Option Investor

Daily Newsletter, Tuesday, 07/27/2004

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The Option Investor Newsletter                 Tuesday 07-27-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: So Far So Good
Futures Markets: See Note
Index Trader Wrap: Coffee's brewing
Market Sentiment: Stocks Bounce Big

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      07-27-2004           High     Low     Volume   Adv/Dcl
DJIA    10085.14 +123.20 10103.13  9963.54 1.97 bln 2030/1223
NASDAQ   1869.10 + 30.10  1872.17  1843.04 1.77 bln 2115/ 975
S&P 100   535.53 +  5.44   536.50   530.09   Totals 4145/2198
S&P 500  1094.83 + 10.76  1096.65  1084.07
SOX       402.91 +  2.60   405.71   393.21
RUS 2000  544.61 + 11.12   544.63   533.49
DJ TRANS 3063.60 + 15.00  3073.74  3046.78
VIX        16.55 -  0.75    17.34    16.30
VXO (VIX-O)15.70 -  1.30    17.14    15.70
VXN        24.31 -  0.98    25.53    24.11
Total Volume 2,892M
Total UpVol  2,021M
Total DnVol    845M
Total Adv  4259
Total Dcl  2504
52wk Highs   43
52wk Lows   247
TRIN       0.68
NAZTRIN    0.79
PUT/CALL   0.72

So Far So Good
by Jim Brown

With the Democratic convention 25% over the markets
rallied off its lows for the year in anticipation of
a successful conclusion. The massive security and multi
block long safety zones on all sides of the convention
must have convinced investors the event risk was far
overdone. They ventured back in the market to vote for
their favorite stocks and the market election was a

Dow Chart – Daily

Nasdaq Chart – Daily

SPX Chart – Daily

The market rebound caught shorts off guard and after a
large buy program hit at 2:30 it was rocket time into
the close. Many still short after the last week of
market weakness were forced to cover once the programs
began firing. The buy programs between 2:30 and 3:PM
added over +1000 issues to the advance/decline line
on an otherwise low volume day.

The morning started off well with another small gain
in the weekly Chain Store Sales of +0.2% but the good
news came at 10:00 with a significant jump in Consumer
Confidence. The July number rose to 106.1 from 102.8
in June. The majority of the jump came in the expectations
component which rose from 100.8 to 105.8. Those planning
on buying a home or car rose slightly but major appliance
purchasers dropped significantly from 34.3% to 30.4%.
Seems consumer just will not turn loose of any cash
out of pocket but will buy things on credit. The headline
number was well over the consensus estimates of 102 and
at 106 is the highest level for the index in 25 months.
The previous sentiment decline on high gas prices appears
to have eased and consumers have become immune to paying
$2 for gas.

The rise in consumers planning on buying homes should
be good news for the homebuilders. The latest reading
on New Home Sales came in at an annualized 1.326 million
and while it is a minor drop from May's 1.337 level it
was far better than consensus estimates for a drop to
1.255 million. June's number was only slightly off the
record pace set in May and suggests the news may not
be as dire as people predicted a couple weeks ago.
Interest rates have declined despite the Fed's new rate
hike cycle as markets come back in line with reality.
That reality is a still growing economy moving at a
steady pace that will not excite the Fed into aggressive
action. Demand is still very high and builders are
slowing the pace of construction to prevent high levels
of inventory going into fall and an uncertain 2006

The biggest news of the day revolved around the HMO
sector with the abrupt departure of the CFO at Cardinal
Health. CAH lost -6.50 on the news. The recent disclosure
that the government would oppose the Wellpoint/Anthem
merger also continues to weigh on the sector. Wellpoint
beat earnings by 4 cents after the close but was trading
down -6.50 on the merger news. The HMO Index ($HMO)
dropped -4.20% or -38 points on the strong blows to the
sector. The HMO sector had been a strong rallying point
in the markets with a three month high as late as
July-16th. There could be some convention risk being
priced in as the high price of health care becomes the
focal point of both parties. The drop in the HMO Index
took it back to the 200dma at 878 and buyers did appear
at what should be long term support.

Oil traded over $42 today with a bounce to $42.25 but
pulled back to close at $41.83. The Yukos oil company,
the largest company in Russia appears on the verge
of collapse. The stock fell -14% on the Russian exchange
and at 105.66 rubles it was the lowest level since Oct
2001. The stock dropped -20% in trading on Monday and
-55% since last week when the court said they would
begin selling Yukos assets to pay its tax debt. There
are allegations of a criminal conspiracy and while the
company is still pumping 1.7 million barrels per day
there are worries a slow down in production could be
coming as various issues are resolved. This is keeping
upward pressure on the price of oil and flushing gas
dollars out our tail pipe.

The chip sector suffered another setback on the heels
of the SLAB and CRAY warnings but was able to recover
from its 393 low to close at 403. Considering the
current environment for techs that was a positive move.
Techs have been the weakest link and investors have
been voting them off the island since this earnings
cycle began. Equity funds specializing in techs have
seen 25 straight weeks of outflows. While some of that
is historically seasonal for techs to be weak during
the summer months they are not normally that weak. If
chip stocks can find a bid tomorrow then we may have
seen the bottom.

With earnings for 300 of the S&P-500 already reported
for this cycle the numbers are still decent. 206 have
beaten estimates, 52 inline and 42 have missed their
numbers. Q2 last year at this point were 254, 8, 38
respectively. The trend is definitely weaker but only
because expectations were much higher. This trend will
only continue to worsen as we move into Q3 and the
very strong comparisons with Q3-2003. This does not
mean companies will not be more profitable but they
just have a higher hurdle to vault.

After the close today UTSI warned and was trading down
in after hours. EDS cut its dividend from 15 cents to
a nickel and also got knocked for a loss. PSFT missed
estimates by a penny. None of these events are going
to be positive for techs tomorrow.

Got cash? Then you may be one of the few considering
an investment in the Google IPO. Google priced its
IPO between $108-$135 and quickly priced itself right
out of the market for most investors. There are so
many reasons not to bid on the IPO that it would be
hard to list them all. Just yesterday Google noted
that revenue growth had slowed and future growth may
not be as strong as previously thought. The competition
for Google's market is growing daily with everyone from
Amazon to Microsoft entering the search engine marketplace
in addition to Yahoo and its clones already chipping away
at its base. The nearly $3.2 billion expected to be
raised will be used to cash out the founders at $100
million each and many of the officers and early
investors. I have no problem with that because they
built a great company but others may feel they are
selling at the top. Only $1.66 billion, barely half
of the IPO will actually go to the company.

The entire investment banker community wants it to
fail so future companies will not take the auction
route. Mutual funds as a group have already commented
that the price was too high and most have no interest
in bidding. In traditional institution supported IPOs
the bankers give shares to their favorite funds at a
low entry price knowing the shares will pop when opened
for trading. The bankers get credit for "placing" much
of the offering and the funds and high dollar individuals
then get to flip the shares for an instant profit and
everybody goes home a winner. Even the eventual
shareholder is normally still in decent shape because
the shares were undervalued initially to make sure
the bankers could place all the offering and earn the
highest fees possible. It may not be perfect but it
has worked for years.

The appearance of Google shares coming to market way
over priced is going to be tough to overcome. The
actual valuation is inline with Yahoo but the initial
share price is a stumbling block for most investors.
Only 60 or so stocks currently trade over $100 and
those high priced stocks tend to decline rapidly when
pressured. Should Google's revenues decline again they
could easily see a significant haircut that investors
would like to avoid. There is already a strong short
sentiment once shares are available. Hedge funds are
drooling at the potential. The consensus I am hearing
is "I will wait until they have some history and then
decide if the price is fair." It will definitely be
an interesting IPO.

The market rebound today was definitely not expected.
I was looking for it on Thursday or maybe even Wednesday
afternoon as convention risk lessened but not today.
The general consensus was an oversold rally from
strong support on better than expected economics. I
have trouble buying that reason but I have nothing to
disprove it. I believe it was an oversold rally when
it started but once it began triggering buy stops on
the upside the shorts began to get squeezed. As we
have seen so many times in the past once the oversold
rebound cycle gets started it tends to feed on itself
into the close. This rebound was much tamer than it
appears in the closing numbers. Much of it occurred
after the 10:00 numbers then we moved sideways with
a barely perceptible upward bias until a strong buy
program hit at 2:30. That program triggered others
and the shorts ran for cover. That 2:30 move accounted
for about half of the days points but it only lasted
about 45 minutes. The first buy program triggered the
break over resistance and the dominos fell into place
over the next 30 min.

We did not get a major sell off into the close but
once the programs ended we did see closing weakness.
The key will be the open tomorrow. The Dow stalled at
10100 today and decent resistance. If there is no follow
through tomorrow that is strong enough to break that
10100 level at the open then we could see weakness the
rest of the day. The Nasdaq stalled at 1870 and the
SPX at 1096. Both are right below strong resistance.
Using the SPX as our guide 1098-1100 is a strong
hurdle and one that will take real conviction to
cross. I expect that conviction will develop before
Friday but I am not counting on it at the open tomorrow.

The key point I need to stress tonight is the potential
for a post convention rally. We may get another buying
opportunity before the rebound begins for real and we
may not. We need to be prepared in the case there is
no further weakness. I mentioned last week to use SPX
1100 as your guide. I would look to be long on any move
over 1100 and remain long until the trend changes.
Ideally I would love to see one more dip to strong
support between now and Friday to give us a strong
double bottom retest from which to launch a strong
rally. Strong support for me would be SPX 1078-1080
with VERY strong support at 1068-1070. After today's
rebound I doubt seriously we will see the lower range
but we could easily see 1080 again. I would look to
buy a rebound from those levels. Just to make myself
clear, go long over 1100 on a breakout or buy any
rebound off a dip to 1080 or below.

Enter Passively, Exit Aggressively.

Jim Brown


Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.


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Coffee's brewing

Stock buyers woke up and smelled the economic coffee pot brewing
when the Conference Board said its July Consumer Confidence Index
surged to a much stronger-than-expected reading of 106.1, a
shocker to economists' forecast of 102.0.

Treasuries got flushed as the "safe haven" trade turned south
with the benchmark 10-year yield ($TNX.X) jumping 12 basis points
to 4.595%.  Meanwhile, the "riskiest" portion of the bond market
found bulls pushing the Pacholder High Yield (PHF) $9.35 +1.52%
further above its rising 200-day SMA ($9.12).

For the first time in over a month.... stocks seemed to follow
our "junk bond" indicator, if not an economic report!

Market Snapshot / Internals - 07/27/04 Close

Market internals at the A/D line were solidly positive, but I've
got to think that today's gains were largely a part of bearish
short-covering as the weaker NASDAQ A/D line was much stronger
than the relatively stronger (in recent weeks) NYSE A/D line.  If
simply comparing new highs at both the NYSE and NASDAQ, I would
also have to think it was bearish short covering doing the bulk
of today's buying among equities, though the NYSE did post a few
more highs than the weaker NASDAQ.

Question is.... are buyers smelling coffee laced with caffeine,
or decaf, which has little lasting pick me up?

Is MARKET SENTIMENT shifting a little, back positive?  The Broker
Dealer Index (XBD.X) 119.34 +2.47%, a sector we thought might be
a telling index for MARKET sentiment was among today's sector
winners.  Bears have made A LOT of money in this sector since
January and would represent "smart money."  Perhaps today's
release of July Consumer Sentiment (economic impact) has bears
smelling some coffee.

Major Economic Reports - 07/27/04 Close

A whiff of July Consumer Confidence may have shocked some "the
economy is REALLY slowing down" bears into doing some buying
today.  That's helpful for a bull, but the difference between
decaffeinated coffee and the real thing could present itself
tomorrow morning when June's durable goods data is forecasted to
show a rebound of 1.5% after two months of declines.

What bulls DON'T want to see tomorrow.

Pivot Matrix -

Recent BULLISH trades I had profiled in the QQQ had me profiling
BULLISH trades at DAILY R1, feeling squeamish on a decline at
DAILY Pivot, and getting stopped out for a loss at DAILY S1 on
the way to DAILY S2 and then lower.

Hit me over the head with an iron skillet twice, and I think a
bull should know what they do NOT want to see.

What a BEAR doesn't want to see, is what they say today, followed
by SUPPORT at DAILY Pivot, then taking out higher of DAILY R1 and
CLOSES back at, or ABOVE DAILY R2, which could have market
SENTIMENT turning bullish (XBD.X closing above its 50-day SMA).

Hold on Treasuries, you've "reflated" just enough at WEEKLY R2,
and might have some of the newly developed "recession bears"
second-guessing their thoughts, after "inflation bears"
were more boisterous in May.

Jeff Bailey


Stocks Bounce Big
- J. Brown

The oversold rally many traders have been looking for finally
occurred on Tuesday and stocks bounced pretty strongly.  The
rally was very wide with only the HMO healthcare index and the
XAL airline index closing in the red.  HMO-related stocks were
lower on news out of Cardinal Health (CAH) who reported that its
CFO had abruptly resigned while the company was dealing with an
SEC probe into its accounting.  Meanwhile the XAL airline index
slipped as crude oil prices tagged $42 a barrel on an intraday

There is no denying the strength in the bounce today.  Market
internals were very bullish.  Advancers outnumbered decliners 2-
to-1 on the NYSE and 21 to 9 on the NASDAQ.  Up volume was more
than double down volume on the NYSE and more than 3-to-1 on the
NASDAQ.  Overall volume was pretty strong.  The only fly in the
soup with today's rebound is that many investors are skeptical.
The markets have been so oversold that we were due for a bounce.
Now that we've got it there are plenty of traders who are going
to use any sign of strength as a new opportunity to get short.

Bulls will point to today's consumer confidence numbers, which
hit new two-year highs.  This is a very good economic data and it
should filter into the retailers who have been suffering from the
June "slump".  If consumers are confident then they should be
spending.  That will keep GDP growth strong, which would be a big
bonus for stocks as we head into the generally weak third

Wall Street is also measuring how much the Democratic National
Convention might give John Kerry a boost in the polls.  Political
opinions aside current logic states that if Kerry gains in the
polls then stocks will struggle because that puts the Bush tax
cuts on the chopping block.

Tomorrow brings the durable goods orders and the Federal
Reserve's Beige book report.  If the economic data is good we
could see a second day to this rally.  Don't forget that we're
still in the midst of the Q2 earnings season and there will be
plenty of stock-specific stories that could move their individual


Market Averages


52-week High: 10753
52-week Low :  8997
Current     : 10085

Moving Averages:

 10-dma: 10086
 50-dma: 10215
200-dma: 10220

S&P 500 ($SPX)

52-week High: 1163
52-week Low :  960
Current     : 1094

Moving Averages:

 10-dma: 1098
 50-dma: 1116
200-dma: 1106

Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1204
Current     : 1391

Moving Averages:

 10-dma: 1397
 50-dma: 1444
200-dma: 1447


CBOE Market Volatility Index (VIX) = 16.55 -0.75
CBOE Mkt Volatility old VIX  (VXO) = 15.70 -1.30
Nasdaq Volatility Index (VXN)      = 24.31 -0.98


          Put/Call Ratio  Call Volume   Put Volume

Total          0.72        720,204       520,685
Equity Only    0.55        570,934       314,997
OEX            0.87         22,924        19,842
QQQ            0.42         35,070        14,881


Bullish Percent Data

           Current   Change   Status
NYSE          60.4    - 2     Bear Confirmed
NASDAQ-100    36.0    + 1     Bear Confirmed
Dow Indust.   56.6    + 0     Bear Confirmed
S&P 500       54.4    - 1     Bear Confirmed
S&P 100       56.0    - 1     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: 1.18
10-dma: 1.29
21-dma: 1.30
55-dma: 1.12

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


Market Internals

            -NYSE-   -NASDAQ-
Advancers    1855      2100
Decliners     963       940

New Highs      32        21
New Lows       28        87

Up Volume   1266M     1330M
Down Vol.    641M      391M

Total Vol.  1952M     1737M
M = millions


Commitments Of Traders Report: 07/20/04

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 have upped their short positions a tad while
reducing their longs by nearly the same amount.  Yet the change
is rather insignificant.  Small traders pared back their shorts
by a very small amount and remain net bullish.

Commercials   Long      Short      Net     % Of OI
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%)
07/22/04      404,828   419,017   (14,189)   (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
06/29/04      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%
07/22/04      138,123    94,990    43,133    15.5%

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

There is some interesting action in the e-minis.  Commercial
traders significantly added to their long positions, which
reduced their overall net bearish stance to the lowest level
in weeks.  Small traders, in contrast, reduced their longs
and added to their shorts.  This could be viewed as a
bullish move in sentiment except institutional traders remain
net bearish.

Commercials   Long      Short      Net     % Of OI
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%)
07/22/04      309,972   428,240   (118,268)  (16.0%)

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
06/29/04      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%
07/22/04      212,078     62,416   149,662    54.5%

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


Very little action in the commercial traders with similar
additions to both longs and shorts.  Meanwhile small traders
upped their longs and reduced their shorts and that significantly
reduced their overall bearish posture.

Commercials   Long      Short      Net     % of OI
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%
07/22/04       45,069     37,975     7,094    8.5%

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
06/29/04        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%)
07/22/04        9,398    11,776    (2,378)  (11.2%)

Most bearish reading of the year: (20,270) - 06/01/04
Most bullish reading of the year:  19,088  - 01/21/02


Almost no change in positions for commercial traders but
small traders have pared back their bearish positions.

Commercials   Long      Short      Net     % of OI
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%
07/22/04       27,957    20,389    7,568      15.7%

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
06/29/04        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%)
07/22/04        4,857     7,297   (2,440)   (20.1%

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                  Tuesday 07-27-2004
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: TXT, FDX, HUG
New Calls Plays: SYMC
Put Play Updates: CEPH, DISH, GS, IBM, MGA, PGR, STJ
New Put Plays: None


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.






Full Service Brokers

Man Financial announces the formation of the OneStopOption
Brokerage Group, addressing the demand for personalized,
experienced service for both securities* and futures trading
within the same firm. Licensed Option Principals Andrew Aronson
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

Live Broker and Online Trading Available     888-281-9569




Textron - TXT - close: 61.35 change: +0.63 stop: 57.49

TXT is our newly added call play in the industrial/aerospace
sector.  Shares have been very strong since their earnings report
and the stock is climbing on better than average volume while the
market has been sinking.  Monday's breakout over resistance at
$60.00 was very significant and TXT added another 1 percent on
Tuesday.  We suggest considering bullish positions on any dip
above the $60 mark.  No change in our stop at $57.49 for now.

Picked on July 26th at $60.72
Change since picked:   + 0.63
Earnings Date        07/22/04 (confirmed)
Average Daily Volume =    622 thousand
Chart =


Fedex Corp - FDX - close: 80.46 change: +0.10 stop: 79.00

It's time to turn even more cautious on FDX.  The Dow Jones
Transports managed a decent bounce today even though crude oil
hit $42 a barrel intraday.  Yet shares of FDX barely budged and
added just 10 cents on the session.  We suspect FDX may be
burdened by the bearish action in rival UPS.  Shares of UPS broke
through their simple 200-dma today and they failed at that level
intraday on Tuesday before turning lower.  We are not suggesting
new bullish positions in FDX until it trades back above the $82
level. Conservative traders may want to exit now just to keep
losses at a minimum.

Picked on July 20 at $ 82.81
Change since picked:  - 2.35
Earnings Date       06/23/04 (confirmed)
Average Daily Volume:    1.1 million
Chart =


Hughes Supply - HUG - close: 59.81 change: +0.91 stop: 57.00

Believe it or not we're not that happy with HUG's 1.5 percent
rally today.  The Industrial average surged 123 points and HUG
still couldn't close over resistance at the $60 mark.  We're
still suggesting that readers look for a confident close over the
$60 mark before considering new positions.  No change in our stop
loss at $57.00.

Picked on July 15 at $ 60.51
Change since picked:  - 0.69
Earnings Date       08/24/04 (unconfirmed)
Average Daily Volume:    288 thousand
Chart =


Symantec - SYMC - close: 44.91 change: +1.88 stop: 41.45

Company Description:
Symantec is the global leader in information security providing a
broad range of software, appliances and services designed to help
individuals, small and mid-sized businesses, and large
enterprises secure and manage their IT infrastructure. Symantec's
Norton brand of products is the worldwide leader in consumer
security and problem-solving solutions. Headquartered in
Cupertino, Calif., Symantec has operations in more than 35
countries. (source: company press release)

Why We Like It:
Last week SYMC reported Q2 earnings and beat estimates by 3 cents
per share.  The stock had been basing long support near the $40
level and its simple 200-dma.  After the earnings report the
short-term trend in SYMC turned bullish.  There has been some
volatility but the new trend is underway and SYMC is now trading
over short-term resistance at $44 and its simple 50-dma.  We feel
that the latest round of Internet worms/viruses that have spawned
again in the last few days will keep investor interest focused on
SYMC.  Today's rally tested the $45 level and its 100-dma but it
also produced a new triple-top breakout buy signal on its P&F
chart, which now points to a $54 target.

We would suggest bullish positions here or on a dip back toward
the $44 level.  We're going to start the play with a stop loss at
$41.45 and a 49.50 target.

Suggested Options:
We like the August and September calls, specifically the $40 and
$45 strikes.

BUY CALL AUG 40 SYQ-HH OI= 6367 Current Ask $5.20
BUY CALL AUG 45 SYQ-HI OI= 8385 Current Ask $1.55
BUY CALL SEP 45 SYQ-II OI=  764 Current Ask $2.35

Annotated chart:

Picked on July 27 at $ 44.91
Change since picked:  + 0.00
Earnings Date       07/21/04 (confirmed)
Average Daily Volume:    5.4 million
Chart =


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Cephalon - CEPH - close: 50.00 change: +1.27 stop: 52.01

The slow consolidation lower continued on Monday but Tuesday's
market-wide rally prompted some oversold bounce buying in the BTK
biotech index (+2.87 percent).  Shares of CEPH followed the BTK
higher with a 2.6 percent climb.  What disturbs us is the close
right at the $50.00 support/resistance mark.  Thus far CEPH has
not broken its short-term trend of lower highs but it came very
close to doing so today.  Technical traders will also note the
bullish uptick in the short-term technials and the hint of a buy
signal in the MACD.  We feel these are mainly due to CEPH's
oversold condition.  Today's rally could prove to be a new
shorting opportunity but we'd suggest waiting for a drop back
through $49.00.  We're going to leave our stop loss at $52.01 for
now but more conservative traders could take it down a notch to

Picked on July 15 at $ 49.87
Change since picked:  + 0.13
Earnings Date       08/03/04 (confirmed)
Average Daily Volume:    969 thousand
Chart =


EchoStar Comm. - DISH - close: 28.43 chg: -0.12 stop: 29.55

Good news for the bears in DISH.  Last week's rally on SBC's
earnings report has failed to breakout over resistance at the 21-
dma.  What makes today's decline significant is how DISH failed
to participate in the market-wide rally.  The early morning drop
did manage to bounce but began to fade again into the afternoon.
This looks like a new entry point for bearish positions.

Picked on July 09th at $28.99
Change since picked:   - 0.56
Earnings Date        08/11/04 (unconfirmed)
Average Daily Volume =    2.5 mln
Chart =


Goldman Sachs - GS - close: 88.79 change: +1.76 stop: 91.51

We suggest bears turn cautious in GS immediately.  The stock's
short-term technicals are starting to point higher and its MACD
is close to producing a new buy signal.  Likewise the XBD broker-
dealer index is trying to rally and is poised just under
resistance at the 120 level.  Should the XBD close over 120 we
may exit our play in GS.  Likewise if GS closes over the $90.00
mark we'll probably consider exiting our play as well.

Picked on July 15 at $ 87.25
Change since picked:  + 1.54
Earnings Date       06/22/04 (confirmed)
Average Daily Volume:    4.0 million
Chart =


Intl Business Mach - IBM - cls: 85.88 chg: +0.79 stop: 86.51

It should be no surprise that on a day when tech stocks are in
rebound mode we see IBM bounce back above its 21-dma.  The stock
tried to rally past minor resistance in the $86.50 region but
couldn't and slipped back under the $86 level by the close.
Currently we remain un-triggered and continue to wait for IBM to
fall out of its bear-flag pattern and hit our trigger to go short
at $83.99.  IF IBM can close above $87.00 we may abandon this
play unopened.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked:  - 0.00
Earnings Date       07/16/04 (confirmed)
Average Daily Volume:    5.2 million
Chart =


Magna Intl - MGA - close: 80.05 change: -0.12 stop: 83.01*new*

So far so good.  MGA has slipped under support at the $80.00 mark
and the simple 200-dma on an intraday basis for two days in a
row.  We're encouraged that MGA failed to participate in the
market-wide rally on Tuesday.  Readers may want to consider new
positions on a failed rally at the simple 10-dma overhead or a
drop below $79.50.  We're going to lower our stop loss to $83.01.

Picked on July 15 at $ 81.53
Change since picked:  - 1.48
Earnings Date       08/05/04 (confirmed)
Average Daily Volume:    182 thousand
Chart =


Progressive - PGR - close: 75.36 chg: -0.50 stop: 78.51

Tuesday proved to be another positive day for PGR bears.  The
stock failed to rally with the markets and closed at another new
relative low.  In the MarketMonitor this morning we suggested
short-term traders consider exiting for a profit since the
suggested options have approximately doubled since we picked PGR.
We still suspect PGR may bounce from the $75 level so we
reiterate the opportunity to take at least some of your gains off
the table. We suspect that any future bounce may stall at the
simple 10-dma, which is currently trading near $77.50.  Readers
looking for new entries can wait for a failed rally or a
breakdown under $75.

Picked on July 15 at $ 79.00
Change since picked:  - 3.64
Earnings Date       07/14/04 (confirmed)
Average Daily Volume:    655 thousand
Chart =


St. Jude Medical - STJ - close: 67.32 chg: +2.14 stop: 68.50

Ouch!  STJ produced a painful bounce on Tuesday following
Monday's new low.  STJ's 3.28 percent rally completely erased
Monday's losses.  Part of STJ's rally today was due to the
broader market strength and its oversold condition but this was
boosted by news that JNJ might be making a bid to acquire rival
GDT.  Last night we lowered our stop loss to $68.50.  This may be
a tad too tight and some traders may want to inch it higher to
$68.85, just over the simple 200-dma.  We're going to leave it
where it is since the $68.00 level is short-term resistance.
More aggressive traders can leave their stop above $70.00 and
hope for a failed rally under $70 and/or its 10 & 200-dma's as a
new entry point.

Picked on July 25 at $ 66.75
Change since picked:  + 0.57
Earnings Date       07/21/04 (confirmed)
Average Daily Volume:    1.2 million
Chart =




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The Option Investor Newsletter                  Tuesday 07-27-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Watch List: Internets to Oil
Spreads & Straddles: Strategy Selection: Part II


Internets to Oil.


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.

Yahoo! Inc - YHOO - close: 30.00 change: +1.79

WHAT TO WATCH: Shares of YHOO surged more than 6% today as
investors pondered the upcoming Google (GOOG) IPO, which is
expected to be priced in the $100-135 range.  This could have
traders looking at YHOO at $28 and thinking maybe YHOO is
undervalued.  Short-term technicals on YHOO are turning positive
and its MACD indicator is hinting at a new buy signal soon.  We'd
consider bullish positions on a rally past its 40-dma (31.73).



Tesoro Petroleum - TSO - close: 28.20 change: +1.00

WHAT TO WATCH: It was a good day for TSO.  The stock added 3.67%
and bounced from long-time technical support at its simple 40-
dma.  Technical traders can use this as a entry point for new
bullish positions with a tight stop under the 50-dma.  If you
prefer to see some confirmation then look for TSO to push through
the $29 level.



Research In Motion - RIMM - close: 61.20 change: +3.91

WHAT TO WATCH: It may be time for bulls to give RIMM another
look.  Yesterday the stock broke down through support at $60 and
its simple 50-dma.  Today's 6.8% rally is a strong reversal
putting RIMM back above support again.  Short-term technicals
look bullish and its MACD is hinting at a new buy signal in a few
days.  We might consider aggressive bullish positions here or on
a move above $62.50.



Valero Energy - VLO - close: 73.29 change: +0.92

WHAT TO WATCH: With crude oil prices hitting $42 a barrel on an
intraday basis you might expected refiners like VLO to turn in a
better session.  In reality VLO dipped to $70.76 near the open
and then proceeded to climb throughout the session.  Optimistic
traders might consider today's session a rebound from support at
$70.00 and its simple 50-dma - a technical level where VLO has
been bouncing for months.  While we might be tempted to consider
aggressive bullish plays here VLO does have earnings to report on
July 29th so we'll wait and watch.


RADAR SCREEN - more stocks to watch

NKE $70.75 +0.79 - We're keeping NKE on the Radar screen.  The
stock almost produced a bullish engulfing candlestick and at the
bottom of a descending trend these candles can be one-day
reversal signals.  Not to mention the stock is back above $70.


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Strategy Selection: Part II
By Ray Cummins

Now that you understand vertical spreads, we'll review a popular
directional strategy that has additional upside potential and
also benefits from the sale of short-term options.

Spread Strategies - Spread Basics

The options market offers a number of tools and techniques that
can help the astute trader construct a powerful portfolio; one
which possesses a high degree of safety with consistent returns.
Through the use of combinations, the trader has a vehicle to
pursue a wide variety of strategies.  The complete option player
can profit with bullish and bearish plays in situations that
dictate either aggressive or conservative positions.  With an
understanding of the risk-reward relationships between long and
short options at different prices in varying time periods, he can
benefit from the most advanced techniques available in the market.

The majority of traders utilize spreads to reduce the cost and the
risk of option ownership.  They construct combination plays with
partially offsetting option positions to reduce the potential for
capital loss.  Spreads can be designed to generate return diagrams
of almost any character but unfortunately, the fundamental benefit
of this type of trading is also its downfall; the potential gains
are limited.  The most popular types of combination positions are:

Vertical (price) spreads - the purchase of an option at one strike
price and the sale of another option with a different strike price.
The potential profit in this strategy is based solely on a correct
forecast of the direction of the market.

Horizontal (time) spreads - the purchase of an option with one
expiration month and the sale of another option with a different
expiration month.  This type of spread benefits from the faster
decay in the time value of the short-term option.

Horizontal Spread

On Sunday we reviewed vertical spreads, so now we will discuss
another conservative combination position; the horizontal, or
calendar spread.  This type of spread benefits from the rate of
decay in the time value of the short-term option.  Also commonly
known as a time spread, the position involves the purchase of an
option with one expiration date and the sale of another option
with the same strike price but a different expiration date.  A
calendar spread that is established when the stock is at or near
the strike price of the target options is a neutral spread and
the position will earn a profit if the stock remains relatively
unchanged until the near-term option expires.

It is important to understand how a calendar spread profits from
the passage of time.  When opening a horizontal (time) spread, a
long-term option is purchased and a short-term option is sold.
Both options have the same exercise price, thus they have the
same intrinsic value.  Regardless of the movement of the stock,
time value will always be less in the near-term option.  As long
as the underlying stock price remains relatively close to the
exercise price, the value of the spread will be determined by the
time "premium" of each option.  When the position is closed at
expiration, the remaining time value in the short-term option
will be very low relative to that of the long-term option.

Horizontal Spread (Time Erosion) Example:

ABC Stock Price = $10.00

1  month  $10 call option = $1.00
4  month  $10 call option = $2.00
9  month  $10 call option = $3.00
16 month  $10 call option = $4.00


Buy  16-month call option for $4.00
Sell  1-month call option for $1.00
Cost basis = $3.00

Outcome After 1 Month - ABC Stock Price Unchanged ($10):

One month call option     = $0.00
Three month call option   = $1.73
Eight month call option   = $2.82
Fifteen month call option = $3.87

Position Profit = $0.87 on $3.00 invested (with no movement in
the underlying).

To the average trader, it would appear this technique couldn't
lose.  One would simply buy the longer-term option and sell the
shorter-term option.  As both time values decayed, the position
would gain value.  In reality, it's rarely that easy because the
stock does not remain constant and since the profitability of
this spread is determined by the relative behavior of time-value
decay in each of the option positions, it is important for the
underlying issue to remain near the strike price; where time
value premium is theoretically the highest.  If the stock price
is at a high or low extreme, the time value of both options will
be relatively small and the position will likely incur a loss;
the remaining credit will be less than the opening debit.  One
way to reduce the negative effects of a volatile stock is to
open the play at least four to six months before the near-term
option expires, capitalizing on the ability to write a second
(third, fourth, etc.) position against the longer-term option.
Writing near-term contracts against the long options helps
reduce the overall cost of the position as each short-term
option expires.

Ideally, the trader would like to have the stock finish slightly
below the sold strike when the near-term option expires but if
the short-term position is "in-the-money" on the last day of the
strike period, you must buy it back so that you don't have to
exercise the long-term options to cover your obligation; that
would defeat the purpose of the strategy.  Of course, there is
always a risk of early exercise in a calendar spread, especially
when the sold (short) option is "in-the-money."  The degree of
risk depends on which options are bought (sold) and the distance
to the underlying stock price.  The greater the time value in the
sold option, the lower the probability of it being exercised.  If
an early assignment occurs, a trader can fulfill the obligation
by simply purchasing the underlying stock or an offsetting option
position.  The important issue is to be notified by the broker in
a timely manner, so that appropriate action can be taken before
the stock price changes significantly.

Diagonal Spread

The diagonal spread is a combination of price and time spreads.
The most common version of this strategy requires the purchase of
a long-term call and the sale of a short-term call at a higher
strike price.  In most cases, the initial debit of the position
should be less than the spread between the two options, removing
the possibility of loss in an upside break-out.  The advantage of
this strategy is the cost basis of the long position is reduced
by the sale of the short-term option.  The spread achieves maximum
profit (at expiration) if the stock price remains above the sold
option's strike price.  In addition, the spread can profit (before
expiration) if the underlying issue advances significantly in a
short period after the play is opened.

In many cases, a diagonal position offers a big improvement over
the standard price spread.  If the stock price remains relatively
unchanged or falls slightly, the long option will retain more value
because of its extended maturity.  If the near-term (sold) option
expires, the position can be reestablished with the sale of a new
option.  If the long option is current month, the position can be
converted to a normal price spread.  Once again, if the underlying
issue rises above the sold (short) strike price, the spread will be
profitable.  With longer-term options, the character of the spread
can be adjusted to match the outlook of the underlying issue.  A
neutral or bearish position can be established with the sale of an
ATM option or the original spread can be duplicated (at a lower
cost basis) with the sale of a new OTM option.  In either scenario,
the long-term diagonal spread benefits from the sale of additional
options throughout the life of the (long) position.

Using the Strategy

The majority of advantages in a diagonal spread are obvious but
there is one characteristic that traders overlook.  In a vertical
spread, if the stock advances substantially and the options trade
at parity, the maximum potential profit will be limited to the
difference between the strike prices.  With a diagonal spread,
the long option has more time premium, so when the underlying
issue trades near the strike price at expiration, the value of
the spread will grow beyond the theoretical profit range.  This
effect is obvious when you examine the maximum profit potential
(without adjustment), which occurs at the strike price of the
sold option.  In short, a diagonal spread generally outperforms
a vertical spread with similar strike prices, even without the
sale of new (short-term) options.

As I mentioned previously, an understanding of relative value and
implied volatility in option pricing is necessary to increase the
probability of profit in this strategy.  When opening or adjusting
any type of spread, it's important to take advantage of the highest
relative premium to create the best possible position.  The use of
option pricing disparities in spread construction is also paramount
and traders should strive to initiate new positions when there is a
disparity in quoted prices that will result in a theoretical edge,
or "discount" in the spread.

A Worthwhile Approach

The great feature of options is they can be used in a number of
ingenious ways to create the most appropriate position for the
current market outlook and your personal risk-reward attitude.
The right combination of puts and calls can produce an effective
position with results that are similar to being long or short on
the underlying stock, with less expense, and "premium" from the
sale of near-term options can be used to help pay for the spread.
This approach also has the potential for unlimited gains over the
long term, thus providing an opportunity (one you don't have with
vertical spreads alone) to overcome a number of losing plays.  As
with any trading strategy, it's important to thoroughly explore
the various outcomes and potential risk, so you can comfortably
execute the technique to its fullest potential.

Good Luck!

P.S. I'll be home from my family vacation later this week, so look
for a new group of conservative candidates for spread and "premium
selling" strategies in the Sunday edition of the OIN.







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