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Daily Newsletter, Monday, 08/02/2004

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The Option Investor Newsletter                   Monday 08-02-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Still bullish but willing to so bearish if I need to
Futures Wrap: See Note
Index Trader Wrap: Alert, but no sign of fear
Traders Corner: Never Fool with Mother TRIN


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     08-02-2004            High     Low     Volume Advance/Decline
DJIA    10179.16 + 39.45 10203.56 10101.36 1.53 bln   1621/1148
NASDAQ   1892.09 +  4.73  1893.13  1869.66 1.50 bln   1318/1801
S&P 100   540.41 +  2.74   541.49   535.22   Totals   2939/2949
S&P 500  1106.62 +  4.90  1108.60  1097.34
RUS 2000  551.93 +  0.64   551.93   544.40
DJ TRANS 3134.15 + 22.46  3135.35  3089.75
VIX        15.37 +  0.05    16.58    15.22
VXO        14.67 -  0.73    16.16    14.58
VXN        24.13 +  0.82    25.26    23.97
Total Volume 3,335M
Total UpVol  1,868M
Total DnVol  1,376M
52wk Highs     131
52wk Lows      171
TRIN          0.92
PUT/CALL      0.79
*******************************************************************

Still bullish but willing to so bearish if I need to
Jane Fox

Yesterday Homeland Security Secretary Tom Ridge raised the threat
alert to "orange," or high, for areas of New York City, northern
New Jersey and Washington because new intelligence pointed to Al
Qaeda terrorists targeting Wall Street and international
financial institutions. Yesterday's warning represented the first
time the color code was raised in a specific area for specific
institutions. The impact on the markets this morning however, was
surprisingly muted. Buyers were skittish from the get go but
sellers were not able to get a good foothold either. As the day
progressed, however, buy programs took over and pushed the
markets back to daily highs.

In other news, nearly eight months after taking the helm at the
NYSE, CEO John Thain, has put together a proposal to allow more
electronic trading, replacing the tradition-bound auction method,
known as the open-outcry system. Mr. Thain's proposal is a hybrid
that marries the benefits of the human-based system, which helps
minimize price volatility, with the convenience of sophisticated
technology. Needless to say Mr. Train is not too popular among
specialists, the people who keep the market flowing by using
their own cash to buy and sell shares when trading slows. The
more shares traded electronically the less profit for the
specialists. One specialist, Peter Murphy, head of Bear Stearns's
floor specialists unit was quoted as saying "What's the point of
being down there with capital if we can't use it?"

Fears of further disruptions in supply from Iraq and Russia on
top of the new terror warnings drove September crude up to the
highest price since oil futures began trading in New York 21
years ago. Crude Oil prices are nearly 35% higher than they were
a year ago.


Economic reports

June's Institute for Supply Management showed factory activity
continued to expand in the U.S. last month. The ISM rose to 62.0
from 61.1 in June whereas economists had expected a reading of
61.6. The survey found new orders and production jumped as
inflation pressures slowed but remained high while hiring slowed
slightly. Any reading above 50 indicates expansion and overall
readings in the survey have been above 60 for 15 months -- the
longest stretch since the 12-month period between July 1972 and
June 1973. An extended reading of 62.0 is consistent with a 7%
annualized increase in the U.S. gross domestic product.

The other report that hit the wires this morning was Construction
Spending for the month of June. The Commerce Department said
total construction spending for June fell 0.3%, the first decline
since January. Economists' expectations were for no change.

Earnings

Procter & Gamble Co.'s (PG), the maker of Tide detergent, Crest
toothpaste and Pampers diapers, saw fiscal fourth-quarter
earnings grow 44% from a year-earlier period. Company officials
say the figure included restructuring charges, as sales and unit
volume both saw double-digit gains. PG closed up +$1.19.

Edison International (EIX) reported a net loss of $374 million,
or $1.13 a share including a $610 million loss from the Edison
Mission Energy largely due to the termination of a big power-
supply contract in the U.S. The Edison Mission loss was partly
offset by $242 million of income from the #2 investor-owned
utility in California, Southern California Edison.  EIX closed
down -$0.75.

Shares of Corinthian Colleges (COCO) stumbled after announcing
its revenue and earnings for the fiscal fourth quarter and the
year would fall below its previous forecasts. Harris Nesbitt,
Bear Stearns and J.P. Morgan all downgraded the company's stock
saying they were  "completely shocked by the magnitude by which
the company has lowered guidance." Corinthian blamed the
shortfall on higher costs related to marketing and advertising
and negative publicity surrounding a series of lawsuits filed by
former students in Florida. COCO fell 43% today bringing
competitors down with it and COCO closed down -$8.42.

Reynolds American Inc. (RAI) reported net income for the quarter
at R.J. Reynolds rose to $151 million or $1.77 a share, from $70
million, or 83 cents a share. The 2nd quarter net income nearly
doubling was due to a net restructuring charge adjustment of $9
million, while the year-earlier net included a $55 million
restructuring charge.

RAI was formed on July 30 after R.J. Reynolds Tobacco Holdings
and British American Tobacco combined their U.S. tobacco
businesses. It reported the results of R.J. Reynolds as a separate entity.

Annotated Daily Chart of the NYA :



In my wrap on July 28th I noted that NYA was the strongest market
and it continues to be so. I also showed a reverse head and
shoulders that continues to play out. Of course, this is not a
valid formation until the neckline is broken and even then I
would like to see a retest of the neckline just to make sure.

Annotated Daily Chart of the SOX:



The SOX has not yet broken above the swing high at 430 but is
closer today than it was when I talked about it on July 28th. The
MACD has definitely made a bullish cross giving the bulls just a
little more encouragement. I also still see the SOX reaching the
top of the regression channel at 467 before finding too much
resistance.

Annotated Daily Chart of the Nasdaq:



Like the SOX I see a bounce to 2000, the top of regression
channel, as doable but it needs to get past the swing high at
1933 first.

This is a hard chart to decipher because the higher high on July
30th failed and I cannot turn bullish here until I see this
market proving it to me. That proof would be in the form of a
break of the swing high at 1933 and then a higher low. Of course
this scenario will take days but if the last swing low is taken
out then all bullish bets are off.


Annotated Daily Chart of the SPX:



Is the SPX making a double bottom or a reverse Head and
Shoulders? You know it really doesn't matter because both are
bullish and both will require SPX to break above 1146 to prove
them. I really like the MACD cross but I just wish it were making
a higher low like price.


Annotated Daily Chart of the Dow:



You could ask the same question of the DOW - is it making a
reverse head and shoulders or a double bottom? And once again it
doesn't matter because both will need to be proven valid by a
trade above 10487. I am more encouraged by this chart because of
the MACD making a higher low along with price.


Annotated Daily Chart of the Russell 2000:



There is no question that the RUT is making a double bottom that
is supported by a MACD making a higher low. This double bottom
will need to prove itself with a trade above 591.5, a long ways
off.


After-hours developments

Shares of Priceline.com Inc. (PCLN) fell in after hours trade
after the closing bell after it said it expects third-quarter
earnings to come in below the Wall Street consensus. PCLN said it
expected current quarter adjusted income of 25 cents to 30 cents
a share, compared with the Wall Street average estimate of 31
cents.

Shares of Macrovision Corp. (MVSN) rose in after hours trade
after the company said a 22% rise in revenue helped drive second-
quarter profits sharply higher from a year earlier.

Tomorrows Earnings and Economic Releases

Tomorrow will see an 8:30AM ET Bureau of Economic Analysis'
release of Personal Spending and Personal Income. Income is
expected to be up 0.3% and spending even at 0.0%.

Companies releasing earnings tomorrow include Before the Open:
AMED CZN COH CMLS DVA EMR ETM EOG EOP EQR EXPD HNT MSO MLM MBI
MRCY MHX PRXL PDX PFGC PER PCG PL Q SRZ SPN THC TEVA TKTX TYC VSH
WPI WCI OATS. After the Close: ALO BRKR CEPH CKFR EDMC IMDC IACI
JILL PCTI PDLI PRU TALK UPCS VCLK VRSO.

Outlook

I am still bullish and as long as the charts I have shown above
hold up I will remain bullish but I am also very willing to turn
bearish again if I see the markets deteriorating.

Jane Fox


************
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


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

Alert, but no sign of fear

Investors shrugged off morning jitters with blue chips extending
their winning streak to five sessions after The Department of
Homeland Security raised the terror alert level on Sunday to
"orange," or high, for New York City, northern New Jersey and
Washington, D.C..

Market Snapshot / Internals - 08/02/04 Close



Internals began to show some stability after today's 10:00 AM EDT
release of economic data.  While inline with economists'
forecast, the July ISM purchasing manager's index showed modest
improvement from June's 61.1 reading at 62.0, echoing both the
gains from the regional New York Empire and Chicago PMI rebounds
in July.

The NYSE A/D line turned positive just after 01:00 PM EDT, where
perhaps a good fight from some of the "generals" helped bring in
some buyers of 4 and 5-lettered stocks at the NASDAQ.  From more
"oversold" levels below 30%, the NASDAQ's 10-day NH/NL ratio
threatens to reverse up into a column of "X" at 22%, while it
would currently take a 54% reading for the NYSE 10-day NH/NL
ratio to turn back higher.

S&P 100 Index (OEX.X) - Daily Intervals



The S&P Retail Index (RLX.X) 385.33 +0.41% managed to close above
its 21-day SMA (384.52), but didn't see a test of its rounding
flat 200-day SMA (387.08).  OEX heavyweights, retail
heavyweights, and Dow components Wal-Mart (NYSE:WMT) $53.18
+0.32% and Home Depot (NYSE:HD) $34.03 +0.91% looked to provide
some mid-session leadership, but faded from respective highs of
$53.73 and $34.22 later in the session.

Pivot Analysis Matrix -



The S&P Banks Index (BIX.X) 351.31 +0.73% spent the first half of
today's session below its MONTHLY Pivot, finding support from a
rising 50-day SMA.  As the clock struck 01:05 PM the banks made
their move above MONTHLY Pivot and Friday's close, with the
broader S&P 500 Index (SPX.X) following 5-minutes later above
1,102.00 as some "blue coated bulls" joined their generals for the
push higher to the close.

"The Generals" - 33-most heavily weighted OEX components



Note: * denotes a Dow Industrials (INDU) component.

The "generals" were able to rally some of their troops and lead
the major indices to fractional gains where 29 of the 33-most
heavily weighted OEX components found gains on the session.

Jeff Bailey


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

Never Fool with Mother TRIN
Jane Fox

Master trader, Linda Raschke was recently quoted in an interview
as saying: "TRIN is a VERY important indicator...Today the Trin
has stayed low all morning... between .55 and .60 in general...
no selling coming in...  could see a low TRIN from the get go
this morning and it was staying low."

I used to watch the TRIN but I didn’t how to use it in my daily
trading. I didn't know what the different levels meant. Was a low
TRIN good? Was a high TRIN bad? So I decided to go find out.

The TRIN measures the internal strength or weakness of the market
by comparing the advance-decline ratio to the up-down volume
ratio. It can be used to help gauge the upside or downside
momentum of the market, as well as signal potential overbought
and oversold markets when it reaches an extreme low or high
level.

The TRIN was developed by Richard Arms in 1967 to indicate when
abnormally high volume is accompanying either advancing or
declining stocks. The index is based on the assumption that
volume tends to swing in the direction of market sentiment. If we
are in a bullish atmosphere, volume will tend to be
proportionately higher in the stocks that are going up. If the
bears are in control, the volume will tend to be proportionately
heavier in those stocks that are declining.

The index is effective because it very simply, with a single
number, answers the question, "Are the up stocks getting more
than their share of the volume?" If they are, it is a bullish
sign, which is signaled by an index that is less than 1.00. If
they are not, a bearish sign, the reading is over 1.00. Mr. Arms
has been quoted as saying, "It would have been logical to invert
this calculation when I first invented it, so that low numbers
would reflect weakness and high numbers would reflect strength,
but I never thought that the index would become so popular, and
by the time I came to the realization that I should invert the
numbers, the calculation had become so accepted and entrenched
that it was too late. Therefore, we are stuck with the values
that say "big is bad and little is good."

Most references to the TRIN are based on the NYSE stocks but you
can calculate it for the NASDAQ also as long as you have the
advancing/declining issues and volume. My quote service gives me
the TRIN for NYSE and NASDAQ stocks so I follow both. If your
quote service does not give a TRIN you can calculate it yourself,
intraday or daily.

Here is the formula:

ADVANCING ISSUES/DECLINING ISSUES
ADVANCING VOLUME/DECLINING VOLUME

A TRIN of 1 is considered neutral because the ratio of advancing
issues to declining issues is the same as the ratio of up volume
to down volume. Let's look at some examples:


1400/1400 = 1 = 1
200/200     1


2000/500 = 4 = 1
400/100    4

The ratio of adv/dec volume matches the ratio of adv/dec issues.
We are neutral, selling or buying is not concentrated in the
either the advancers or decliners.


1000/1600 = .625 = 2.5
100/400     .25

Significant portion of the volume is concentrated in the
declining issues - bearish.

1200/1000 = 1.2 = 1.79
200/300     .67

Advancers may be outpacing the decliners but volume is
concentrated in the decliners - bearish.

1600/1000 = 1.6 = 0.4
400/100      4

Significant portion of volume is concentrated in the advancing
issues - bullish

1400/1400 = 1 = 0.25
400/100     4

Advancing and declining issues are balanced but more volume is
flowing into the advancers - bullish.

The Index shows where volume is flowing, into advancing or
declining stocks. If more volume is flowing into advancing stocks
than declining stocks, the TRIN will be less than 1.0; if more
volume is flowing into declining stocks, the Index will be
greater than 1.0.

On a daily basis, the choppiness of the TRIN, necessitates the
need to use a 10 period moving average to smooth out the
oscillations and better reveal the underlying momentum.

One of Arm's TRIN interpretations is that the market is
overbought when the 10-day TRIN moving average falls below 0.8
and oversold when above the 1.2 level. I have drawn in the 0.8
and 1.2 levels for you.





I have "whited out" the TRIN and just left the MA so it may seem
a bit spotty but I think it helps to see the pattern better. As
you can see the 10-day TRIN is telling us the market has been
oversold most of the year and only overbought twice.

The TRIN can also be used in conjunction with the TICK indicator
for intraday trading. TICK measures the difference between the
number of stocks trading on an uptick versus the number trading
on a downtick. The TICK is a minute-by-minute version of the
daily advance-decline line and is used for the same purpose. When
combining the two during the day, a rising TICK indicator and a
falling TRIN are positive, while a falling TICK and a rising TRIN
are negative.

TRIN readings should be interpreted in the context of the market
trend. For example, in strong bullish trends the TRIN may be
exceptionally low and remain that way for quite a long time.
Similar to the way oscillators like the Relative Strength Index
or Stochastics can remain overbought or oversold for extended
periods of time. Accordingly, such readings may not necessarily
be the indication of an overbought market but rather one that is
exhibiting strong upside momentum.

The TRIN is without a doubt the best internal indicator there is
and you should always be watching it whether a day trader or
longer term investor. My motto is "Never Fool with Mother TRIN."

Another thing to remember is that the TRIN, as with all other
indicators should never be used in isolation. It is to be used
with the rest of your arsenal of indicators that help you
determine the market bias.

Remember plan your trade and trade your plan.

Jane


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The Option Investor Newsletter                   Monday 08-02-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Leaps Update: From Sunday’s Leap Section
Stop Loss Updates: CEPH, MGA
Dropped Calls: None
Dropped Puts: DISH
Watch List: Defense to Financials and more!


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************
LEAPS UPDATE
************

Leap Update - The Sunday newsletter listed the wrong
symbols for the Russell Ishares put play. The Russell
2000 Values Index Ishares (IWN) was listed instead
of the Russell 2000 Index Ishares (IWM). Here is the
corrected play description. The IWN play had the
same risk/reward profile and would be the same play
just on a different symbol. This update corrects the
symbol to IWM.


Russell 2000 - 551.29

The Russell 2000 has rebounded from the edge of the
cliff over the last several days from a low of 531 to
Friday's close at 551. There is very strong resistance
just above us at 565 and I believe strongly that the
Russell will not make it over that level in the coming
week.

Small caps are typically the weakest link in the fall
months because of liquidity concerns. Funds want to
be in the big caps or cash while waiting for the
Sept/Oct dips. This is their best buying opportunity
and this year should be no different. In fact with
the event risk this year it could be a very good
buying opportunity.

I profiled this play in the Editors Plays section
this week and liked it so much I thought readers of
this section would benefit from it as well.

The Russell options are too expensive for pure
speculation plays so we are going to focus on the
Ishares (IWM) The Russell closed at 551 on Friday
an the IWM at 109. It trades at about 1/5 of the
Russell value.

The Russell has strong resistance at 563-565 which
corresponds to 112-113 on the IWM.

Because LEAP traders are used to paying a little
more for options we are going to use the Nov-106
Put IWT-WB at $4.20. You might get it a little
cheaper on Monday if the market manages to break
upside resistance for a change. Resistance on the
IWN is 112-113 and we closed at 110.

If you are feeling aggressive I would buy the Nov
$115 puts for $8.40, already 5.00 in the money
and increase your delta on this play. The more
you spend the more you risk because the delta
cuts both ways on an in the money option.

I do expect a continued rebound on Monday/Tuesday
and the closer we can get to the 113 resistance
the better the price on the put. I am not going
to put a trigger on this and leave it up to you
on when to enter. I plan on buying this option
myself so I will use my price for the entry and
I am targeting 112 for the entry but that could
change.

The target on the play is $105 and the May lows. The
low for last week was $105.71. Obviously if the target
is hit it would be a very profitable trade.

Considering the potential for a terrorist event over
the next 45 days I think this is a very low risk trade.
Whether the event happens or not we could still see
the Russell sink on worry alone.

BUY Nov $106 IWM Put IWT-WB (Closing price $4.20)

Stop loss = IWM $115
Profit target = IWM $105

IWM Chart



Russell Chart




*****************
STOP-LOSS UPDATES
*****************

CEPH - put play -
 Remember that CEPH announces earnings tomorrow (Tuesday)
 after the closing bell.   We are going to close the play before
 Tuesday's closing bell.

---

MGA - put play -
 We are also going to exit the MGA put play on Wednesday
 ahead of its earnings on Thursday.  That's assuming we aren't
 stopped out first.  The bounce toay from the $80 region is
 starting to look like a short-term bottom.  Conservative traders
 may want to exit now!


*************
DROPPED CALLS
*************

None


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************
DROPPED PUTS
************

EchoStar Comm. - DISH - close: 28.64 chg: +0.92 stop: 29.05

Surprise!  Shares of DISH surged higher on Monday hitting $29.54
intraday before slipping back to close under technical resistance
at its 21-dma.  The move was unexpected and without a catalyst
unless you consider the news from Cox Communications (COX).  The
family that owns the majority of COX announced a $7.9 billion
buyout offer to take the company public.  Shares of COX soared
more than 20 percent and lifted the rest of the sector with it.
We have been stopped out in DISH at $29.05 for a small loss.

Picked on July 09th at $28.99
Change since picked:   - 0.35
Earnings Date        08/10/04 (confirmed)
Average Daily Volume =    2.5 mln
Chart =



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Financial global presence and the convenience of one group for
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success.

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

Defense to Financials 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.
___________________________________________________________________


General Dynamics - GD - close: 100.03 change: +1.21

WHAT TO WATCH: The DFI defense index has been a strong performer
the past several days and the sector is challenging resistance at
770.  A breakout would put the group at new all-time highs.  We
think GD might be a way to play the group.  Shares of GD once
again broke through psychological round-number resistance at $100
today.  Unfortunately, GD has been flirting with this level for
weeks.  We suggest bulls look for a breakout over the $102 mark
to consider new positions.  A move over $102 would not only
produce a bear trap on its P&F chart but a new triple-top
breakout buy signal.

Chart=


---

Golden West Financial - GDW - close: 108.16 change: +1.25

WHAT TO WATCH: Financial stocks turned in a decent performance on
Monday in spite of the Sunday terror warning.  We're intrigued by
the small rally in GDW, which is trying to breakout above its
short-term trend of lower highs.  We'd consider bullish positions
in GDW if it can breakout over the $110 level.  Its P&F chart is
bullish and points to a $129 price target.

Chart=


---

Lehman Brothers - LEH - close: 70.46 change: +0.36

WHAT TO WATCH: The brokers are really trying to put in a bottom
but the XBD index is struggling with resistance at the 120 level.
Meanwhile LEH is producing a nice short-term trend of higher lows
and today's small gain puts it back above the $70.00 mark and its
simple 10 and 21-dma's.  The overall trend is still bearish and
the P&F chart is still in a sell signal but LEH has already
exceeded its bearish price target.  More aggressive traders might
want to keep LEH and some of the broker-dealers on their watch
list for a more confident rebound.

Chart=


---

eBay Inc - EBAY - close: 79.15 change: +0.82

WHAT TO WATCH: The oversold bounce in the INX Internet index is
still in progress albeit it is slowing somewhat.  Bulls will note
that its MACD has finally produced a new "buy" signal.  Getting
more specific we noticed a similar trend in EBAY who's MACD has
just crossed into a bullish signal.  Bulls can watch EBAY for a
breakout over resistance at $80.00 and its simple 100-dma.  It is
noteworthy that EBAY's P&F chart has already reversed into a new
buy signal with a $93 target.

Chart=



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

JBHT $39.25 +0.84 - Transports are doing pretty well today
despite the rise in crude oil prices.  JBHT is nearing resistance
at the $39.50-40.00 level.  This is a crucial test.  If it fails
bears will see this as a double top.

WFMI $80.79 -1.53 - The oversold bounce in WFMI is failing at its
simple 100-dma.  Yet shares held on to round-number
support/resistance at the $80.00 mark today.

ZBRA $83.18 +0.55 - ZBRA is still looking strong but is nearing
short-term resistance at $84.00.


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price is $129.95 which is $20 off the monthly rate.

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.

To subscribe you mar go to our website at

www.OptionInvestor.com

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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DISCLAIMER

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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Option Investor Inc
PO Box 630350
Littleton, CO 80163

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