72% of the United States donated blood supply for
HIV-1 and HCV.

GPRO - Gen Probe  $44.17

AUG 40.00 PSU TH LB=0.90 OI=71 CB=39.10 DE=38 TY=1.8% MY=5.0%


__________________________________________________________________

ATI - Allegheny Technologies  $18.29  *** Made Of Steel! ***

Allegheny Technologies (NYSE:ATI) is a diversified producer of
specialty materials.  The company operates in three business
segments: flat-rolled products, high-performance metals and
industrial products. The flat-rolled products segment produces,
converts and distributes stainless steel, nickel-based alloys
and super-alloys and titanium and titanium-based alloys.  The
high-performance metals segment produces, converts and sells
nickel- and cobalt-based alloys and super-alloys, titanium and
titanium-based alloys, zirconium, hafnium, niobium, tantalum,
their related alloys and other specialty materials.  Industrial
products' principal business produces tungsten powder, tungsten
carbide materials and carbide cutting tools.

ATI - Allegheny Technologies  $18.29

AUG 15.00 ATI TC LB=0.25 OI=113 CB=14.75 DE=38 TY=1.4% MY=4.7%


__________________________________________________________________

CTSH - Cognizant Technology  $25.24  ** Consolidation Complete? **

Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life
cycle solutions to complex software development and maintenance
problems that companies face as they transition to e-business.
These information technology (IT) services are delivered through
the use of a seamless on-site and offshore consulting project
team.  The company's solutions include application development
and integration, application management and re-engineering
services.

CTSH - Cognizant Technology  $25.24

AUG 22.50 UPU TX LB=0.45 OI=304 CB=22.05 DE=38 TY=1.6% MY=4.6%


__________________________________________________________________

ERES - eResearch Technology  $27.70  *** Testing 2004 Highs! ***

eResearch Technology (NASDAQ:ERES) is a provider of technology and
services that enable the pharmaceutical, biotechnology and medical
device industries to collect, interpret and distribute cardiac
safety and clinical data more efficiently.  The company offers a
range of products and services, including Diagnostics Technology
and Services and Clinical Research Technology.  Their Diagnostics
Technology and Services include centralized diagnostic services
and clinical research operations, including clinical trial and
data management services.  Their Clinical Research Technology and
Services include the developing, marketing and support of clinical
research technology and services.

ERES - eResearch Technology  $27.70

AUG 22.50 UDB TX LB=0.35 OI=369 CB=22.15 DE=38 TY=1.3% MY=4.5%


__________________________________________________________________

ELN - Elan Corporation  $24.54  *** Strong Sector! ***

Elan Corporation (NYSE:ELN) is an integrated biopharmaceutical
firm engaged in research and development in Alzheimer's disease,
Parkinson's disease, multiple sclerosis, pain management and
autoimmune diseases.  The company's objective is to discover
and develop products that will fulfill the unmet medical needs
of patients.  Elan conducts its worldwide business, including
research and development, manufacturing and marketing, through
wholly owned subsidiaries incorporated in Ireland, the United
States, the United Kingdom and other countries.

ELN - Elan Corporation  $24.54

AUG 20.00 ELN TD LB=0.30 OI=1613 CB=19.70 DE=38 TY=1.2% MY=4.3%


__________________________________________________________________

EYET - Eyetech Pharmaceuticals  $44.50  *** Premium-Selling! ***

Eyetech Pharmaceuticals (NASDAQ:EYET) is a biopharmaceutical firm
that specializes in the development and commercialization of novel
therapeutics to treat diseases of the eye.  Its initial focus is
on diseases affecting the back of the eye, particularly the retina.
The company's most advanced product candidate is Macugen, which it
is developing for wet age-related macular degeneration (AMD) and
diabetic macular degeneration (DME).

EYET - Eyetech Pharmaceuticals  $44.50

AUG 30.00 QUJ TG LB=0.45 OI=424 CB=29.55 DE=38 TY=1.2% MY=3.9% "TS"



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BEARISH PLAYS - NAKED CALLS

Based on analysis of option pricing and the underlying stock's
technical background, these positions meet our fundamental
criteria for bearish "premium-selling" strategies.  Each issue
has robust option premiums, a well-defined resistance area and
a high probability of remaining below the target strike prices.
As with any recommendations, these positions should be carefully
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and personal trading style.

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered calls entails considerable financial risk,
far more than the initial margin or collateral required to open
the position.  The maximum financial obligation for the sale of a
naked option is the strike price (of the underlying stock) that
is sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of options must have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  The simple fact is: stocks often experience large price
swings, exponentially increasing the margin maintenance and very
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock price moves in
a volatile manner.  Many professional traders suggest closing the
position when the underlying share value moves beyond the sold
strike, or using a "buy-to-close" stop order at a price that is no
more than twice the original premium received from the sold option.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ASKJ - Ask Jeeves  $31.01  *** New Downtrend Underway? ***

Ask Jeeves (NASDAQ:ASKJ) is a provider of Internet-wide search,
providing consumers with authoritative and fast ways to find
relevant information to their everyday searches.  Ask Jeeves
deploys its search technologies on Ask Jeeves (Ask.com and
Ask.co.uk), Teoma.com, and Ask Jeeves for Kids (AJKids.com).
In addition, to its internet sites, Ask Jeeves syndicates its
monetized search technology and advertising units to a network
of affiliate partners.  The company is based in Emeryville,
California, with offices in New York, Boston, New Jersey, Los
Angeles, London and Dublin.

ASKJ - Ask Jeeves  $31.01

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  AUG 40    AUK HH    2137   0.50  40.50   6.0%   1.2%


__________________________________________________________________

DRIV - Digital River  $26.96  *** Sector Slump! ***

Digital River (NASDAQ:DRIV) is a provider of electronic commerce
outsourcing solutions.  As an application service provider, the
company enables its clients to access its proprietary electronic
commerce system over the Internet.  The firm's hi-tech platform
allows it to provide a suite of electronic commerce services,
including Web commerce development and hosting, transaction
processing, fraud screening, digital delivery, integration to
physical fulfillment and customer service.  Digital River also
provides analytical marketing and merchandising services to
assist clients in increasing Web page view traffic to, and sales
through, their Web commerce systems.

DRIV - Digital River  $26.96

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  AUG 30    DQI HF     213   0.85  30.85   7.9%   2.8%


__________________________________________________________________

SINA - SINA Corporation  $25.82  *** Premium-Selling Only! ***

SINA Corporation (NASDAQ:SINA), formerly known as SINA.com, is an
online media company and value-added information service provider
for China and the global Chinese communities.  With a branded
network of localized Websites targeting China and overseas Chinese,
the company provides an array of services to its users including
region-focused online portals, search, directory, interest-based
and community-building channels, free and premium e-mail, wireless
short messaging, online games, virtual Internet service provider,
classified listings, e-commerce, e-learning, and enterprise
e-solutions.  In turn, SINA generates revenue through advertising,
fee-based services, e-commerce and enterprise services.

SINA - SINA Corporation  $25.82

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  AUG 35    NOQ HG    4042   0.45  35.45   6.4%   1.3%



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SEE DISCLAIMER - SECTION 1

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


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

Nested Keltner Channels Made Easy
Linda Piazza

To those unfamiliar with nested Keltner channels, the channel
lines snake across the charts in a confused tangle.


Five-Minute Chart of S&P Futures:



These channel lines undulate in a manner that reveals crucial
information about the markets.  A few tips can untangle the
information the lines reveal.  For the purposes of this article,
I'm charting the ES.  Traders should note that these charts do
not include all sessions, as including the overnight sessions
skews the Keltner channels.

Using Keltner channels requires no knowledge of the history
of Keltner channels or the formulas used to construct them, but
that's handy information for those who might want to experiment
with the settings.  In February, OptionInvestor's Jane Fox wrote
an article on Keltner channels, providing a historical perspective
as well as basic information on using a single set of Keltner
channels.  Her article can be found at this link:
http://www.OptionInvestor.com/traderscorner/tc_021804_1.asp

As Jane explained, Charles Keltner has been credited with
formulating these channels as a type of moving-average envelope.
Bollinger bands are another type of moving-average envelope
familiar to most traders.  Keltner built his envelopes around a
central moving average, with the envelopes spaced around that
moving average by a multiple of the average true range.  By
tinkering with the settings, one can construct a Keltner channel
that contains most movements of the underlying trading vehicle,
and then, with the aid of a preferred oscillator, buy support and
sell resistance.

Annotated Five-Minute Chart of the S&P Futures:



As useful as defining likely support and resistance might be to
the buy-low/sell-high trader, Keltner designed the charts for a
different purpose:  to pinpoint breakouts.

Annotated Five-Minute Chart of the S&P Futures:



While these two uses of Keltner channels prove valuable, other
charting tools provide similar information.  Bollinger bands can
define the likely range for prices.  Donchian channels can
identify breakouts.  Traders might question the need for another
type of channeling system.  However, Keltner channels excel at
providing other information when they're nested one within the
other.  The concept of stacking different term channels on one
chart does not prove unique to Keltner channels.  It's been done
with Bollinger bands, too.  Other traders such as Jerry
Wawrzeniak ("The Case for Keltner Channels") applied the
technique to Keltner charts, but I've observed some uses of the
nested channels that I haven't seen explained elsewhere.

Here's how nesting the channels works for Keltner channels.  The
channel with the shortest-length moving average undulates within
the larger channel.  As it undulates, it's sometimes stopped at
the central Keltner channel basis line, the equilibrium level.  I
sometimes refer to that basis line as the mid-channel support or
resistance.  Equilibrium is achieved when the two channels line
up together, as if two flexible pipes were lined up one within
another, the smaller-bore pipe suspended in the middle of the
larger-bore one.  Such an equilibrium position can be maintained
for some time, but predicts an eventual breakout to come.

Annotated Five-Minute Chart of the S&P Futures



Why not just use the widest channel and its basis line to
identify likely support and resistance?  Nested Keltner channels
make it possible to confirm important support and resistance
other than the levels shown here, pinpoint divergences, and
sometimes compose if/then scenarios for likely market action.  In
these uses, they prove superior to many other channeling systems,
including single Keltner channels.

When charts include two or more nested Keltner channels, bullish
and bearish divergences can be pinpointed without the use of
oscillators.  These divergences occur as the smallest channel's
upper or lower lines are touched.  The following chart depicts an
example of bearish divergence.

Annotated Five-Minute Chart of the S&P Futures:



Bullish divergences can be discovered in the same manner by
comparing two touches of the smallest channel's bottom line.  If
the smallest channel has not dipped as close to the larger
channel on that second touch, that's bullish divergence.  Of
course, as with any system that denotes bullish or bearish
divergences, these divergences offer a warning only.  The
bullishness or bearishness they suggest might not be fulfilled or
might not be fulfilled quickly.

Adding a third Keltner channel increases opportunities to find
divergences.  In addition, the third channel becomes more
important when discussing my preferred methods of using Keltner
channels:  evaluating whether resistance or support is stronger,
and composing if/then scenarios.  It should be apparent by now
that resistance or support can often be found at Keltner lines,
but it's in the convergence of different lines that strongest
support or resistance might be found.

Annotated Five-Minute Chart of the S&P Futures:



The converging resistance lines implied that resistance was
stronger than support.  More widely separated lines represented
the support.  The converging resistance lines appeared to fence
off the candles while support lines separated, appearing to allow
easier access through them.  This judgment proved easy to form
based on visual clues.  Subsequently, the ES did drop to the
support offered at the black channel line.  Most price action for
the ES on the five-minute chart will be contained within this
black channel. Some might prefer charting only two nested
Keltner channels, simplifying the chart, with the number of
nested channels a matter of individual preference.  Two appears
workable, three possibly ideal, four probably too tangled.

Because they're based on moving averages, Keltner lines move,
too.  They're dynamic.  Although this article compares them to
pipes, they're flexible pipes.  If the candles butt against them,
they can be bulged outward.  This leads into another
characteristic of Keltner channels: the way they allow a
construction of if/then statements.  For example, about 1:00 EST
Wednesday, 7/07, it would have been possible to compose the
following if/then statements about the ES:  If the ES can
maintain values above 1116 and preferably above 1117.40, then
it's more likely to test 1119.80 than fall to 1113.30.  If the ES
maintains values below 1114.70, then it's more likely to fall to
1113.30 than rise to 1119.80.  While those statements may seem
simplistic, this ability offers an opportunity to assess when a
break out of a consolidation pattern might occur or when a play
might be in trouble.  Longer-term charts offer more widely spaced
targets.  At the time those if/then statements about 7/07 could
have been composed, the ES was settled into a consolidation zone
with oscillators flat-lining, with few other clues as to future
direction.

Annotated Five-Minute Chart of the ES:



This ability to compose if/then statements draws from the dynamic
nature of the Keltner channels.  If prices butt against a Keltner
line or breach them, that line and the entire channel turn in
the direction prices are traveling.  Using the resistance or
support levels determined by the Keltner channels, it's then
possible to decide what prices will turn channels up or down
again.  Using the black channel lines that contains most prices
as targets, it's then possible to decide on a likely upside or
downside target.  If prices break out of the black channel, new
if/then statements can be composed and targets are based on the
wider, purple channel.  Depending on the vehicle used for trading
and on the time interval of the chart, it might be more likely
that prices would regularly travel to the outer, purple channel
lines.

Since Keltner designed these channels to pinpoint breakouts, such
breakouts should usually be considered valid signals, but plans
should be made to protect profits in the direction of the trade.
Breakouts indicate overbought or oversold conditions, and
sometimes prove particularly suspect when they are produced in
the first few minutes or last few minutes of the cash market.
Once a breakout has occurred, prices become vulnerable to a
pullback to the mid-channel level.  However, trending markets
always produce overbought or oversold signals, so a vulnerability
to a pullback does not guarantee that it will occur.

Keltner channel breakouts usually signal that it's a time to
follow prices with stops, being always prepared for a reversal.
It is usually not a time to automatically reverse sides. Although
prices prove vulnerable to a pullback to the mid-channel level,
that mid-channel level usually moves swiftly in the direction of
the price movement.  Sometimes a return to mid-channel level does
not constitute much of a retracement at all.

If, immediately after breaking out, prices hesitate, Keltner
lines will snake around them again, providing support or
resistance.  If this occurs, watch for divergences, both Keltner-
style and on oscillators, to warn of an impending reversal.

Annotated Five-Minute Chart of the ES:



Let's put it all together with a look at a period from 6/23-6/24.
On the afternoon of 6/23, a breakout above a channel line at
1138.21 had been preceded by a bullish MACD crossover, with outer
channel resistance then at 1140.23.  A bullish trade could have
been entered, with an 1140 upside target but with hope for more.

Annotated Five-Minute S&P Futures Chart for 6/23-6/24:



The ES hit the 1140 upside target.  Depending on account
management style, profit might have been taken as that level was
hit, or stops might have trailed the ES's climb since no bearish
MACD cross had been produced.  Subsequently, the ES broke above
the outer Keltner channel line, giving another breakout signal.
While MACD had still not produced a bearish cross, participating
in this second breakout play was probably safest for those
already in a bullish play.  Trailing stops would have been
necessary, because the pull to reestablish equilibrium suggested
vulnerability down to the mid-channel level, then at 1132.63.

As mentioned earlier, when candles break out to the upside, the
action tilts the channels higher, so that midline average began
climbing along with price.  Since that midline level was always
visible as it climbed, bullish traders could always assess their
willingness to risk a return to that midline level.

As the regular session drew to a close that Wednesday afternoon,
MACD flattened.  Prudent short-term traders would likely have
exited a bullish play ahead of the close of regular trading, but
MACD completed the bearish cross the next morning, opening back
inside the mid-length Keltner channel.  (Note:  The overnight
session saw a low of 1141.50, possibly stopping out some bullish
traders, depending on their stops.)  Not until mid-morning on
Thursday did the Keltner resistance lines converge near or just
above the then-current ES level.  That convergence suggested that
resistance was once again growing stronger than support, and
hinted at a decline down toward the mid-channel level.  That mid-
channel level had meanwhile climbed to 1138, near the entry
level.  Bearish resistance, Keltner style, began to form at that
point, too, and MACD turned down again after attempting a bullish
cross, the histogram printing negative values.  It was time for
all straggling, can't-give-up bullish traders to exit their
positions.  Candles found resistance at the converging channel
lines.  This suggested a new bearish entry at about 1145,
targeting the mid-channel level.

Annotated Five-Minute Chart of S&P futures:



The converging lines as the mid-channel level was hit suggested
that the ES might bounce, while the still-declining MACD
suggested that any bounce might be a countertrend bounce doomed
to hit a lower high.  Depending on trading style, automatic
profit might have been taken as that mid-channel level was hit or
stops might have followed the candles lower.  The automatic
profit stop turned out to have been the better choice in this
case, but a bullish MACD cross would have suggested an exit at
about 1143.50 for those who chose to stay in the trade longer.

Keltner channels offer the opportunity to find support and
resistance and evaluate which appears stronger, pinpoint tradable
breakouts, set profit targets, locate divergences, and construct
if/then statements that help plan needed action.  They offer some
of the benefits of candlesticks in that the clues are visual and
easy to spot.  For example, if three channel lines converge just
below the current ES price, prices will likely find support
there.  The evidence has been easy to spot.  Hopefully, this
article has untangled some of the useful information in that
snarl of lines on a nested Keltner channel chart.

To illustrate the uses of Keltner channels, this article has
employed instances when Keltner channels worked as expected, but
no tool works all the time.  Keltner channels do not appear to
work well with overnight futures trading, for example.  Before
attempting to enter trades based on Keltner channel evidence,
watch your chosen vehicle long enough to determine whether
Keltner channels prove useful.  Tinker with settings.  Tinker
with the number of channels used.  Currently, I'm experimenting
with settings that use exponential moving averages as the basis
line and also use the AvgHLC setting.  Although I used different
settings for demonstration purposes on the charts using single
Keltner channels, the three channels on the nested Keltner
channel charts are based on the following averages with the
accompanying multipliers:  10,1.6; 62,3.2 and 127,6.2.  The
colors used in these channels should depend on personal
preference.  Choose colors that ensure that the central averages
of the shortest- and longest-length channels remain visible, as
they often prove important in intraday trading.  I've also used
slightly different settings in the past, borrowed from fellow
traders.  I'm still experimenting, and I encourage you to do so,
too.


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