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Daily Newsletter, Thursday, 07/15/2004

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The Option Investor Newsletter                Thursday 07-15-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: No Surprise Yet
Futures Wrap: See Note
Market Sentiment: No Conviction


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      07-15-2004           High     Low     Volume   Adv/Dcl
DJIA    10163.16 - 45.60 10235.65 10162.94 1.70 bln 1686/1426
NASDAQ   1912.71 -  2.20  1925.76  1910.13 1.64 bln 1479/1512
S&P 100   537.88 -  3.91   542.81   537.84   Totals 3165/2938
S&P 500  1106.69 -  4.78  1114.67  1106.60
W5000   10792.14 - 29.38 10861.07 10790.07
SOX       418.53 -  2.20   425.49   416.75
RUS 2000  562.16 +  2.42   564.35   559.74
DJ TRANS 3125.39 + 40.20  3141.32  3084.24
VIX        14.71 +  0.95    14.73    13.60
VXO (VIX-O)15.73 +  0.71    15.75    14.96
VXN        21.68 +  0.04    22.14    20.96
Total Volume 3,603M
Total UpVol  1,531M
Total DnVol  1,985M
Total Adv  3536
Total Dcl  3364
52wk Highs  148
52wk Lows   181
TRIN       1.61
NAZTRIN    1.13
PUT/CALL   0.83
************************************************************

No Surprise Yet
by Jim Brown

As the earnings momentum increases the markets continue
to trade sideways as investors hold their breath expecting
big surprises. So far those surprises have not appeared
and we are seeing earnings much like the economics, mixed.
After the close today we had an almost equal amount of
earnings warnings, earnings misses and companies beating
the street.

Dow Chart


Nasdaq Chart


SPX Chart



Recent economics have resembled a box of chocolates, you
never know what you are going to get. It started with the
Jobless Claims this morning spiking to 349,000 once again
and completely erasing the one week drop to 309K last
week. Continuing claims moved closer to the three million
market with a jump to 2,971,000. While the government and
analysts speculated that last weeks low number was an
anomaly, nobody expected a jump right back to the 350K
level. Last weeks low number is being attributed to
incorrect July-4th seasonal adjustment factors. The jump
this week is being attributed to a shutdown in automakers
to retool for the 2005 production year. Most notable for
me is the flat trend for claims. They have quit falling
over the last six weeks and have stabilized just under
the 350K level. This is troubling but it could be just
the summer doldrums of hiring.

Business Inventories rose a smaller than expected +0.4%
in May. Retail inventories were flat for the month and
the first time they have not risen since August 2003.
Concern about the direction of the economy and early
warning signs about the slowing consumer trend probably
kept retailers from stocking up. Business Sales rose
+0.7% and when coupled with low inventory levels keeps
exposure to potential economic risks at a minimum. The
inventory to sales ratio remained at its record low
of 1.30 for the third month. That means there is only
1.3 months of inventory on hand. Any further increase
in sales should force a continued uptick in manufacturing
or eventually there will not be any product to sell.

The NY Empire Manufacturing Survey jumped to 36.5 from
29.9 in June. This was well over consensus estimates of
only 28.3. Shipments, orders and back orders all posted
large gains. Even employment eked out a small gain.
Unfortunately Prices Paid rose while Prices Received
dropped. This shows inflation pressures building but
could also be a reflection of higher energy prices.

The Philly Fed Survey jumped to 36.1 from 28.9 and
echoed the same theme as the NY Survey. This was well
above consensus estimates of 26.3. Employment in the
Philly Survey jumped to a very strong 24.6 from 16.8.
The various Fed surveys have been mixed of late.
Different regions are showing different stresses and
this is normal for a slow growth environment. The
current expansion signals are very positive for future
non inflationary growth.

The main inflation gauge for this week the PPI posted
a surprising -0.3% drop. This was directly related to
the drop in oil prices last month and this is good news
for the Fed. Unfortunately with the oil spike to $41
this week this brief drop in the PPI may not last. This
report produced a spike in the futures on the headline
number but that spike did not hold once the cash market
opened. There were lots of positive internals but they
were mostly related to the drop in oil so I will not
dwell on them.

More important to the economic picture was the drop in
Industrial Production by -0.3% when expectations were
for a small gain. May's gains were also revised down
slightly. Capacity Utilization dropped to 77.2, a drop
of -0.4% from the prior month. Consumer goods production
dropped -0.7%. This does not bode well for the retail
inventory buildup I discussed above.

For the Fed this was a very good day. Headline inflation
falling and manufacturing still expanding but enough
slack in the industrial production to prevent a
resumption of that inflation any time soon. The chances
for a 50 point rate hike in August have dropped to only
15% according to the Fed Fund futures and this is a
statistically insignificant chance. There is still a
good chance for a 25 point hike in August and that
meeting is only three weeks away. Sure seems like we
just had one but that is what the calendar is saying.
Time sure flies when you are having fun.

The big news for the day was earnings and Nokia headed
the morning list with another warning that future profits
were threatened by increased competition, lower prices
and a lack of popular new models. Nokia has been the
poster child for the problems in the cell phone industry
of late and today's whining is no different. Yes, we
know it is a tough market and the easy money has been
made. Suck it up and forge ahead.

The other market mover was oil topping $41 a barrel this
morning and the cancellation of the OPEC meeting next
week. They instead believe they can implement the increase
in production without impacting prices. Let's see. They
are already pumping well over their stated levels even
after the "formal" production increase. Oil prices are
$41 today and rising despite this increase in production.
It does not take a rocket scientist to figure out that
the "proposed" increase already in effect will not impact
prices. Yep, no reason for a meeting.

After the close today the big numbers came from IBM
which posted earnings that beat the street by +4 cents.
This should have produced a rousing reception but the
lukewarm guidance poured cold water on the flames. IBM
repeated its guidance word for word from the previous
quarter saying "analysts estimates were reasonable."
They were right on the mark on their revenue with only
a miniscule miss of $20 million on total revenue of
a whopping $23.15 billion. They said spending was
continuing to improve led by growth in emerging markets
like China. I am not normally a fan of IBM earnings due
to the game they play each quarter. Like other quarters
they bought back $1.3 billion in shares which raises
their earnings per share. They also received a currency
benefit of 2-7% depending on the division and type of
sale. Still IBM did post an increase in revenue, profits
and said they expect margins to improve going forward.
There was nothing really negative in this report. This
alone may not be enough to produce an earnings bounce
on Friday but there is nothing here to really push us
lower.

Helping the markets in addition to the IBM news was
earnings wins for PMCS and RMBS after the bell. PMCS
beat by a penny and RMBS by two cents. PMCS talked up
the future prospects but suggested that summer revenue
could be flat to +7% for the quarter. PMCS fell about
-50 cents in after hours but the overall outlook was
very positive. Offsetting the PMCS weakness was RMBS
which doubled its earnings and grew revenue by +20%
to a new record. Rambus was bubbling with excitement
and the stock jumped about +12% in the after hours
session.

The reason I am thinking we could see a relief rally
tomorrow is two fold. First we had a fear of IBM crash
at the close where the major indexes tanked as investors
bailed rather than be long over their earnings. This
created an artificial oversold bias. Secondly, IBM,
PMCS and RMBS were all making bullish comments about
chips. Considering the two day drop in the SOX to 420
support any good news should be a reason for a rebound.
The SOX is very oversold and due for a rebound off that
420 support which dates back to September of last year.

In addition to the IBM comments about spending increasing
we had the CEO of Eaton (ETN) saying this was the strongest
economy on all fronts he had seen in years. Eaton is a
diverse manufacturer and like GE they are saying business
is good.

Offsetting that warm feeling was NFLX, which missed
estimates by -2 cents and failed to impress investors
with their story. The stock dropped -$4 in after hours.
HOTT warned after the close but that is old news as
we already know the retail sector is under pressure.

SOX Chart



The drop in the SOX and fear of IBM sent the Dow back
to its monthly lows at 10162 just before the close. It
did not recover. This is a little more than -20 points
below its 200dma at 10189 and right on the edge of a
real breakdown. It is time for the bulls to make a
stand if they are going to rescue the markets from a
retest of the May lows this summer.

The Nasdaq has slowly inched down to its lowest close
of the month at 1912 but it appears the decline is
slowing as we near support at 1900. I have speculated
before that 1900 would be a good bottom for a summer
trading range and I would really like to see a relief
rally on Friday give us a little more breathing room
before the Democratic convention on the 26th.

Our best chance of a rebound comes from the SPX which
is about to test its 200dma at 1102 after closing at
1106 on Thursday. This is a critical test of market
support and one that should hold. The S&P futures
hit 1102.50 in after hours and have rebounded slightly
already. We may need the cash test to trigger the buy
programs (speaking optimistically here) and that could
come at Friday's open. It is an option expiration day
and sharp volatility at the open could be the key to
the test.

The focus on Friday will be on Martha Stewart and the
betting line is 10 months in a minimum security prison.
The sentence will be given at 10:00 tomorrow and you
can bet all eyes will be watching whether they really
care about the outcome or not.

Volume on Wednesday's Intel led dip soared to 4.239B
across all markets. This was the highest volume since
June-25th and the Russell rebalance. Unfortunately it
was 2:1 negative. Thursday's volume was only slightly
lower at 3.651B but the ratio was only slightly negative.
New 52-week highs have been rising daily since last
Friday's low. That low capped a two-week slide since
June 23rd. What I am suggesting is that the internals
are not quite as negative as the indexes and we could
easily rebound from the IBM dip at the close. However,
with the Dow teetering on the cliff at 10162 this is
a do or die situation. A failure to rally here could
setup a quick retest of Dow 10000 or even the May lows
at 9900.

The major problems still ahead are the Democratic
convention only one week away. I believe any rally
will be short lived as investors take protective positions
ahead of that event. Earnings will continue to increase
next week and there will be plenty of companies to cuss
and discuss.

The setup for Friday sees markets at their lows and
right at critical levels. It would be a good place
for a major move in either direction and I am hoping
it is up but ready to react in either direction. I
suggest you do the same.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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

Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.
http://www.OptionInvestor.com/indexes/futureswrap.asp


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

No Conviction
- J. Brown

We appear doomed to watch stocks slowly slip away or at best
remain within their trading range.  Wall Street is turning up its
nose to lackluster economic reports while investors seem to be
focusing on the earnings misses and not the earnings hits.  Nokia
(NOK) was the big disappointment this morning with a sales
shortfall due to rising competition in the handset market.  Yet
we saw individual stock gains in flash memory maker SanDisk
(SNDK) and iPod wonder Apple Computer (AAPL) after their
impressive earnings numbers but it wasn't enough to juice up the
technology sector.  Traders were too worried that Big Blue might
miss when it announced after the close.

Fortunately, IBM managed to beat analyst profit estimates but
revenues came in a little light and could spoil investors'
reaction.  What I find strange is that the Industrials have been
slowly fading lower throughout the month while the NASDAQ
Composite is down more than 6.5 percent for the month yet the
volatility indices continue to hover near their lows when they
should be climbing.  Another technical/sentiment indicator the
TRIN or ARMS index is showing several moving averages near
bullish levels, which should coincide with the market's short-
term oversold status.  Maybe the Dow needs to hit 10,000 and the
NASDAQ needs to hit 1900 before investors feel brave enough to
buy the dip.  On the other hand a breakdown below these
psychological levels could lead us into a very bearish third
quarter for stocks.

We don't have any super big earnings reports tomorrow so Wall
Street will focus on the CPI and Michigan Sentiment economic
reports due out tomorrow.  Oh, I'm sorry, what was I thinking?
The financial media is going to focus on the Martha Stewart
sentencing (as if it matters).


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  8996
Current     : 10163

Moving Averages:
(Simple)

 10-dma: 10250
 50-dma: 10228
200-dma: 10193



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  960
Current     : 1106

Moving Averages:
(Simple)

 10-dma: 1115
 50-dma: 1117
200-dma: 1103



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1204
Current     : 1415

Moving Averages:
(Simple)

 10-dma: 1443
 50-dma: 1448
200-dma: 1445



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

CBOE Market Volatility Index (VIX) = 14.71 +0.95
CBOE Mkt Volatility old VIX  (VXO) = 15.73 +0.71
Nasdaq Volatility Index (VXN)      = 21.68 +0.04

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.83        935,067       771,837
Equity Only    0.62        708,886       436,307
OEX            1.51         34,399        51,887
QQQ            1.22         37,454        45,693


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

Bullish Percent Data

           Current   Change   Status
NYSE          64.8    - 1     Bear Confirmed
NASDAQ-100    45.0    - 3     Bull Alert
Dow Indust.   66.7    + 0     Bear Confirmed
S&P 500       60.4    - 1     Bear Correction
S&P 100       62.0    - 2     Bear Correction



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

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


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

 5-dma: 1.28
10-dma: 1.74
21-dma: 1.36
55-dma: 1.17


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    1497      1506
Decliners    1272      1499

New Highs     102        37
New Lows       39        97

Up Volume    663M      736M
Down Vol.   1033M      839M

Total Vol.  1712M     1629M
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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The Option Investor Newsletter                 Thursday 07-15-2004
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: AET, ATK, HUG, ITT, PD, SUN
New Calls Plays: ZBRA
Put Play Updates: DISH, IRF
New Put Plays: MGA, PGR


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

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

None


PUTS:
*****

None


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

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

Aetna - AET - close: 87.82 change: +1.42 stop: 82.99 *new*

AET is following our script perfectly.  We were triggered on
Wednesday when AET traded through our entry point at $86.55.
Thursday produced a strong midday rally that carried through the
afternoon while the Dow was sinking.  The next test will be the
$90.00 level.  We're going to raise our stop loss from $81.99 to
$82.99.

Picked on July 14th at $86.55
Change since picked:   + 1.27
Earnings Date        07/29/04 (confirmed)
Average Daily Volume =   1.44 mln
Chart =


--

Alliant Tech - ATK - close: 65.68 chg: -0.04 stop: 62.99

ATK has been very strong the last couple of weeks and we've been
expecting some profit taking.  On Tuesday we suggested a pull
back would be the better entry point.  It looks like we got our
request.  Traders jumped in on the dip and the $65.00 level acted
as support just as it should have.  Our only concern is the
weakness in the broader indices.  If the Industrials and NASDAQ
take a plunge then ATK may retest the $64 level as support.
We're keeping our stop loss at $62.99.

Picked on July 11 at $ 65.03
Change since picked:  + 0.65
Earnings Date       08/05/04 (confirmed)
Average Daily Volume:    335 thousand
Chart =


--

Hughes Supply - HUG - close: 60.15 change: +0.15 stop: 57.00

We added HUG to the call list last night with a trigger to go
long at $60.51.  HUG traded at that trigger (and higher) early
this morning opening the play for us.  Unfortunately, HUG seemed
to struggle with maintaining its breakout over the $60.00 mark.
We will continue to suggest longs here but more conservative
traders may want to look for a little more conviction and wait
for a new high above $60.71.  If the broader indices sink
tomorrow HUG could drift back toward the $59 area.

Picked on July 15 at $ 60.51
Change since picked:  - 0.36
Earnings Date       08/24/04 (unconfirmed)
Average Daily Volume:    288 thousand
Chart =


--

ITT Industries - ITT - close: 81.74 chg: -0.81 stop: 80.95

Uh-oh!  It could be time to head for the exits in ITT.  The stock
has slipped back through several minor support levels and pretty
much erased its recent rally above the $84 level.  Today's close
under the $82.00 mark is discouraging and ITT is likely to test
the simple 50-dma at $81.25 or support at the $81.00 level.  If
we don't see a bounce tomorrow (or if we don't get stopped out)
we may close ITT anyway.

Picked on July 11 at $ 82.86
Change since picked:  - 1.12
Earnings Date       07/23/04 (confirmed)
Average Daily Volume:    532 thousand
Chart =


---

Phelps Dodge - PD - close: 80.70 chg: +2.10 stop: 75.49

Metal and mining stocks continued to shine today and PD soared
2.67% to close above $80.00 for the first time since early April.
Another rise in copper prices didn't hurt either.  Remember that
we're targeting a move to the $84-85 range.  No change in our
stop but more conservative traders might consider placing theirs
under the simple 10-dma where PD bounced from this morning.

Picked on July 07 at $ 78.75
Change since picked:  + 1.95
Earnings Date       07/27/04 (confirmed)
Average Daily Volume:    2.6 million
Chart =


---

Sunoco - SUN - close: 67.26 change: -0.14 stop: 63.99

So far so good.  SUN has bounced from the $65.00 level as
expected and we witnessed a decent follow through yesterday.
We're a little surprised that SUN couldn't break through minor
resistance at $68.00 today with the strength in oil stocks but we
still have time left before its earnings report.  We are
beginning to wonder if SUN is a stock split announcement
candidate.  The only data we could find showed SUN last split 2-
for-1 back in 1988 but we didn't know at what price.  Its
earnings report next week could be a good time to announce a
split but it's pure conjecture at this point.

Picked on July 08 at $ 66.67
Change since picked:  + 0.59
Earnings Date       07/22/04 (confirmed)
Average Daily Volume:    973 thousand
Chart =



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

Zebra Tech - ZBRA - close: 82.90 chg: +2.51 stop: 79.85

Company Description:
Zebra Technologies Corporation delivers innovative and reliable
on-demand printing solutions for business improvement and
security applications in 90 countries around the world. More than
90 percent of Fortune 500 companies use Zebra-brand printers. A
broad range of applications benefit from Zebra-brand thermal bar
code, "smart" label, receipt, and card printers, resulting in
enhanced security, increased productivity, improved quality,
lower costs, and better customer service. The company has sold
more than three million printers, including RFID printer/encoders
and wireless mobile solutions, and also offers software,
connectivity solutions, and printing supplies.
(source: company press release)

Why We Like It:
We are adding ZBRA to the call list because shares have finally
pulled back to the bottom of its rising channel near its simple
50-dma.  Actually, it's more than that.  Yes, we've been waiting
for the appropriate entry point but ZBRA's 3 percent gain today
is a nice rebound from the $80.00 region and produces a bullish
engulfing candlestick.  Furthermore the gain was produced on
almost double the average volume.  On top of ZBRA's bullish
performance when the Industrials and NASDAQ were sinking into the
close the company announced a 3-for-2 split after the closing
bell.  Shares aren't trading too much higher after hours so we
should still be able to get a decent entry point tomorrow.  Our
initial target is the $90.00 region and we need to get there
before ZBRA's earnings report on July 28th.  We'll start the play
with a stop loss at today's low.

Suggested Options:
We're going to suggest the August calls.  Our favorite is the
August 80s.

BUY CALL AUG 80 ZBQ-HP OI= 177 Current Ask $5.00
BUY CALL AUG 85 ZBQ-HQ OI= 424 Current Ask $2.25

Annotated Chart:



Picked on July 15 at $ 82.90
Change since picked:  + 0.00
Earnings Date       07/28/04 (confirmed)
Average Daily Volume:    401 thousand
Chart =



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EchoStar Comm. - DISH - close: 29.32 chg: -0.29 stop: 31.01

DISH managed a decent bounce yesterday after CSFB started
coverage on them with an "out perform".  Fortunately for the
bears the rally failed at the $30.00 mark, which should act as
psychological resistance.  DISH continued to drift lower today.
This may be a play that takes patience to ride out.

Picked on July 09th at $28.99
Change since picked:   + 0.33
Earnings Date        08/11/04 (unconfirmed)
Average Daily Volume =    2.5 mln
Chart =


---

Int'l Rectifier - IRF - close: 34.58 chg: +1.28 stop: 36.01

We noticed a number of smaller semiconductor stocks tried to
bounce today.  IRF was one of them as it charged to an intraday
high at $35.40 before slipping back under the $35 level before
the closing bell.  We're obviously not happy with the 3.8%
rebound but IRF has been very oversold and due for a bounce.
Traders might want to consider new positions on a drop through
the $34 mark.

Picked on July 6th at $37.00
Change since picked:  - 2.42
Earnings Date       07/29/04 (unconfirmed)
Average Daily Volume =  1.07 mln
Chart =



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

Magna Intl - MGA - close: 81.53 change: -1.35 stop: 84.51

Company Description:
Magna, the most diversified automotive supplier in the world,
designs, develops and manufactures automotive systems,
assemblies, modules and components, and engineers and assembles
complete vehicles, primarily for sale to original equipment
manufacturers of cars and light trucks in North America, Europe,
Mexico, South America and Asia. Magna's products include:
automotive interior and closure components, systems and modules
through Intier Automotive Inc.; metal body systems, components,
assemblies and modules through Cosma International; exterior and
interior mirror and engineered glass systems through Magna
Donnelly; fascias, front and rear end modules, plastic body
panels, exterior trim components and systems, greenhouse and
sealing systems, roof modules and lighting components through
Decoma International Inc.; various engine, transmission and
fueling systems and components through Tesma International Inc.;
a variety of drivetrain components through Magna Drivetrain; and
complete vehicle engineering and assembly through Magna Steyr.
Magna has approximately 75,000 employees in 212 manufacturing
operations and 47 product development and engineering centres in
23 countries. (source: company press release)

Why We Like It:
We like MGA because it's giving us another chance to play the
trading range.  Shares have been oscillating in a very wide
channel since last August.  Now MGA is rolling over again so it's
a simple play the move to the other side of its range.  Yes,
there are a host of moving averages between here at $81.53 and
our target near $75.00 but MGA has been virtually ignoring them
for months.  Furthermore today's high volume drop looks like a
good starting point for what could be a relatively quick trip
lower.  Please see the chart so further understand this play.

Suggested Options:
We're going to suggest the August puts.  The August 85s or 80s
could work well.

BUY PUT AUG 85 MGA-TQ OI= 20 Current Ask $4.80
BUY PUT AUG 80 MGA-TP OI=203 Current Ask $1.75
BUY PUT AUG 75 MGA-TO OI= 20 Current Ask $0.65

Annotated Chart:



Picked on July 15 at $ 81.53
Change since picked:  - 0.00
Earnings Date       08/05/04 (unconfirmed)
Average Daily Volume:    182 thousand
Chart =


--

Progressive - PGR - close: 79.00 chg: -2.50 stop: 82.35

Company Description:
The Progressive group of insurance companies ranks third in the
nation for auto insurance based on premiums written, offering its
products by phone at 1-800-PROGRESSIVE, online at progressive.com
and through more than 30,000 independent agencies and insurance
brokers. (source: company press release)

Why We Like It:
Ouch!  Earnings rise by 35 percent compared to a year ago but
it's not enough to satisfy investors.  PGR reported earnings on
July 14th and only beat estimates by a penny.  As usually Wall
Street was looking for more.  After the report UBS came out to
reiterate their "reduce" rating.  Traders immediately sold the
stock this morning and PGR broke through major support at the
$80.00 mark on big volume.  This produced a new triple-bottom
breakdown on its P&F chart with a $69.00 target.

Recent reports suggest that auto insurance rates are going down
or at least rising at a slower pace across the country.
Investors may take PGR's recent results as a sign that business
really could be slowing.  After all there is a lot of room left
for profit taking when we're talking about a stock that was
trading at $15.00 in March of 2000.

It wouldn't surprise us to see a bounce but as long as it trades
under the $82.00 level and its 200-dma we should be okay.
Patient traders can wait for a potential bounce to initiate plays
on (preferably when the rally starts to fail).   For the rest of
us we'd consider positions as long as PGR trades under $80.
There could be support at the $75.00 mark but we're going to
target the $71-72 region.

Suggested Options:
We're going to suggest the August or November puts but our
favorites would be the August 80s.

BUY PUT AUG 80 PGR-TP OI= 574 Current Ask $2.55
BUY PUT AUG 75 PGR-TO OI= 440 Current Ask $0.80

Annotated Chart:



Picked on July 15 at $ 79.00
Change since picked:  - 0.00
Earnings Date       07/14/04 (confirmed)
Average Daily Volume:    655 thousand
Chart =



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The Option Investor Newsletter                  Thursday 07-15-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Brokers, Oil, Transports
Option Spread Strategies: Our Monthly Peek Into The Future – August
    “Hypo” Positions
Traders Corner: A Little Guidants Please?
Traders Corner: Dow Theory and Technical Analysis: Tres (3)


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

Brokers, Oil, Transports

___________________________________________________________________

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.
___________________________________________________________________


Goldman Sachs - GS - close: 88.33 change: -1.56

WHAT TO WATCH: This could be it!  We've been watching GS for a
possible short play for weeks.  The recent drift through support
at the $90.00 level has been slow but today's 1.7 percent drop
looks like a decisive blow by the bears.  Even so GS still has a
trendline of support from its various lows dating back to June
2003.  Thus we'd probably wait for a new relative low, a drop
under $87.60, before considering new short positions.  Our
immediate target would be the $82.50 region.

Chart=


---

ChevronTexaco - CVX - close: 94.79 change: +0.04

WHAT TO WATCH: We strongly considered CVX as a potential call
play this evening but the failure to hold the breakout over its
$95.00 level was discouraging.  Yet overall the strength in the
energy/oil sector makes this stock attractive and we could see a
run to the $100 level yet.  Its P&F chart is bullish and points
to a $108 target.  Earnings are expected on July 30th.

Chart=


---

Fedex - FDX - close: 81.30 change: +1.30

WHAT TO WATCH: The Dow Transports did relatively well today and
FDX has broken out of its recent consolidation.  Yet FDX still
has resistance at the $82.00 mark.  We'd consider new bullish
positions on a breakout.  Currently its P&F chart is bullish with
a $97 target.

Chart=



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

Our Monthly Peek Into The Future – August “Hypo” Positions
By Mike Parnos, Investing With Attitude

Guess who’s coming to dinner?  It’s the CPTI and we’re getting
ready to feast on the market again.  Do you like steak?  Get you
knife and fork ready and let’s dig in.  I hope you like it well
done, because everything we at the CPTI do is – well done.   Are
we getting overconfident?  I don’t think so.  I’ll put up our
results against other traders.  Any takers?

Remember, August is a five-week option cycle.  There may be a
little more premium available, but we’re also exposed for another
week of market action.  Be careful.  Remember, our “hypothetical”
butts are on the line.  Don’t get aggressive.  The market has been
in a range and it has been pretty darn good to us.  Sooner or
later, either the Viagara or the alcohol will kick in – and we may
face having to make adjustments.  We always have a Plan B.

August Position #1:  SPX Iron Condor – 1106.69
Sell 5 SPX August 1050 puts
Buy 5 SPX August 1025 puts
Credit of about: $1.90 + $.50 bid/ask shaving = $2.40 ($1,200)

Sell 5 SPX August 1155 calls
Buy 5 SPX August 1180 calls
Credit of about: $1.30 + .30 bid/ask shave = $1.60 ($800)

Potential profit of $2,000.  Maximum profit range: 1050 to 1155.
Breakeven points: 1046 & 1159.  Maintenance: $12,500.

August Position #2 – RUT Iron Condor – 562.16
Sell 10 RUT August 520 puts
Buy 10 RUT August 510 puts
Credit of about: $1.10 + .10 bid/ask shave = $1.20 ($1,200)

Sell 10 RUT August 600 calls
Buy 10 RUT August 610 calls
Credit of about: $.65 + $.10 bid/ask shave = $.75 ($750)

Potential profit: $1,950.  Maximum profit range: 520 to 600.
Breakeven points: 518.05 & 601.95.  Maintenance: $10,000.

Note:  When you look at the bid/ask prices on RUT options, it
would seem we could shave a little more from the bid/ask spreads
of each option.  But, recently, it’s become increasingly difficult
to get fills on the RUT.  They have a bad attitude or a bug
buzzing where the sun don’t shine.  So, the idea is to not get too
greedy.  It’s better to get filled than to spend half the day
cursing at the market makers.

August Position #3 – BBH Iron Condor - $140.90
Sell 10 BBH August $130 puts
Buy 10 BBH August $120 puts
Credit of about $.50 + $.10 bid/ask shave = $.60 ($600)

Sell 10 BBH August $150 calls
Sell 10 BBH August $160 calls
Credit of about $.65 + $.05 bid/ask shave = $.70 ($700)

Profit potential: $1,300.  Maximum profit range: $130 to $150.
Breakeven points: $128.70 & $151.30.  This is a nice wide range
for the conservative investor.  Maintenance $10,000.

August Position – SPX
Don’t forget that our “Credit Spread Boogie” position was rolled
out to August (see below).  That should be fun to watch.  And, be
alert.  We have to be prepared to adjust when necessary.

That’s all for now.  Perhaps I’ll come up with another position
for the Sunday newsletter.  Let’s see what the market does on
Friday.
___________________________________________________________

July Trade Results
We still have to endure the Friday settlement prices for SPX and
RUT, but we have plenty of cushion in each direction.  This is
another month I’m looking forward to writing the Sunday column.  I
just love adding up those hypothetical profits.

July Quickies
Looks like the RUT quickie will work out beautifully.  The OEX
still has all Friday to trade, but we’re in pretty good shape
there too.

Isn’t it nice when you can have your money working for you?  I
know my money has been a lot more productive than I was – when I
was working.

___________________________________________________________

JULY POSITIONS
Position #1 – SPX Iron Condor – 1106.69
We sold 10 July SPX 1170 calls and bought 10 July SPX 1180 calls
for a credit of about: $1.10 ($1,100).  Then we sold 7 July SPX
1075 puts and bought 7 July SPX 1060 puts for a credit of about:
$1.20 ($840).  The total net credit of was $1,940.  Maximum profit
range of 1075 to 1170.  Breakeven points of 1072.23 to 1171.94.
Maintenance: $10,500.  Potential profit: $1,940.

Position #2 – RUT Iron Condor – 562.16
We sold 10 July RUT 600 calls and bought 10 July RUT 610 calls for
a credit of about: $1.00 ($1,000). Then we sold 10 July RUT 530
puts and bought 10 July RUT 520 puts for a credit of $1.30
($1,300).  Our total net credit was $2.30 ($2,300).  Maximum
profit range of 530 to 600.  Breakeven points of 527.70 to 602.30.
Maintenance: $10,000.  Profit potential $2,300.

Position #3 – SPX Credit Spread Boogie – 1106.69 – See Adjustment
We haven’t done this strategy is quite some time.  To review, it
consists of establishing a 25-point credit spread and taking in
$6-7 of premium (as much as possible).  If the trend continues,
you keep the premium.  If the trend reverses, you close the trade
for double the premium amount.  Then, you open a credit spread in
the opposite direction, using enough contracts to replenish what
you spent to close the initial spread.

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

Our profit potential:  $1,800.  Maintenance: $7,500 (initially).
We’ll need to keep a close eye on this one.  We have to be alert –
plus, we have to have a large enough account size to accommodate
trading an increased number of contracts if adjustments become
necessary.

Position Adjustment:  As the market went down, so did the S&P.  It
was time to dance, and dance we did.  I closed out the 3 contracts
of the July 1125/1100 bull put spread for $12.60 and rolled out to
5 contracts of the August 1125/1150 bear call spread for $8.70.
That put an additional $570 potential profit into our pocket –
making a total of  $2,370 ($1,800 + $570).  Our new maintenance is
$12,500.

Position #4 – SOX (Semi-Conductor Index) – Iron Condor – 418.53
We sold 10 SOX July 490 calls and bought 10 SOX July 500 calls for
a credit of about: $1.10 ($1,100).  Then we sold 10 SOX July 420
puts and bought 10 SOX July 410 puts for a credit of about: $1.30
($1,300).   Our total net credit of: $2.40 ($2,400).  Maximum
profit range: 420 to 490.  Breakeven points: 417.60 & 492.40.
Maintenance: $10,000.  Potential profit: $2,400.

Position Adjustment:  I’m a chicken -- and I’m not ashamed to
admit it.  Today, with the SOX bouncing around the short 420
strike price, I decided not to take my chances on Friday’s
settlement price.  Around 2:30 p.m., the SOX 420 put was trading
at 1.00 by 1.10 (SOX was at about 423+).  I had the chance to
close out the position and lock in $1,300 profits.  So, that’s
what I did.  Earlier in the day (when SOX was trading at 424+), I
could have even closed it out for a little less. Once the price
gets down near the short strike price, you no longer have a
cushion.  It’s a coin flip.  I like to keep percentages on my side
as much as possible.  When they’re not there any longer, it’s time
to make a move.  I had the opportunity.  $1,300 in the hand is
better than $2,400 in the bush -- though it sometimes depends on
the bush in question.  Watch.  Some employment number or some
earnings report will come out and the SOX’s opening settlement
number will be over 420.  Will I be pissed?  No, because I’m going
to sleep very well tonight – and I made a logical decision – not
an emotional one.


ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $35.07
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts
of the 2005 QQQ $29 calls for a total debit of $14,300.   We make
money by selling near term puts and calls every month.  Here’s
what we’ve done so far:  Oct. $33 puts and Oct. $34 calls – credit
of $1,900. Nov. $34 puts and calls – credit of $1,150. Dec. $34
puts and calls – credit of $1,500.  Jan. $34 puts and calls –
credit of $850.  Feb. $34 calls and $36 puts – credit of $750.
Mar. $34 calls and $37 puts – credit of $1,150. Apr. $34 calls and
$37 puts – credit of $750.  May $34 calls and $37 puts – credit of
$800.
June $34 calls and $37 puts -- total net credit of $750.  We
rolled out to the July $34 calls ($.20 credit) and $37 puts ($.60
credit) and took in a net credit of $.80 ($800).  Our new total
credit is now $10,400.

Position Adjustment: Last Thursday, I rolled out the July $37 puts
to the August $37 puts and took in $.40.  Today (Thursday), I
rolled out the $34 July calls to the August $34 calls and took in
$50.  That’s a total of $90 or $900 to add to the kitty.

Note:  We haven’t included the proceeds from this long term QQQ
ITM Strangle in our profit calculations.  It’s a bonus!  And it’s
a great cash flow generating strategy.

ZERO-PLUS Strategy.  OEX – 537.88
In my Feb. 8th column, I outlined a strategy based on an initial
investment of $100,000.  $74,000 was spent on zero coupon bonds
maturing in seven years at a value of $100,000.  The principal
$100,000 investment is guaranteed.  We’re trading the remaining
$26,000 to generate a “risk free” return on the original
investment.
Our current position:  We own 3 OEX December 2006 540 calls @ $81
(x 300 = $24,300).  Our cash position as of May expiration was
$4,390 plus unused $1,700 = $6,090.  From the June option cycle,
we are able to officially add $1,175 to our cash position – that
now stands at $6,265 ($4,565 plus unused $1,700).

New July Zero Plus Positions.
July bull put spread 535/525 for credit of $1.30 x 5 contracts =
$650.  Short 570 call for credit of $1.40 x 5 = $700.  If all goes
well, we’ll be able to add $1,350 to our cash position as we wait
for the market to move up.
________________________________________

New To The CPTI?
Are you a new Couch Potato Trading Institute student? Do you have
questions about our educational plays or our strategies? To find
past CPTI (Mike Parnos) articles, first look under "Education" on
the OI home page and click on "Traders Corner." For more recent
columns, you can look under "Strategies" and click on "Spreads &
Combos." They're waiting for you 24/7.

____________________________________________________________

Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it's not the cards we're dealt. It's how we
play them. Your questions and comments are always welcome.
Mike
Options Therapist and CPTI Master Strategist

Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the
numbers represented here may have been achieved or beaten by our
readers, we make no representation that any individual investor
achieved these exact results. The tracking for the plays listed in
this section uses closing prices for the day the newsletter is
published and it is not meant to imply that any reader actually
received those prices or participated in these recommendations.
The portfolio represented here is hypothetical and for investment
education purposes only. It is only an illustration of what type
of gains a knowledgeable investor might receive utilizing these
strategies.


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

A Little Guidants Please?
by Keene Little

I thought I'd take a look at a chart that a reader asked my
opinion on and it looked interesting enough to share with all. I
think this chart has some interesting features that are useful for
showing some various technical studies, including Elliott Wave of
course, and how combining these studies can be useful in analyzing
a stock's potential move.

The stock is GDT, Guidant Corp., a medical equipment company I
believe. I don't trade a lot of individual stocks but even when I
do I rarely research a company or its fundamentals. This is
because I believe fundamentals follow technicals, not the other
way around as most traders believe (that's the EW theorist in me).
I've put some EW labels on this weekly chart that shows the rally
from the end of Sept 2002 to the Jan 2004 high in order to show
the EW count for the rally.





I've labeled this rally as the 5th and final wave of the rally but
I don't have enough price history on the stock to know whether or
not that's true. For this exercise, and trading it for the next
few years, I don't think it will matter. What matters is that it
was an impulsive move up that is now being corrected (next chart).
Each impulse wave consists of its own 5 waves and I've labeled
them on the chart as waves 1 through 5, creating wave-(5), the
rally from 2002 to 2004.

Normally in an EW pattern the 3rd wave (up in this case) is the
strongest and longest wave. Sometimes the 1st or the 5th wave is
the strongest and it usually has to do with the sentiment in the
market and even what you're trading. For example, commodities
often exhibit strong 5th waves. The big rally in the equity
markets in the 1990's was an extended 5th wave of the rally that
started back in 1982. Extended 5th waves often give the impression
of a parabolic rise that flames out and crashes back to earth
(think tech bubble). Anyway, it looks like this stock had an
extended 5th wave that ran from June 2003 to the Jan 2004 high. I
mention this because a little later I'll show a support level that
is derived from this wave.




This second weekly chart shows the price peak and subsequent price
action this year, and even where I think price might be headed on
this stock. There is a head and shoulders pattern around this
price peak and the pattern projects down to about 45 for the
pullback. Its current price is around 53 and it had peaked out at
73.70. So maybe it's due for another $8 haircut.

If you'll notice the count in the extended 5th wave--the rally
from June 2003 to January 2004--you can see where I've labeled its
5 waves as wave (i) through (v). Each impulse wave can be broken
down into its own 5 waves right down to tick charts. This is
because EW patterns are a study in fractals that repeat in
different time frames. And these fractals are based on fibonacci
ratios that can also be seen in most everything from tiny sea
shells to major galaxies. Fascinating to study if you're
interested. So, for the rally up to the January high, the 5th wave
of that rally, starting in June 2003 "extended" in EW terms and
became the longest wave of the move up from 2002. When this
happens, price will typically then pullback and find support at
the 2nd wave low of this extended 5th wave. So that would be the
wave-(ii) low in Oct 2003. Notice that the H&S projection is right
on top of this EW projection. And then both of the above
projections come very close to the 62% retracement of the rally
from 2002, at 44.45.

The current leg down from the January high looks to be bouncing in
the 4th wave of an expected 5-wave move down. So it would look
like GDT needs just a little push higher to finish the correction
and then roll over into its 5th wave down. One of the reasons I'm
expecting a flat correction here and not much higher is because of
the EW rule of alternation. It is very common to see the form of
2nd and 4th waves alternate in form. If one is spiky the other
will likely be flat, and vice versa. Look at the 2nd and 4th waves
on these charts and you'll see what I mean. This rule can often
help you identify the kind of bounce to expect. So if we see
confirmation of a 5-wave move down like I've depicted, it will be
confirmation of a long term top having been put in. The new
impulse wave to the downside will tell us we have a trend change--
follow the impulse waves because they are pointing in the
direction of least resistance.

But it's also possible the entire pullback is finished at the last
low of 51.50 on May 23rd which would be a 3-wave a-b-c move down,
instead of (i), (ii), (iii) as I've labeled it, and GDT could be
getting ready to rally back up more strongly than I show on the
chart. That's what I'd be watching for currently. Confirmation of
a 3-wave corrective move would be a rally above the high at 69.50
on April 18th (where I have a wave-(ii) label). A corrective
pullback after an impulsive rally into the January high says stick
with the impulsive direction which is up because new highs are
likely on their way. But if it follows through as I've depicted,
we'll see one more drop lower to finish 5 waves down, to that
44.50-45.00 target area.

If we see 5 waves complete to the downside as I show, then we
should see the start of a long correction back up in a 3-wave
pattern (a-b-c on the chart) that could take us well into 2005. A
typical retracement for this correction back up would be 50-62% so
potentially as high as the high 50's/low 60's. And then another
roll over in the big 3rd leg down, taking us to new lows and well
into 2006. How's that for a projection!

By the way, this same analysis on the general equity market is
what has many Elliotticians chomping at the bit to get short. Many
believe the rally from October 2002 to this year's high was a big
3-wave correction to the decline from 2000 to 2002. I'm not sure
we've topped out in the market yet and am inclined to think we'll
go sideways for many years before we get another leg down. I don't
think the bear market is over, but I don't believe we're headed
for the basement yet. A big correction down that starts after a
new high? Yes. But not yet.

Again, this chart's purpose was more to show how the various
technical studies combined can give one a greater level of
confidence in taking a position, and then how to use the various
EW levels to control risk and identify potential targets. This
kind of analysis can be done right down to tick charts as the
timeframe has no meaning, except in your trading style of course.
These projections are of course never guaranteed but that's what
stops are for. Let me know if you have any questions on this.

Keene Little


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

Dow Theory and Technical Analysis: Tres (3)
By Leigh Stevens
lstevens@OptionInvestor.com

This last and final part of my discussion of Charles Dow's stock
market theory focuses on defining market trends as to importance
and duration.  And, I'll say some more about how technical
analysis has broadened the concept of divergence by relating this
principle to the idea of price/indicator divergence as also
signaling possible upcoming trend reversals. Most of what I see
written about Dow theory is about the two Dow averages moving in
tandem or not. There is a lot more to what Dow wrote about. He by
the way never put his ideas forward as a (unified) "theory".

Dow's writings were a series of editorial articles in his Wall
Street Journal related to his unique observations about how the
Market worked. For myself, having worked for Dow Jones for a few
years in their market data services division, Telerate, I was
struck as to how, when genius goes away, a dull bureaucracy may
take its place. Where are the replacement visionaries? There is
was no one at the Journal any longer that provided any ongoing
commentary about the market in terms of Dow's principals, which
always struck me as odd. Hey, I'm available!

Part 1 on Dow Theory was on Dow's idea that the Market discounts
everything, the Dow Averages need to confirm each other and the
concept of divergence: this Trader's Corner article is at -
http://www.OptionInvestor.com/traderscorner/tc_062904_2.asp

Part 2 was on the phases of Bull and Bear markets; and, on the
concepts of accumulation and distribution –
http://www.OptionInvestor.com/traderscorner/tc_070604_2.asp

TRENDS ARE OF THREE TYPES -
Just as the market tends to have three phases related to mood or
market sentiment, Charles Dow divided market trends into three
types.

The most important trend for investors, those who look to buy and
hold stocks for as long as stock prices are rising over time – is
the primary or major trend. The primary trend is one lasting a
year or more – up to several years.

However, there are inevitably price movements that are counter to
the direction of the major trend and prices move in the opposite
direction to the primary trend - Dow called these secondary price
movements.

Secondary or countertrend price swings occur when bullish or
bearish expectations for the market gets overly one-sided and
ahead of the fundamentals related to earnings prospects.
Eventually a reaction develops that causes prices to correct back
to a more realistic price level.

For example, a bull market trend reaches levels where price to
earnings (P/E) ratios get too high to reasonably expect future
earnings growth to keep up and still (more or less) match
historical P/E's. The result is that enough knowledgeable
investors take enough money out of stocks and curtail their buying
enough to knock prices down to more "realistic" levels.

So, countertrend moves – often called reactions or (trend)
corrections - are price swings that are in the opposite direction
of the main or major trend and comprise secondary trends. Their
duration is months at most, never years. Once one of these
movements runs its course, the primary trend resumes.

Smaller segments that make up the price swings that are both in,
and against, the direction of the primary trend are also often
referred to today as intermediate price swings/moves and are best
defined as lasting only the few weeks to few months of secondary
trends. However, there are a lot of careless descriptions made.

Within these secondary/intermediate price moves are day-to-day
price fluctuations Dow called minor trends.  These can be as short
as a few hours to a day or days, mostly and typically contained
within a week or month time span.

Both intermediate and minor trends are mostly of importance to
traders – minor trends are all that concern a day trader who will
likely complete every trade within the same day.  Intermediate
trends are usually only of importance to investors when they are
looking for the best point to enter the primary trend or to add to
their position(s) in a stock or the market. Investors are mostly
concerned with the major trend – the trend lasting a year or more.

In terms of Dow Theory, as I read it, a primary bear market ended
about a year ago, in late-May/early-June 2003, when both Dow
averages exceeded their prior closing highs from a few months
earlier.  Interestingly, the 10,607 closing weekly high of March
'02 was just recently exceeded by a weekly close at 10,627 from
earlier this month (July, 2004).

Dow used Monthly closes: by this measure the February closing
monthly high (10,583) of the Dow 30 Industrials (INDU) this year
was above its prior peak, the 10403 monthly close of March '02.
The Dow Transportation average (TRAN) recently cleared an even
higher monthly TRAN close going back to early-2001. At times
recently it may not feel to you like a bull market, but according
to Dow's Theory, it is one.

THE PRIMARY TREND -
The primary or major trend as said already, is a price movement
lasting a year or more. Exceptions to this time duration can
happen if we look at what happens to price alone; e.g., the 1987
decline, which was severe but of relatively short duration.

A widely accepted measure of what constitutes a bear market is
when there is a decline that takes prices more than 20% below the
high point reached in the prior advance.  Dow however, didn’t
have a "rule" or guideline on this subject.

An essential guide as to a trend being a primary bull market
is that each advance within the advancing trend should reach a
higher close than the rally that preceded it.  And, each reaction
or counter-trend move should stop at a level that is above the
prior major downswing.  The reverse would need to hold true to be
considered a primary bear market trend as it relates to lower
closing lows.

An analogy to the primary trend is that it is like the tide of
the ocean.  In the rising tide, each wave comes in to a higher
and higher point.  And, just as the rising tide lifts all the
boats, a bull market will mostly take all stocks higher.   The
waves in an outgoing tide gradually recede away from a high point
and all boats fall with it.

A primary up trend is considered to be a bull market and primary
down trend, a bear market, according to Dow. If you are an
investor in terms of your time horizon and investment goals, you
want to buy stocks as soon as possible after a bull market has
begun. Some investors will anticipate areas where stocks are
undervalued and while still in a bear market, but savvy knowledge
and experience is required, as is apparent with Warren Buffet.

And example in the chart below – one that I've used before – taken
from 1990 – 1991, shows both a primary down trend/bear market and
the primary up trend/bull market that developed following it –




You can see in the above chart that the duration of the primary
bear market trend was relatively short compared to the duration of
the primary uptrends.  On average this has been true since the
1950s due to the longer periods of economic expansion and shorter
periods of recession – there is more urgency to end a recession.

The 2000 – 2003 bear market lasted not quite 2 and half years –
compare this to the multiyear bull market that preceded it -  from
at least 1994 to 2000.

The relative duration of bull and bear markets also has to do with
the fact that investors tend to stagger their purchases over the
duration of bull markets, providing ongoing buying power, whereas
selling out is often a one time decision and would be buyers stay
away and don’t "support" the market on the declines, especially in
a panic phase.

SECONDARY TRENDS
The secondary trends as said already is of shorter duration –
typically, 3 weeks to 3 months and interrupts the major direction
of stock prices with a countertrend movement.  These are the
declines or corrections in a bull market (i.e., they "correct" a
situation where prices have risen too far, too fast) or are the
bigger rallies in a bear market.

Frequently these secondary countertrends retrace anywhere from a
little over a third to as much as two thirds of the prior advance
or decline.  Very common is to see retracements of 50% (up or
down) of the prior price move in the direction of the primary
trend.

To continue the ocean analogy, the secondary trend is like the
waves of the ocean.  They can be big and they can knock you over,
but they will come in and go out within the bigger movement of
the tide – the primary trend.

MINOR TRENDS -
The minor trends are the price fluctuations that occur from day
to day and week to week, although a minor trend will rarely last
more than 2-3 weeks.  In terms of the overall market trend these
are just "noise" and relatively unimportant.  They can be
compared to the ripples on a wave. The wave being the secondary
trend - together the minor trends make up the intermediate trend.

The minor trend is the one that could be set off by the actions or
words of an individual – for example, the chairman of the Federal
Reserve, when that individual makes a statement
hinting at the direction of policy regarding Fed bias toward
raising or lowering of interest rates.  Or, the precipitating
action might be a statement from a key company in a key industry
about their actual or expected earnings or profit trends.

MORE ON CONFIRMATION AND DIVERGENCE -
I discussed Dow's ideas on "confirmation" and "divergence" in my
prior article on Dow Theory.

From this concept that the averages should confirm each other,
came what followed relating to technical Indicators like the RSI
as "confirming" or not confirming (i.e., diverging) price moves
that take an Index or stock to new highs or lows.

A recent example of a price/Indicator divergence on an hourly
(chart) basis, was provided by the Nasdaq 100 Index (NDX), when
several new hourly highs were not accompanied by similar higher
RSI readings - this lack of an RSI confirmation, this divergence
of the RSI, relative to the higher price peaks, was a strong
warning of an impending trend reversal – see this highlighted
below.

Now even more recently with the NDX, there has been a series of
lower lows but with the RSI trending higher per the chart
highlights below. Stay tuned! on whether this price/RSI divergence
here signals an upcoming and possibly sharp upside reversal –




We don't have volume indicated for the above chart of course, but
we can also look at volume in the tracking stock for NDX – QQQ, or
on any stock – as to whether volume is confirming the price trend
or diverging from it. Volume diverging from the price trend would
be when volume does not expand in the direction of the trend. In a
bullish trend, generally, average daily volume should rise in
rally phases and decline on price pullbacks. In a bearish trend,
volume will or should tend to rise on declines as selling picks
up.

When there is a divergence from this principle – e.g., in rally
phases of a bullish trend, average daily volume starts falling –
this divergence is a warning of a possible reversal. However, this
is only something to be alert to. Dow felt that volume was a
"secondary" indicator to price but could be watched for its
confirming aspect.

On balance, Charles Dow made a huge contribution to the
understanding of market behavior or "human" behavior as it
manifests in trading and investing in stocks.


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