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Daily Newsletter, Monday, 07/19/2004

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The Option Investor Newsletter                   Monday 07-19-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Work Horses of the Big Caps
Futures Wrap: See Note
Traders Corner: Every Oscillator Needs its Breath.


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     07-19-2004            High     Low     Volume Advance/Decline
DJIA    10994.06 - 45.72 10148.63 10063.31 1.58 bln   1465/1343
NASDAQ   1883.83 +  0.68  1893.80  1870.14 1.72 bln   1258/1805
S&P 100   536.29 +  0.39   538.61   533.94   Totals   2723/3343
S&P 500  1100.90 -  0.49  1105.52  1096.55
RUS 2000  554.73 -  0.75   556.75   551.14
DJ TRANS 3105.13 + 16.13  3117.65  3089.62
VIX        15.17 +  0.83    15.83    14.86
VXO        14.95 -  0.40    15.94    14.72
VXN        22.21 +  1.27    22.47    21.55
Total Volume 3,660M
Total UpVol  1,542M
Total DnVol  2,070M
52wk Highs     145
52wk Lows      296
TRIN          1.15
PUT/CALL      0.70
*******************************************************************

Work Horses of the Big Caps
Linda Piazza

Two work horses of the big caps, MMM and MSFT, pulled the
opposite direction Monday morning, plowing index prices first one
direction and then the other.

Futures had been drifting before the open, ready to be hitched to
one work horse or the other.  The Nikkei had been closed for a
national holiday.  At least in part due to Motorola's decision to
trim its chip-unit IPO by one third, chip-related stocks had
struggled in Asia.  Without the Nikkei against which to take
direction, both European markets and U.S. futures had drifted
first one direction and then another in the overnight session.
Pharmaceutical stocks had been a focus in European trading, with
Bayer, Roche and Schering all dropping in response to news
related to their companies.

MMM reported before the bell, with the company's Q3 outlook
coming in below expectations.  That soured investors on other
reassuring news within the earnings report.  Investors punished
the stock, gapping it lower at the open.  Four other work horses
among the big caps--BA, MO, JNJ and WMT--had at first helped MSFT
plow toward the bullish side of the field, furrowing indices up
to test resistance, but then BA and JNJ pulled the opposite
direction, lending their weight to MMM's decline.  After another
zig and zag toward the bullish and bearish sides of the field,
the day ended with MMM lower by 5.45 percent, leading the Dow
losers; BA lower by 0.95 percent; JNJ lower by 0.70 percent; MSFT
higher by 1.71 percent; MO higher by 0.33 percent and WMT higher
by 0.21 percent.  MSFT's strength helped the Nasdaq manage a
0.68-point higher close, but it couldn't rescue the Dow or the
SPX.

MSFT had benefited from positive analysts' comments ahead of its
Thursday earnings report, with a Goldman Sachs analyst citing
strength in the PC and server markets as his reason for believing
MSFT might produce more upside than estimates suggested.  WMT had
confirmed that initial back-to-school sales had been strong
enough to maintain its same-store sales estimates of 2-4 percent
for July.  BA had at first seen modest gains as an exec for that
company made encouraging statements about the outlook for the
industry at an air show in England.  JNJ moved higher and then
drove lower despite an upgrade by CIBC World Markets.  The firm
had speculated that Boston Scientific's recall of its stents last
week might help JNJ regain market share.

The pulling power of the declining big caps plowed indices down
to new relative lows by midday.  Out of the BIX, TRAN, SOX, Dow,
Nasdaq, Russell 2000, OEX and SPX, only the BIX and TRAN avoided
those new recent lows hit about 12:30, hitting their lows earlier
in the day.  Surprisingly, given the closing values of the
indices, the Nasdaq saw more decliners than advancers, with the
adv:dec ratio at 13:18.  Down volume exceeded up volume on that
exchange, too, as it did on the NYSE.  The pattern of advancers
to decliners showed an opposite result on the NYSE, however, with
advancers leading by a 17:15 ratio.  New highs far exceeded new
lows on the NYSE, while new lows far exceeded new highs on the
Nasdaq.

That comparative strength on the part of the BIX was followed by
a break above the BIX June 24 high and a close at a closing level
not seen since March.

Annotated Daily Chart of the BIX:



While many have waited for the SOX to lead the indices higher,
the BIX was quietly showing strength ahead of Greenspan's
testimony tomorrow.  As is clear from the chart, the BIX has not
yet dropped below its 200-sma and now appears ready to challenge
a trendline it violated in April.  Those wanting market guidance
might watch the BIX's challenge of that trendline, if it occurs,
with a break back above the trendline perhaps suggesting that the
BIX can help pull other indices higher, especially if the SOX
cooperates and does its part to help the tech-related indices,
while a downturn at that trendline might suggest that today's BIX
breakout was a false one.

The SOX closed modestly higher, but did not contribute much
strength.  It has, however, approached the bottom of its
descending regression channel.  A 100-week moving average just
below 400, at 399.81, might lend support the expected round-
number support near 400 as well as the bottom-of-the-channel
support, producing a technical bounce.  Now that the SOX has
dropped below the 38.2 percent retracement of the 2003 rally, it
has vulnerability down to about 384-385, the 50 percent
retracement level, so a dip that low would not be unexpected and
would not undo the bullishness of the 2003 rally.  A retracement
to a 50 percent level is deeper than bulls might like but still
not uncommon.  A drop below that 50 percent retracement level
becomes bearish, however.

On a SOX bounce, if one should occur, resistance might now be
expected at that 424-426 level, the 38.2 percent retracement of
the rally, as well as at the midline of the descending regression
channel and then the 50-dma, far overhead now.  A move above the
50-dma suggests a test of the top of the descending channel.

Annotated Daily Chart of the SOX:



While it's not uncommon to see a 50 percent retracement of a
rally, a retracement the SOX has not yet made, the SOX does need
to bounce soon to avoid falling out of the descending regression
channel.  Such a fall would suggest that the channel is not a
bull flag, but something more ominous.  A SOX fall out of the
regression channel would hint that other indices could also fall
out of their respective regression channels.

The Nasdaq also approached the bottom of its descending
regression channel, and also produced a modest gain.

Annotated Daily Chart of the Nasdaq:



The Nasdaq sprang up from its low, but the declining MACD
suggests that it still could have vulnerability down to the 1850
level, the bottom of its descending regression channel.  The
Nasdaq, however, has moved into a zone on its weekly chart where
it's difficult to pinpoint likely support if that technical level
at the bottom of the regression channel doesn't hold.  The 1860-
1880 level looks like one possibility, but the 38.2 percent
retracement lies all the way down at the 1756 level.  While that
level seems heart-stoppingly low, bulls can be cheered by the
realization that the Nasdaq, unlike the SOX, has not yet retraced
even 38.2 percent of the rally off the late 2002 low.  As
troubling as the retreat has been this year, the pattern doesn't
yet look bearish on a weekly chart.  Weekly MACD dips just below
the signal line, however, so that a strong bounce is needed to
turn it higher again.

One further comfort comes from a study of the Nasdaq's weekly
chart.  The 200-week moving average (simple) crosses at 1869.39,
with that average lending credence to the historical support
shown from the 1860-1880 level, and with the Nasdaq now close to
that level.  That suggests a possibility that the Nasdaq might
steady somewhere from the current level down to the bottom of its
descending regression channel, although it doesn't suggest the
strength of any bounce.

A sustained Nasdaq move above 1900, accompanied by a strong
bounce on the SOX, might cheer Nasdaq bulls enough to send it
retest the 1920-1926 zone, and then the midline resistance on its
descending regression channel if the 1920-1926 zone can be safely
negotiated.  Unlike the SOX, however, the Nasdaq's moving
averages group closely together overhead in the 1980 level,
appearing to fence off the Nasdaq if it should attempt a test of
that zone.  It will need to break above those averages before it
can test the top resistance of its regression channel.  As those
averages are configured now, that appears to be a difficult task,
and the pressure of those overhead moving averages might even
turn the Nasdaq back from a lower level.

The Russell 2000 also produced a possible reversal signal in
Monday's trading, suggesting that it might rise to retest 552.75
or even the converging 200- and 50-dma's.  MACD now suggests that
the Russell 2000 may find it difficult to press through those
averages, but market participants would need to take a look at
conditions again as those averages were tested.

Annotated Daily Chart of the Russell 2000:



The Russell 2000's bounce was produced as it touched top support
of May's congestion zone.  On further dips, support might be
found anywhere within that zone, with 535, 540, and 549 appearing
to offer possible support.

The Dow, like many other indices, has moved into the lower half
of its descending regression channel, below the midline support.
MACD suggests that it could test the bottom of its descending
regression channel, but May's congestion zone might also slow its
descent.

Annotated Daily Chart of the Dow:



Although the Dow's daily candle showed a lower shadow, a sign
that the Dow had tested support and risen from that support, the
candle did not produce the same type of reversal signal seen on
some other indices, creating more doubt about the Dow's ability
to climb than exists with respect to the other indices, but that
could be changed by earnings reports tomorrow.  The SPX did
produce a possible reversal signal, however, a doji at potential
support.

Annotated Daily Chart of the SPX:



As the chart annotations suggest, bulls hoping for a completion
of the reversal signal want first to see an open above Monday's
close.  Then they want to see a push higher, through the 200-sma
and the midline of the descending regression channel.

Is that move likely to happen?  After the cash close, YM, NQ and
ES futures dropped, reacting to after-hours earnings
announcements.  Although Corning (GLW) rose in after-hours
trading on results that beat expectations, Flextronics (FLEX)
dropped after it failed to meet expectations.  Corning's bullish
outlook for the coming quarter couldn't offset FLEX's 4 cps and
financial target disappointments.  J2 Global Communications
(JCOM) also reported after the bell, with that stock rising in
after-hours trading.  At the time this report was prepared, GLW
had last traded at $12.07, up from the $11.27 close; FLEX had
last traded at $12.65, down from the close at $14.06; and JCOM
had last traded at 24.46, up modestly from the close at $26.40.

To help gauge whether markets can build on potential reversal
signals or will continue lower, watch how the futures trade in
relationship to the Nikkei's trading pattern tonight.  The Nikkei
will be reacting for the first time to Friday's declines and
today's follow-through on some indices.  Friday, the Nikkei
tested its 50-dma at 11,348.66, bouncing above it, but the Nikkei
verges on a confirmation of a H&S on its daily chart, too, with
MACD evidence mixed.  If the Nikkei should plunge through its 50-
dma and then the 11,250 support level, watch to see whether our
futures show weakness, too, or do not react to Nikkei weakness.
Conversely, if the Nikkei continues Friday's bounce from its 50-
dma, watch to see if our futures show strength, too, or are not
able to capitalize on strength in the Nikkei.

If our futures dip despite Nikkei strength or fall with a Nikkei
decline, our markets are in danger of opening lower, not
following through on bounce potential.  If futures do not react
to weakness in the Nikkei or are able to bounce with the Nikkei,
it's possible that markets will attempt an early bounce, but
trading might remain cautious in the morning and early afternoon
hours.  While Monday might have been light on economic
developments and earnings report, Tuesday's offering includes the
much-watched Greenspan testimony on the economy and Fed policy
before the Senate Banking Committee.  That testimony begins at
2:30, with all eyes focused on his speech as it's released just
prior to his testimony and all ears focused on the Q&A session
that follows.

Chain store sales appear first on the day's agenda, however, with
ICSC/UBSW releasing the figures at 7:45 EST.  June's housing
starts and building permits come next at 8:30, with May's numbers
at 1.97M and 2.08M, respectively.  Redbook retail sales will be
released at 8:55, with the last reporting period showing a 0.5
percent drop.

Important earnings announcements include MO and TASR before the
bell, and MOT, SUNW and TXN after the bell.  Motorola figured in
the performance of the overseas markets last night, sending some
tech stocks down when the company decided to reduce the offering
of the IPO for its chip unit by one third, as mentioned earlier.
CIBC reduced its rating on Motorola Monday, citing its lessening
outlook for operational profitability in the handset market.
Motorola wasn't alone, however, as TXN also received a downgrade,
this one to an equal-weight rating from its previous overweight
rating by Lehman Brothers.  Lehman cited softness in the wireless
industry.   Both stocks closed lower Monday.

Keep crude prices on your radar screen, too, as crude futures
rose Monday to test the $42.00 level again, reaching a few cents
above the early June high. As has been discussed several times on
this page, rising crude prices pressure the markets.

On the short-term, markets still appear vulnerable despite the
reversal signals produced on many indices Monday.  Most markets
appear ready to attempt bounces, but those bounces may be
undercut by overnight developments.  If they occur, they may
produces climbs up to recently broken support, to establish
whether that support will now serve as resistance.  A failure to
hold as resistance could send markets higher.  If recently broken
support holds as resistance, indices may roll down again through
their descending regression channels.  Some may choose to watch
the SPX as their bellwether index, watching to see if it can
climb above the 200-sma and the midline of its descending
regression channel or whether it rolls over and tumbles down
through that channel.

Long term, matters don't look dire just yet, but most of us trade
short- to intermediate-term.  On those time frames, remember that
most indices still trade within consolidation formations, most of
those being descending regression channels.  Trading may remain
choppy until there's a breakout, one direction or the other.


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

Every Oscillator Needs its Breath.

Every day that stocks are traded, we get a number of stocks that
closed higher (advancing) and a number of stocks that closed
lower (declining). The difference between these numbers is called
the daily breadth. The Daily Advance-Decline Line is a running
cumulative total of daily breadth. These numbers are important
because they have a high correlation to the strength or weakness
of the stock market, and because it gives us another way to gauge
the internal health of the market.

"Breadth" indicators are indicators that use advancing and
declining issues to help us determine the "amount" of
participation in the movement of the stock market. We like to see
more stocks moving up (advancing) than down in a healthy bull
market and more stocks moving down (declining) than up in a bear
market. A bull market in trouble is characterized by the number
of stocks moving up weakening compared to the number of stocks
moving down.  The market advancing but on the shoulders of a
small number of stocks making large advances in price, gives the
false appearance that all is well. This type of divergence often
signals an end to the bull market. On the other hand a weakening
bear market can be characterized by a small number of stocks
making large declines, giving the false appearance that all is
doom and gloom. An interpretation that can be applied to market
bottoms is where the market indexes continue to decline while
fewer stocks are declining.

In the late 1960's, Sherman and Marian McClellan developed an
indicator they called the McClellan Oscillator that is calculated
by subtracting the advancing issues from declining issues to
arrive at "net advances." They then calculated a 39-day and 19-
day exponential moving average of the net advances and finally
formed the oscillator by subtracting the 39-day from the 19-day
EMA.

Although the McClellans originally used the daily advances minus
declines as the basis of this oscillator the most common
calculation now is a ratio-adjusted index for easier comparisons
over long periods of time. The basic input for the ratio-adjusted
version is no longer the daily advances minus declines. It is:

1. Subtract declines from advances

2. Divide the result by the total of advances plus declines

3. Multiply that result by 1000. (Multiplying by 1000 is simply
cosmetic so the index works with whole numbers instead of
decimals.)

The rest of the calculations for the Oscillator is the same. The
McClellan oscillator I show in this article is the Ratio-adjusted
oscillator.

The McClellan Oscillator is a momentum indicator similar to MACD
but applied to the advance/decline statistics. When the shorter
moving average (19-day EMA) moves above the longer moving average
(39-day EMA), it is telling you that advancing issues are getting
stronger than the declining issues. Conversely, when the 19-day
EMA drops below the 39-day EMA, it signals that declining issues
are strongest. In this way, the McClellan Oscillator is
anticipating positive and negative changes in the advance/decline
statistics.




Here is the 19-day and 39-day EMA of the NET advances (advancing
issues - declining issues). On April 9th the 19-day EMA crossed
below the 39-day EMA telling us there is internal weakness in the
market. On May 18th when the 19-day crossed over the 39-day it
told us there was internal strength in the market.




Here is the McClellan Oscillator from www.stockcharts.com when
the 19-day crosses the 39-day the oscillator will cross the 0
line. When the Oscillator is positive, it generally portrays
money coming into the market; conversely, when it is negative, it
reflects money leaving the market.

One of the ways to use the oscillator is look for divergences
just like we look for divergences in MACD. If the McClellan
Oscillator lows are rising (higher lows) but accompanied by lower
lows in the market we read this as bullish as the market is being
lead lower by larger losses in fewer and fewer stocks.
Conversely, rising market prices accompanied by lower lowers in
the oscillator is considered bearish as the market is being lead
higher by larger gains in fewer and fewer stocks.

Here is the McClellan Oscillator and the SPX.



I drew in the 0 line on the McClellan Oscillator and tried to
show where lows matched up. As you can see the oscillator is
making (almost) equal lows while SPX is making lower lows. This
is bullish for it is telling us price is falling on fewer stocks
declining. A few stocks are making large declines while the rest
are doing just fine, showing internal strength in the market.




Another way to use the oscillator is that when we have too many
issues advancing and the market enters a period of potential
bullish excess. However we all know oversold can become more
oversold and it can be dangerous to go against the trend without
a confirmation.  Thus, a sell signal is trigger only when the
McClellan Oscillator gets to overbought (usually, readings above
+80 to +100 are considered overbought) and confirms the
overbought with a cross below the 0 line, suggesting a potential
reversal of the trend. Conversely, a buy side signal is triggered
when the market enters a period of potential bearish excess and
the oscillator gets to oversold (usually readings below -80 to -
100 are considered oversold), and then crosses above the 0 line,
confirming a trend reversal. So buy signals are generated when
the oscillator advances from oversold levels to positive
territory. Sell signals are generated on declines from overbought
to negative territory.

On May 27th the McClellan oscillator hit a high of 96 and
retreated back to the 0 line but only broke it briefly giving a
false sell signal. Although the oscillator has had many
opportunities to make a sustainable break it has not done so. I
would like to see it break the last high to confirm bullishness
but a break of the July 9th lows would be a lower low and a sell
confirmation. Keep your eye on this oscillator for market
internal strength or weakness. But, as you can see from the chart
above, you cannot use this indicator in isolation for it can give
false signals just like all indicators.

Remember plan your trade and trade your plan.

Jane Fox


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The Option Investor Newsletter                   Monday 07-19-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: DISH
Dropped Calls: None
Dropped Puts: None
Watch List: Retail, Tobacco, Stun guns and more!


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STOP-LOSS UPDATES
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DISH - put play -
 Lower stop from $31.01 to $30.01


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DROPPED CALLS
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None


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DROPPED PUTS
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None


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

Retail, Tobacco, Stun guns and more!

___________________________________________________________________

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


K-Mart Holding - KMRT - close: 74.10 change: -2.96

WHAT TO WATCH: Are we seeing cracks in the armor for KMRT?  The
stock has been churning sideways in a wide range between its new
highs near $85 and the $75 level.  It would appear to have
produced a new lower high (82.50) three days ago and today's
breakdown under the $75 mark on big volume looks ominous.  This
would probably be a high-risk short/put play given its volatility
but when it turns it will probably fall quickly.  Another caveat
- we can't find an earnings date for KMRT, which adds another
level of risk should they surprise investors (good or bad).

Chart=


---

Altria Group - MO - close: 48.83 change: +0.16

WHAT TO WATCH: MO has been slowly sinking under lower highs as it
struggles with its simple 50-dma.  The MACD has produced a new
sell signal after the stock's rebound from the May lows.  The
company is due to report earnings before the opening bell
tomorrow so we should see shares breakout one way or the other.
Bulls will be watching resistance at the 200-dma near $52.  Bears
will be watching support near $47 (and $45) on a breakdown.

Chart=


---

Capital One - COF - close: 65.20 change: -0.82

WHAT TO WATCH: COF is looking bearish here under its simple 200-
dma.  The stock dropped 1.24% on Monday, falling lower after its
recent consolidation near the $66 level.  Normally we'd probably
consider bearish plays here or with a trigger under $65.00 with a
target near $60.  Its P&F chart is bearish and points to a $49
target.  Unfortunately, earnings are on Wednesday and we wouldn't
suggest holding over the event.

Chart=


---

TASER Intl - TASR - close: 36.32 change: -3.92

WHAT TO WATCH: TASR fell about 10% on Monday after new concerns
were raised about the lethality of the company's products.  The
breakdown from the wedge-like pattern growing for the past three
weeks is certainly bearish.  We'll be watching to see how
investors react to TASR's rebuttal to the concerns and their
earnings report tomorrow before the opening bell. Estimates are
at 13 cents a share.

Chart=



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

AIG $68.80 -0.21 - Dow-component AIG has slipped back to crucial
support at $68-69 and its simple 200-dma.  We'd expect it to
trade sideways until its Thursday earnings report.  Then expect
some volatility.

RIMM $63.30 +0.40 - We're still watching RIMM.  Aggressive
traders might consider bullish plays on its rebound from the $59-
60 region.

LLL $60.40 +0.19 - LLL continues to look like a breakdown
candidate under the $60 level.  Target the 200-dma near $55.
Earnings are July 27th.

GM $43.77 +0.17 - General Motors long-term trend continues to
drift lower in its wide descending channel.  Yet the last few
days have seen GM consolidate sideways near $43-44.  Earnings are
expected on Wednesday so we should see a breakout one way or the
other.

IMCL $76.76 -0.25 - IMCL could see a lot of attention on
Wednesday after its early morning earnings report.  Now that
shares are up significantly from March it may be tough to avoid a
"sell the news" reaction.


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would welcome you as a permanent subscriber.

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We would like to have you as a subscriber. You mar
subscribe at any time but your subscription will not
start until your free trial is over.

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and click on "subscribe" to use our secure credit
card server or you mar simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you mar call us at 303-797-0200 and give us the
information over the phone.

You mar also fax the information to: 303-797-1333


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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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Option Investor Inc
PO Box 630350
Littleton, CO 80163

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