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Daily Newsletter, Thursday, 07/22/2004

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The Option Investor Newsletter                Thursday 07-22-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: New Nine Month Low
Futures Wrap: See Note
Index Wrap: SOX.X holding 408
Market Sentiment: Key Reversal or Speed Bump?


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      07-22-2004           High     Low     Volume   Adv/Dcl
DJIA    10050.33 +  4.20 10073.49  9946.88 1.95 bln 1268/1948
NASDAQ   1889.06 + 14.70  1892.98  1853.58 1.96 bln 1348/1795
S&P 100   535.49 +  2.47   536.99   529.43   Totals 2616/3743
S&P 500  1096.84 +  2.96  1099.69  1084.16
W5000   10663.45 + 12.45 10691.29 10541.91
SOX       420.44 + 12.60   422.58   407.81
RUS 2000  546.52 -  2.05   549.60   539.05
DJ TRANS 3051.63 - 35.50  3087.62  3014.21
VIX        15.75 -  0.66    17.10    15.29
VXO (VIX-O)15.82 -  0.32    17.86    15.41
VXN        22.44 +  0.29    23.10    21.96
Total Volume 4,263M
Total UpVol  2,444M
Total DnVol  1,747M
Total Adv  2932
Total Dcl  4309
52wk Highs   45
52wk Lows   357
TRIN       0.77
NAZTRIN    0.59
PUT/CALL   0.89
************************************************************

New Nine Month Low
by Jim Brown

The Nasdaq was hit with strong selling this morning and
dropped to a new nine month low of 1853 before bargain
hunters appeared. The Dow broke 9950 briefly and the
Russell fell to strong support at 540. High profile
earnings misses and earnings warnings added to the week's
negativity and pushed the indexes to their limits.

Dow Chart - Daily


Nasdaq Chart


SOX Chart - Daily




The morning started out with a high profile earnings miss
by Dow component CAT and it all went downhill from there.
Ironically Caterpillar's earnings miss was due to too
much business and in the rush to fill all the orders they
let costs get away from them. They raised estimates for
the future and said they expect profits to rise +80-85%
for the full year. They are still experiencing very high
sales and construction bottlenecks from the excess demand.
Must be tough to have the market knock you for a -$5 loss
on so much business you can't produce it all.

Sears added to the negativity with a lowered forecast that
did not come even close to prior estimates. Sears said
weak consumer demand nationwide was the cause for its
-83% drop in earnings. Sears said they experienced very
weak customer demand in June and weak spring sales had
caused inventory levels to rise to unacceptable levels.
Sears lowered estimates for the full year to $2.66-$2.86
and well below analysts estimates of $3.65.

Mixed economics did nothing to overcome the negative
earnings sentiment. The Jobless Claims dropped slightly
to only 339,000 from last weeks 350,000. This was not
enough of a drop to build confidence that the last six
weeks of higher claims were easing again. This report
was neutral but was actually the most positive report
of the day.

The Chicago Fed National Activity Index dropped to 0.00
from 0.75 and that May number was revised down from 0.91
and the high for this recovery cycle. The sharp drop in
the national activity index is a wakeup call for analysts.
The production component fell to -0.15 from +0.34 in the
prior month. Industrial production fell 30 basis points
and the ISM composite index fell to 61.1 from 62.8 in
May. This is the first time manufacturing output fell
since May 2003. Employment was negative for the first
time since February. Of the 85 components 58 fell, only
26 improved and one was unchanged. This report is a clear
sign the economy is slowing.

The Conference Board Leading Indicators fell -0.2% and
it was the first drop since March-2003. This was a sharper
drop than was expected with weakness in housing and hourly
work week the main detractors. Half of the components
lost ground for the month and analysts suggest this
projects slowing through the end of the year.

Further weakness came from the Monthly Mass Layoff
report with layoffs jumping +53% in June to 134,588
from only 87,501 in May. Manufacturing layoffs soared
to 27,307 and was the weakest sector by far. This was
still the lowest layoffs for June since 1999 but that
was slim consolation after the jump from last months
low numbers.

Earnings surprises with Dow component CAT knocking -35
points off the Dow at the open and the weak economics
sent the indexes into free fall. The Dow plummeted to
9947 and a level not seen since May 25th. This was a
continuation move to yesterday's reversal drop and
could be seen as a climatic selling event. The Nasdaq
fell to 1853 and a nine month low. This caps a -15%
drop from the 2153 high in January.

After the bell today there was another deluge of
earnings reports headed by Amazon and Microsoft. Both
seemingly on top of the world and doing great. Both also
missed their numbers by a penny. A penny! What happened
to the days of managing your estimates to prevent these
things from happening? (just kidding) Amazon missed
earnings and revenue and but they did post a profit of
+18 cents compared to a loss for the same quarter last
year. This was the fourth consecutive quarterly profit.
Two cents of their income was due to currency translation.
The quarter was weaker than expected for Amazon but we
already know late May and all of June was a challenge
for all retailers. AMZN traded down -2 in after hours.

Microsoft posted profits of 28 cents and a penny under
estimates despite increased revenue. To make matters
worse they guided lower for the current quarter by about
-2 cents. Microsoft dropped sharply in after hours to
$27.34 but recovered to trade just over $28 late in the
session. Microsoft had just wowed investors on Tuesday
with the big $75 billion investor payout and saw its
stock move up to almost $30. If the current trend
continues it could be a long time before we see $30
again. Investors holding on for the $3 payout and
watching the stock drop in after hours are seeing their
dividend slowly slip away. Remember MSFT will open -$3
lower on the day they pay the dividend in November. It
will be interesting to see if the dividend play is enough
to make investors ignore the lowered guidance on Friday.

Tonight's earnings were just about evenly mixed between
beats and misses yet futures saw a serious drop despite
gains by several chip stocks. So far this cycle nearly
50% of the S&P-500 have reported. Before tonight 159
companies have beaten estimates, 45 announced inline
and only 24 missed estimates. This time last year the
numbers were 194, 7, 27. Considering how weak Q2-2003
was relative to the end of 2003 you would expect results
from this Q2 cycle to exceed those comparisons easily.
You can see that although profits are coming in strong
there is a definite case of overly optimistic estimates.

As we move into the summer we are seeing estimates cut
almost daily to match the constant drone of lowered
guidance. Still analysts are stumped as to why stock
prices are dropping. Hello, connect the dots please.
I have mentioned numerous times that falling expectations
coupled with summer event risk does not provide a strong
outlook for stocks.

This does not mean we will not move higher from here
but it does mean there is no overriding reason to rush
into the market. We are at the point where traders
should be positioned to withstand any problems at the
Democratic convention next week. This means we are
ready for a rebound if the convention ends without any
terrorist event. The markets have sold off to major
support levels and pressures appear to have equalized.

The Dow drop to 9946 gave traders looking for an entry
the chance to buy stocks cheap. The bargain hunters
moved in and we saw a rebound on strong volume. Wednesday
was drastically weighted to the sell side and also on
strong volume. Down volume was 5:1 over up volume. Today
that reversed but just barely to 3:2 in favor of up volume.
While we may have had our climatic selling event there
was no V shaped rocket taking off from that bottom.
There is just two much risk in the immediate future
for that pile of cash waiting on the sidelines to jump
back into the fire. However, we are getting close.

The Nasdaq dip to 1853 was the bottom of its downtrend
channel since January. This is the level where it should
rebound OR at least stop dropping. In a nutshell we are
finally positioned for a post convention rebound at
the bottom of our long term ranges.

The wild card tonight is the AMZN/MSFT earnings misses.
The S&P futures fell to 1088.75 but have since rebounded
to 1092.50. The Nasdaq futures fell from their 1405 close
to 1389 but have since rebounded back to 1400. The knee
jerk reaction to the negative news appears to have already
passed and we may not see any adverse reaction when the
markets open tomorrow. Should we see another drop I would
consider it a buying opportunity for those with a strong
appetite for risk.

SPX H&S Chart Daily



There is a train of thought that suggests we are forming
a reverse head and shoulders on the SPX. This faction
believes we will rebound after the convention and return
to the highs around 1160. They are using the great
historical earnings and the growing economy as the
reason for the rebound.

The other viewpoint sees a major breakdown in internals
taking place with the SPX closing under its 200dma at
1105 for the first time since April 16th 2003. The 200
dma is a critical technical level and it has been broken
for several days. The fundamental justification for a
continued decent is the falling guidance and the rapidly
decreasing earnings picture for late 2004 and 2005. The
current earnings estimates for all 2005 are for less than
10% compared with 20+ percent for our last three quarters.
The 200dma is a critical technical indicator for mutual
funds and many will begin scaling back positions if the
index remains under that level.

SPX Chart Daily




So what is a trader to do given the conflicting viewpoints
and the coming event risk? I believe that even if the
bearish viewpoint is the true view we will still see a
post convention bounce. That bounce may only last a short
time but from our very oversold position it is very likely.
The earnings news after the close today could give us one
more entry point on Friday but I would still be cautious
about entering before Monday. Any long positions should
definitely be protected by insurance puts in case of the
worst case coming to pass.

My outlook is going to be completely technically based.
I feel as long as we are under the SPX 200dma we should
be cautiously bearish. Should we move back over that
level I would be cautiously bullish. This is a very risky
environment but at least traders are seeing some nice
volatility return. While traders like volatility I have
seen on the news every day this week that residents in
Boston have been fleeing the city by the tens of thousands
to get away from the potential volatility there. I can
relate to that since we have seen the same thing in the
market all week. Normally these events turn into an
anticlimactic news event and quickly forgotten. A week
from now we will probably be trading several hundred Dow
points away from our close today. The only question is
which direction?

Enter Passively, Exit Aggressively.

Jim Brown
Editor


************
FUTURES WRAP
************

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


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

SOX.X holding 408

The Semiconductor Index (SOX.X) 420.44 +3.09% was today's sector
winner, while the Dow Transports (TRAN) 3,034.72 -1.69% extended
yesterday's reversal as worries over a potential lack of
production from Yukos had September Crude Oil futures (cl04u)
$41.46 +2.16% holding firm above the $40 mark.

Pivot Analysis Matrix - Daily Intervals




An upbeat outlook for Q3 from Altera (NASDAQ:ALTR) $19.73 +5%, in
what tends to be a seasonally weak quarter for the programmable
chipmaker had the SOX.X refusing to give up the 408 level for a
fourth-straight session, where the ONLY way I can find support
marked at that level is by taking a conventional retracement from
the March 2003 pullback low to the recent high, where that
retracement bracket would have 50% retracement marking current
lows.

As each day passes, that 412 level and bearish price objective
from the head/shoulder top pattern begins to eat away at some
bearish traders.

Closing Internals - 07/22/04



Market internals finished negative at the A/D line, and it took
some energy from buyers to get the major indices back above
unchanged by the close.

Near the mid-May inflection lows for the NASDAQ Composite (COMPX)
of 1,875, NH/NL indications were 12:196, where today's action
looks similar, with bearish leadership firmly in control.

NASDAQ Composite (COMPX) - Daily Intervals



Altera (ALTR) may have saved the day for the NASDAQ, and with
NH/NL indications almost identical to those found on May 10th, it
may well take a MINIMUM of two weeks, give or take a few sessions
for the COMPX to show any sign of strength, where there may still
be some downside to 1,841, even if we are just seeing some trough
lows from the NH/NL indications.  So far, the COMPX hasn't wanted
to CLOSE below 1,865 level, which was the reversal close found to
the far left of the COMPX chart, where I've attached a
conventional BLUE retracement low from.

If the COMPX is going to make it back to 2,050 as it did in late
June, then its got to show a close of above 1,921.

I profiled a bullish trade in the QQQ Tuesday evening for 1/2
position, "certain" we wouldn't take out last week's low.  That
was a mistake, and had I waited for a close above 1,921 COMPX,
and let some NH/NL bullish leadership present itself, then things
might have unfolded similar to that found on May 25th.

Jeff Bailey


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

Key Reversal or Speed Bump?
- J. Brown

Wednesday's market decline was extremely bearish.  Yet the
momentum faded even as the Dow Industrials broke down through the
10,000 mark and the NASDAQ hit new lows not seen since October.
The afternoon rally on Thursday was actually pretty strong.  Some
stocks like EBAY, who gapped down several points actually managed
to close in positive territory.  Is this investors just buying
the dip?  Is it shorts covering for a profit?  Stocks don't look
very healthy here even though hundreds of stocks produced bullish
hammer candlestick patterns, which are typically one-day reversal
patterns. Is there a reason to go long the market ahead of the
Democratic convention next week, which is a huge terrorist
target?

Market internals today were negative despite the afternoon
rebound.  Decliners outpaced advancers 17 to 10 on the NYSE and
17 to 13 on the NASDAQ.  Down volume outweighed up volume by 26%
on the NYSE but up volume was more than double down volume on the
NASDAQ.  Overall volume was pretty heavy.

We can't think of a reason to be bullish.  Investors seem to be
selling stocks on the earnings announcement whether the news is
good or bad.  What's worse is tonight's round of earnings reports
unveiled some high profile misses.  Foundry Networks missed by 3
cents.  Amazon.com missed by a penny and came in under revenue
estimates.  Amgen managed to beat estimates by 2 cents but guided
under analysts' estimates for the rest of the year.  Lo and
behold the might Microsoft actually missed by a penny even though
revenues soared past expectations.

Yes it's true that most of the companies announcing are beating
estimates but the market is suddenly dealing with concerns that
earnings won't grow this fast in the third and fourth quarters.
OptionInvestor has been warning readers about this issue for
weeks if not months.  The high profile misses tonight only make
for a tough opening tomorrow.

Considering how oversold the market is we'd normally say today
was a key reversal and a great spot to watch for new bullish
entries for the oversold bounce.  Yet somehow we just can't work
up enough enthusiasm knowing what's in front of us next week.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  8997
Current     : 10050

Moving Averages:
(Simple)

 10-dma: 10147
 50-dma: 10211
200-dma: 10211



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  960
Current     : 1096

Moving Averages:
(Simple)

 10-dma: 1106
 50-dma: 1116
200-dma: 1105



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1204
Current     : 1408

Moving Averages:
(Simple)

 10-dma: 1413
 50-dma: 1447
200-dma: 1447



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

CBOE Market Volatility Index (VIX) = 15.75 -0.66
CBOE Mkt Volatility old VIX  (VXO) = 15.82 -0.32
Nasdaq Volatility Index (VXN)      = 22.44 +0.29


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.89        828,641       735,463
Equity Only    0.71        639,356       452,128
OEX            1.99         26,031        51,860
QQQ            1.92         23,701        45,530


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

Bullish Percent Data

           Current   Change   Status
NYSE          62.6    - 2     Bear Confirmed
NASDAQ-100    35.0    - 7     Bear Confirmed
Dow Indust.   60.0    - 3     Bear Confirmed
S&P 500       55.6    - 3     Bear Confirmed
S&P 100       58.0    - 3     Bear Confirmed



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: 1.17
10-dma: 1.22
21-dma: 1.38
55-dma: 1.13


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    1058      1305
Decliners    1748      1754

New Highs      22        16
New Lows       39       103

Up Volume    868M     1300M
Down Vol.   1099M      599M

Total Vol.  1980M     1946M
M = millions


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

Commitments Of Traders Report: 07/13/04

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

Not much movement going on in the Commercial traders' positions
for the large S&P futures contracts.  They remain net bearish
but by a small margin.  Small traders remain net bullish but
have upped their shorts a bit.


Commercials   Long      Short      Net     % Of OI
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%)
07/13/04      407,166   416,869   ( 9,703)   (1.2%)

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
06/22/04      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%
07/13/04      133,935    95,787    38,148    16.6%

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

Commercial traders have reduced their long positions in the
e-minis raising their net bearish positions several percentage
points.  Small traders are still very bullish.


Commercials   Long      Short      Net     % Of OI
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%)
07/13/04      265,142   427,017   (161,875)  (23.4%)

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
06/22/04      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    57.8%
07/13/04      225,410     57,699   167,711    59.2%

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 upped their long positions a bit boosting
their bullish stature on the NDX.  Small traders reduced both
their longs and shorts but the drop in long positions actually
left them move bearish.


Commercials   Long      Short      Net     % of OI
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%
07/13/04       44,211     37,007     7,204    8.9%

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
06/22/04        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%)
07/13/04        7,847    15,243    (7,396)  (32.0%)

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 are not making any big moves with their
INDU futures positions and they remain net bullish.  Meanwhile
small traders have turned a bit more bearish, the most we've
seen in weeks.


Commercials   Long      Short      Net     % of OI
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%
07/13/04       27,773    20,573    7,200      14.9%

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
06/22/04        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%)
07/13/04        5,292     9,068   (3,776)   (26.3%)

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 07-22-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: APOL, ZBRA
Dropped Puts: None
Call Play Updates: AET, FDX, HUG
New Calls Plays: Editor's Note
Put Play Updates: CEPH, DISH, GS, MGA, PGR
New Put Plays: Editor's Note


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

Apollo Group - APOL - close 90.26 change: -2.11 stop: 89.99

It was not a great day for APOL bulls.  The stock was weak from
the start as it continued Wednesday afternoon's decline.  We
thought it was going to bounce from support at the $90.00 level
like it did a couple of days ago but no such luck.  We were
stopped out at $89.99.  It may prove to be a fortunate incident.
The technical picture in APOL has deteriorated in the last week
and a breakdown under its simple 100-dma will make it look like a
bearish candidate.

Picked on July 20 at $ 92.49
Change since picked:  - 2.23
Earnings Date       06/24/04 (confirmed)
Average Daily Volume:    2.1 million
Chart =


---

Zebra Tech - ZBRA - close: 80.29 chg: -0.89 stop: 79.85

My how things change.  Yesterday ZBRA sunk lower on the NASDAQ's
sharp decline.  The market's early morning weakness today was
also reflected in ZBRA and the stock hit our stop loss at $79.85
under round-number, psychological support at $80.00.  We may be
closed out but we'd keep ZBRA on the watch list for a bounce from
its simple 100-dma or a breakout above $84 again.

Picked on July 15 at $ 82.90
Change since picked:  - 2.61
Earnings Date       07/28/04 (confirmed)
Average Daily Volume:    401 thousand
Chart =



PUTS:
*****

None


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

Aetna - AET - close: 85.49 change: -0.76 stop: 83.49 *new*

Hold on to your hats.  This is crunch time for AET but first
let's look at the IUX Insurance index.  The IUX has been sinking
the last several days as big insurers like XL and RE sunk sharply
after reporting earnings.  This has been a drag on shares of AET.
Now the IUX has pierced its simple 200-dma but the intraday
rebound has produced a bullish "hammer" candlestick pattern.  The
break down under the 200-dma is bearish but the hammer is
normally bullish - granted we need to see some follow through on
the reversal pattern.  That leaves AET with a rebound from its
simple 40-dma but it's still under the $86 level.  We would not
suggest new positions at this time until we see AET back above
$86.00-86.50.  We're actually going to raise our stop loss to
$83.49 to reduce our risk.  More conservative traders may want to
put their stop under the $84.00 mark.

Picked on July 14th at $86.55
Change since picked:   - 1.06
Earnings Date        07/29/04 (confirmed)
Average Daily Volume =   1.44 mln
Chart =


--

Fedex Corp - FDX - close: 81.17 change: -0.40 stop: 79.00

It's getting pretty ugly in the transport sector.  The Dow Jones
Transportation Index (TRAN) produced a very bearish reversal
yesterday and today's weakness was a strong bearish follow
through.  Fortunately, there was a decent afternoon rebound as
the TRAN rallied from the 3000 level.  Even so the bullish
rebound in the TRAN has been erased.  Thankfully FDX has shown
some relative strength and while it is back under the $82.00
level it did bounce above round-number support at $80.00.  Its
strength may be partially due to a decent earnings report from
rival UPS who announced today and beat estimates by a penny.
We're cautious given the market atmosphere and would not consider
new bullish positions until FDX traded back above $82.00.

Picked on July 20 at $ 82.81
Change since picked:  - 1.64
Earnings Date       06/23/04 (confirmed)
Average Daily Volume:    1.1 million
Chart =


--

Hughes Supply - HUG - close: 59.08 change: -1.27 stop: 57.00

HUG has turned in a very bearish day.  Yesterday's decline was
expected given the drop in the broader indices but HUG held
support at $60.00.  Today's 2.1 percent drop is a concern but HUG
managed to bounce from the 21-dma.  The only catalyst we could
see other than the market weakness this morning was a technical
breakdown in rival EXP.  Eagle Materials (EXP) dropped 2.7
percent and broke multiple support levels as investors turn
cautious ahead of its Monday earnings report.  Unlike HUG, who
has been climbing drifting higher though July, EXP has been
consolidating lower.  We would not consider new bullish positions
in HUG unless it traded back above the $60.50 mark.

Picked on July 15 at $ 60.51
Change since picked:  - 1.43
Earnings Date       08/24/04 (unconfirmed)
Average Daily Volume:    288 thousand
Chart =



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

Editor's note:

Try as we might we couldn't find anything that looked attractive
enough to add to the new call or new put list tonight.  However,
we will have several potential candidates on the watch list.


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PLAY UPDATES - PUTS
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Cephalon - CEPH - close: 50.13 change: +0.61 stop: 52.01

We admit to being a little disappointed when CEPH didn't drop
sharply on Wednesday as the BTK notched a 5 percent decline.
Then again CEPH underperformed the BTK today as the sector index
bounced back 2.3 percent.  CEPH did bounce some with a 1.2
percent gain but it remains under the simple 10-dma in a short-
term trend of lower highs.  This pattern should produce another
breakdown lower.  Tomorrow could be key.  Biotech giant AMGN
reported earnings tonight that beat estimates by 2 cents.  Yet
they also guided under analyst expectations for the rest of the
year.  AMGN is likely to lead the biotech sector lower and CEPH
just might follow this time.

Picked on July 15 at $ 49.87
Change since picked:  + 0.26
Earnings Date       08/03/04 (confirmed)
Average Daily Volume:    969 thousand
Chart =


---

EchoStar Comm. - DISH - close: 29.17 chg: +1.82 stop: 29.55

Uh-oh!  DISH has rallied strongly on earnings results from SBC.
The two companies have been bundling their products together,
DISH's satellite TV and SBC's phone service, to better compete
with cable companies.  Investors may also be reacting to news
that DISH is close to refinancing some high-interest debt, which
will lower their expenses.  The market has virtually ignored news
out Wednesday night that DISH's CFO has resigned for "personal
reasons".  Such a move typically sends a stock lower.  DISH is at
crucial resistance right at the 21-dma.  If it breaks out here we
should be quickly stopped out at $29.55.  More aggressive traders
who believe in the downtrend might consider putting their stops
above the 40-dma but we hate moving our stops the wrong
direction.  We would not suggest new positions at this time.

Picked on July 09th at $28.99
Change since picked:   + 0.18
Earnings Date        08/11/04 (unconfirmed)
Average Daily Volume =    2.5 mln
Chart =


--

Goldman Sachs - GS - close: 87.76 change: +0.34 stop: 92.01

The whipsaw action continues in GS.  This time GS has jerked
lower again and Thursday morning hit a new relative low.  Yet
somehow I don't think we're out of the woods yet.  Be careful
with new positions.  GS could bounce back to $90 once more just
for good measure.  Keep an eye on the XBD broker-dealer index.
If the XBD closes above the 120 level we're going to grow even
more cautious here.

Picked on July 15 at $ 87.25
Change since picked:  + 0.51
Earnings Date       06/22/04 (confirmed)
Average Daily Volume:    4.0 million
Chart =


--

Magna Intl - MGA - close: 80.25 change: -1.04 stop: 84.51

It was a good day for bears in MGA.  The stock's recent
consolidation above the $80 level appears to be breaking
downward.  Today's 1.27 percent drop to the $80 level saw almost
no bounce and failed to participate in the market's afternoon
rebound.  Now we just need to see MGA breakdown under its simple
200-dma.  If you missed an earlier entry consider a break under
$80.  Our target is $75.

Picked on July 15 at $ 81.53
Change since picked:  - 1.28
Earnings Date       08/05/04 (confirmed)
Average Daily Volume:    182 thousand
Chart =


--

Progressive - PGR - close: 77.29 chg: +0.60 stop: 80.75

Try as it might PGR is having a hard time mounting a rebound.
The stock remains stuck inside its three-week old narrow
descending channel.  Yet on the other hand we're surprised to see
PGR not hit a new relative low this morning as the IUX insurance
index sank lower.  This is a tough spot to consider new plays.
Consider a failed rally in the $79.00-79.50 range under the 10-
dma as a bearish entry point or a breakdown under $76.

Picked on July 15 at $ 79.00
Change since picked:  - 1.71
Earnings Date       07/14/04 (confirmed)
Average Daily Volume:    655 thousand
Chart =



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

Editor's note:

Try as we might we couldn't find anything that looked attractive
enough to add to the new call or new put list tonight.  However,
we will have several potential candidates on the watch list.


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The Option Investor Newsletter                  Thursday 07-22-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Healthcare to Telecom and more
Traders Corner: Up Volume Indicator


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

Healthcare to Telecom 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.
___________________________________________________________________


Cardinal Health - CAH - close: 51.05 change: +1.00

WHAT TO WATCH: We're considering a possible rebound in CAH.  The
company warned on July 1st and the stock sank like a rock.  CAH
eventually bottomed out near the $47.50 region and has produced a
decent bounce.  Today's move certainly looks encouraging.  Yet we
wouldn't consider bullish entries just yet.  CAH is due to report
earnings before the opening bell next Wednesday.  Wait for the
report and then see how the market reacts.  Only then would we
re-evaluate it for a bullish retracement of the big drop.

Chart=


---

QUALCOMM - QCOM - close: 72.50 change: +4.82

WHAT TO WATCH: We normally don't like to consider long plays this
close to an earnings report.  The post-earnings excitement tends
to fade away.  Yet QCOM's really looks pretty impressive.  The
company beat earnings by four cents and guided higher and
investors sent the shares soaring by 7%.  The move is not only a
breakout over the $70.00 mark but it comes close to producing a
new buy signal on its MACD indicator.  If the markets are weak
tomorrow we'd look for a dip back toward $70.00 as a possible
entry point.  Use a tight stop.

Chart=


---

Kmart Holdings - KMRT - close: 69.42 change: -4.84

WHAT TO WATCH: Ouch!  KMRT lost 6.5% and closed under round-
number, psychological support at the $70.00 level on big volume.
The move follows what looks like a double top in the $82-85
region.  Today's drop was sparked by a big earnings miss in rival
Sears (S).  It's an aggressive play but we'd watch for a possible
bounce and failed rally near $73-74 or a drop through today's low
as a bearish entry point.  The stock's P&F chart is bearish with
a descending triple-bottom breakdown sell signal and a $61.00
price target.  KMRT is optionable.  KMRT's earnings would appear
to be in mid-August.

Chart=


---

Baush Lomb - BOL - close: 59.19 change: -1.14

WHAT TO WATCH: After almost four months of consolidating sideways
between $60 and $66 shares of BOL are breaking lower.  The close
under round-number, psychological support at $60 is very bearish.
Plus, volume was way above average on the drop.  The P&F chart
looks equally bearish with a sell signal and a $52 target.  We're
putting BOL on the watch list because the daily chart presents
possible support at the $57.50 level underpinned by its simple
200-dma.  We also need to be aware of BOL's earnings expected on
July 29th.

Chart=


---

Vimpel Communications - VIP - close: 81.90 change: -3.08

WHAT TO WATCH: High-flying Russian telecom/wireless company VIP
has seen some heavy profit taking this past week.  Today's drop
broke the simple 200-dma on an intraday basis but shares
rebounded from round-number support at $80.00. Volume was very
strong on the early morning weakness.  With the bearish P&F chart
pointing to a $71 target we're going to consider bearish plays.
Traders can look for a failed rally under $85 or a drop under
today's low at $79.80 as potential entry points.

Chart=



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

Up Volume Indicator
By Leigh Stevens
lstevens@OptionInvestor.com

Volume is an important ancillary indicator that is second only to
price in being important for technical analysis.  Of course in
fact, all technical works with is price and volume information -
well, in stock index futures, there is some analysis that can be
done with "open interest", but this doesn't enter in here.

Stock market volume will often "precede" price.  For example,
before a market gets to or near a price area that will be
perceived as offering “value”, especially a market that is in
transition, there will usually tend to be a contraction of
trading activity (volume) to a similar and reoccurring level and
this occurrence will tend to precede the most substantial and
sustained market rallies.

I wrote something about this topic and its use as a type of
bottoming "indicator" recently, as part of an article that is
published in the current issue (July) of Technical Analysis of
Stocks & Commodities magazine. If interested see -
http://www.traders.com/Documentation/FEEDbk_docs/Abstracts_new/Stevens/steven.html

The most significant volume figure for stocks, for its use as one
type of indication for significant or major bottoms, is up or
advancing volume. Total NYSE daily advancing volume is a count of
all shares bought on upticks, or at a price higher than the
preceding transaction.  Up volume is an excellent test of buying
interest being as this type trading activity reflects a
willingness to "pay up" for stocks so to speak. To refine the
daily figure, I use a 10-day moving average of advancing volume
for both the New York Stock Exchange (NYSE) and Nasdaq.  What is
shown on the two charts that I use for examples further on here
is for the NYSE.

There is a tendency in any given period, of months or years, for
there to be a "base" line for how far (what contraction level) a
10-day moving average of Nasdaq or NYSE Up volume will fall to
before there is a market bottom. For example, when a 10-day
moving average of total NYSE up volume contracts to around 510-
530, or perhaps 550 million shares - this figure will vary
depending on what phase of the trend that we are in.  For
example: during a bear market; off a major low after a long
period of little buying interest; during a phase of intense
market interest.

In the first chart, this baseline figure was when a 10-day moving
average of daily NYSE Up Volume dipped to around 510 million
shares.  This baseline level varies from time as I said - the
number itself is not a constant, only the tendency for a
contraction to a similar reoccurring area that tends to occur
around the time of, ahead of or just ahead of a major or
significant low.

The period shown below is from August 2002 to May 2003 - the date
at top being date of the last daily update for this chart.  The
symbol "$UVOL" is what eSignal uses in their data feed and
database for NYSE daily up volume (their data feeds my
TradeStation application).  Some services have this daily figure,
others don't or at least I am unsure about whether any particular
charting service or site has daily Up Volume totals. Going
through the instances above point by point, I'll comment on
anything of significance -




Point 1. There was a brief rally after a dip to/under the 10-day
moving average of 510 million shares up volume, as shown (above).
2. The volume contraction "bottom" preceded the final low by some
days - this is what is meant by "volume can precede price".
3. A decent rally followed - enough for a good index option call
buy.
4. Small rally only
5. This was the "monster" rally - and, the degree of what
followed is why I only use this indicator in a serious way when
my other indicators also flash a buy, especially my call to put
sentiment indicator and an oversold RSI condition, daily and
weekly

Stock volume is broken down into Up, Down and Unchanged volume
figures. Particular levels of declining volume on a 10-day
average basis, is not especially predictive for market tops, nor
does the market peak as reliably at a particular level of up
volume, unlike the case for market bottoms.

However, it might be a consideration to be watchful of/for
repeated rally attempts, or failures to surmount resistance, that
occur along with a declining Up Volume 10-day average for the
exchange involved.  At tops, when the 10-day advancing volume
line turns down and then keeps declining on balance, the downward
trend of the line is a good secondary indication that prices will
may also fall at some point. A couple of instance of this
situation can be found in the chart examples above. However, I
have never found a correlation to market tops that matches the
consistency of what marks a bottom, as far as an Up Volume
indication such as shown at the highlighted turning points.

This next chart carries the example of using Up Volume forward to
the current timeframe and a declining trend or corrective
pullback over the past month. The points where the 10-day average
of (NYSE) Up Volume declined to a "base line" figure - in this
period I have raised the baseline figure slightly, to 530 million
shares, reflecting the up volume average where the market was
tending to bottom over this period.




Point 6. An excellent "signal" occurred on 11/20/03 with the
contraction of our Up Volume average to the line. However, this
Index (SPX) was not also indicating an oversold condition or
extreme bearish sentiment (these indicators not shown).  So, the
single best indicator was the price pattern, a double bottom and
the contraction of Up Volume to our baseline.
7. A very minor upswing followed this point.
8. A more significant rally followed this dip under my baseline
and the price low occurred at the same time.
9. Another good-sized rally followed but the final price low came
a few days later and from a slightly lower low.  Since this
indicator is best to show an area of a possible major bottom and
with purchases of index calls that have some time to expiration
(e.g., 3-4 weeks), no big deal.  A substantial rally followed the
final price low.  Notice that the up volume average paused there,
but from a level well off the baseline low.
10. Stay tuned! This is a likely point where, if the market is
going to rally, it ought to do so relatively soon from at or near
the day and data shown on the chart.


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