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Daily Newsletter, Wednesday, 08/04/2004

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The Option Investor Newsletter                Wednesday 08-04-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: How Crude!
Futures Wrap: See Note
Index Trader Wrap: At what price does oil need to decline, for stocks
    to bid?


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     08-04-2004            High     Low     Volume Advance/Decline
DJIA    10126.51 +  6.27 10162.42 10068.11 1.64 bln   1334/1464
NASDAQ   1855.06 -  4.36  1864.80  1842.20 1.64 bln   1350/1665
S&P 100   538.49 +  0.57   540.29   535.31   Totals   2684/3129
S&P 500  1098.63 -  1.06  1102.45  1092.44
RUS 2000  546.07 -  0.96   546.07   536.52
DJ TRANS 3119.47 -  1.07  3134.20  3083.84
VIX        16.21 +  0.18    16.65    15.82
VXO        15.55 +  0.34    16.41    15.17
VXN        25.05 -  0.03    25.65    24.63
Total Volume 3,594M
Total UpVol  1,534M
Total DnVol  2,020M
52wk Highs      89
52wk Lows      249
TRIN          1.31
PUT/CALL      0.92
*******************************************************************

How Crude!
Linda Piazza

Markets again waffled around near support Wednesday, refusing to
break out in either direction.  Daily candlestick charts show
many indices producing high-wave candles, candles with small
bodies but long upper and lower shadows.  They're indicative of
indecision.  Volume patterns echoed that indecision, at least on
the NYSE, with advancing and declining issues closely matched.
The Nasdaq saw more decliners than advancers by a 14:17 adv:dec
ratio.

An intraday chart of the OEX depicts the indecision.

Annotated 60-Minute Chart of the OEX:



Other indications of indecision appeared.  The SPX and Dow
pierced their 200-ema's and then bounced, ending the day between
their 200-ema's and 200-sma's.  The SOX pierced 400 and then
bounced, but ended the day between 400 support and 420
resistance.  The Nasdaq pierced 1850 and then bounced.  The BIX
approached its 72-ema, an average from which it's bounced seven
days out of the last 24 trading days, and bounced once again, but
couldn't close over 350, producing a high-wave doji for its day's
efforts.  The TRAN pierced its 30-dma and 3100 and bounced, but
couldn't drive over the descending trendline off the 7/01 high,
with the TRAN also producing a high-wave doji.

That indecision was all crude's fault.

Perhaps other factors played a part.  Futures succumbed to
downward pressure pre-market, and the cash markets followed
through on the opening.  Those pressures included the Nikkei
closing at a 10-week low, UBS lowering the rating of some
European chip stocks to a reduce rating, European banks reporting
lower trading revenue and warning of a difficult environment for
global financial markets, as well as September crude futures
spiking to a record $44.34 a barrel in after-hours trading
Tuesday night.

In addition, although earnings season has begun to wind down,
earnings reports or warnings still impacted markets.  Late
Tuesday, fiber-optic networking equipment manufacturer Ciena
(CIEN) warned that it would not meet revenue expectations.  The
company cited cautious spending habits by its largest customers
as one reason behind the warning.  JP Morgan downgraded the stock
to an underweight rating from its previous neutral rating.  The
stock plummeted in pre-market trading and opened $0.50 below
Tuesday's $2.76 close.  It closed down 24.64 percent, at $2.08.
The news hit Cisco (CSCO), Lucent (LU) and Nortel (NT), all also
opening lower, although only NT closed lower out of those three.
The XTC, the North American Telecoms Index, opened lower and
dropped toward its 200-sma as market watchers worried about those
cautious spending habits by CIEN's largest customers.  The XTC
closed lower by 0.57 percent.

In addition, Internet commerce and TV-shopping company
InterActiveCorp (IACI) guided analysts to expect 2004 operating
income at the low end of its former forecast.  Although earnings
beat expectations, the company faces increased competition from
hotel and airline web sites.  Travel revenue dropped quarter-
over-quarter for the first time.  IACI opened at $22.30, $4.73
below Tuesday's close, and closed at $22.80, down 15.65 percent.
IACI is a component stock of the Philadelphia Internet Index,
$DOT.  That index closed lower by 1.11 percent.

Shortly after the open, attention turned to July's non-
manufacturing ISM and June's factory orders numbers, both
released at 10:00, with markets coming off their lows just ahead
of the release.  June's non-manufacturing ISM had been 59.9 and
expectations for July's number had ranged from 61.5-63.00,
depending on the source.  The Institute for Supply Management
said that July's services index rose to 64.8, a higher-than-
expected result, but the employment component fell to 50 percent
from the previous 57.4 percent.  The ISM reported that
transportation, communication, wholesale trade, utilities and
business services saw the biggest gains.  With global attention
already focused on Friday's non-farm payroll report, the loss in
the employment component now has market watchers speculating that
Friday's much-awaited number won't meet the expectation for
payrolls to rise by 235,000.

May's factory orders had declined 0.3 percent, but June's were
expected to rise from 0.55-0.9 percent, also depending on the
source.  Factory orders increased 0.7 percent, a strong result
given that was in comparison to May's unexpected revision to a
0.4 percent climb rather than the previously reported loss.
However, economists greeted the number with some disappointment
since much of the gain was due to increased orders for defense
aircraft.  Markets dropped back to retest their lows.

The release of the crude oil, gasoline, and distillate
inventories shortly after 10:00 and shortly before 11:00 may have
produced the first real bounce of the day.  As is usual, the
Department of Energy and API industry group announced disparate
figures, with the Department of Energy showing crude stocks down
1.9 million barrels, distillates up 2.1 million barrels and gas
stocks up 2.4 million barrels; and the API showing crude
inventories up 800,000 barrels, distillate stocks down 60,000
barrels, and gas stocks rising by 3.5 million barrels.  While
it's difficult for an industry outsider to reconcile the figures,
both showed rising gasoline stocks in a seasonal pattern that
shifts inventories toward gasoline production as refineries ramp
up to meet increased demand in the summer.  The API announced
that September unleaded gas had dropped 3.2 percent.  Shortly
after the API released its results, crude futures for September
delivery eased off their high.  That first easing was to precede
the completion of a H&S and a plummet through the neckline,
almost all the way to the downside target.

Annotated Ten-Minute Chart of Crude Futures:


Markets needed some hope that crude futures would ease.  Tuesday,
OPEC admitted that over the short-term period, it did not have
the capacity to further increase production.  To try to stem the
ramping up of crude prices, Saudi Arabia's Saudi Aramco announced
early Wednesday that it was starting production ahead of schedule
on the offshore Abu Safah and predominantly onshore Qatif oil
fields.  The company also announced that it would consider
delaying the shutdown of older wells. Before this morning's
developments, crude futures looked as if they would soon reach
the fabled $50.00 level.  Many suggest, however, that markets
will remain pressured until crude prices pull back significantly.

Annotated Daily Chart of Crude Futures:



With markets trading in opposition to the cost of crude,
indecision as to market direction rules here, too.  Crude futures
spent about six weeks trying to break through resistance at
$42.00, so presumably that level or some of the other levels
marked on the daily chart might now provide support.  Yet in the
past, prices tended to retreat to the 50-dma, currently at
$39.78, to regroup before rising again, so there is perhaps
vulnerability down to at least that level.  A drop that deep
would allow indices time to rise or consolidate for several days.
A bounce at $42.00 or above would ratchet up the pressure again.

Whatever caused that 10:30 bounce, rumors of a bomb explosion in
Athens may have been a precipitating cause for a stumble in the
markets.  The bomb was a homemade one targeting an electrical
substation and caused no injuries, with the information soon
forgotten despite the approaching opening of Olympic games in
Greece.  Markets moved to their highs of the day and then
retreated again into the close, producing those high-wave
candles.  Let's take a look at some of the charts.

Inconclusive oscillator action revealed indecision on the SOX's
daily chart.

Annotated Daily Chart of the SOX:



A study of intraday charts (not shown) reveal bullish divergence
as Wednesday's higher low was hit, with oscillators hitting equal
lows while price hit that higher low.  It's possible that the
divergence predicted only the bounce that has occurred.  However,
I advise watching the potential inverse H&S.  The neckline of
that formation is difficult to determine, but may currently be at
about 417.  Cautious traders should wait for a move above 420 as
confirmation of that formation, and should be aware of the OEX's
inability so far to meet the upside target after confirming its
recent inverse H&S, as depicted in the first chart in this
article.  For now, the daily SOX chart does not give us much
information about likely direction, but instead indicates that
bulls began buying the SOX stocks as the SOX hit the bottom of
that channel and its P&F downside target.  Whether the dip-buyers
will be joined by others remains to be seen.  This was a
technical level at which to buy the SOX, and some did.  That's
about the only conclusion we can reach.

Oscillator evidence remains ambiguous on the Nasdaq, too.  Dip-
buyers also stepped in at the bottom of the descending regression
channel, but the climb couldn't be called precipitous.

Annotated Daily Chart of the Nasdaq:



The Russell 2000 also bounced from a higher low today, but also
couldn't manage to turn oscillators into a more bullish mode.

Annotated Daily Chart of the Russell 2000:



Although the 200-ema is not as closely watched as the 200-sma, it
may be playing a minor part in support/resistance on the Dow,
too.  That average helped keep the Dow hovering on the midline of
the descending regression channel on the daily chart.

Annotated Daily Chart of the Dow:



The Dow's oscillators look more bullish than those on other
indices.  At the day's low, the index was moving into the top of
May's congestion zone.  Declines might slow or find support
somewhere within that zone, so that it's possible that the Dow
might try to bounce from the midline of its regression channel.
If it does, it faces a river of moving averages at historical
resistance near 10,200-10,240.

The 200-ema may also have played a part in the SPX's trading
behavior Wednesday, with the SPX ending the day between the 200-
sma and -ema.  The SPX appears to be rounding over beneath the
200-sma, but may actually be moving up in a tight ascending
regression channel.  Until proven otherwise, however, such a
tight pattern of higher highs and higher lows should be viewed as
a possible bear flag when it forms after a steep decline.

Annotated Daily Chart of the SPX:



Not only do charts present doji or high-wave candles indicative
of indecision, but some P&F and bar charts conflict, and some
indices' charts slant to the slightly bearish while some slant to
the slightly bullish. After hours, equity futures dipped slightly
with Dow futures perhaps dipping slightly more than the others,
perhaps erasing some optimism that the Dow was outperforming
other indices and would perhaps lead them higher.

After-hours developments included disappointing earnings from
United Online (UNTD) and lowered revenue guidance from Wireless
Facilities (WFII), with both plummeting in after-hours trading.
WFII also said it would restate earnings from 2000-2003, blaming
foreign taxes for the need to do so.  WFII supplies services and
equipment for the wireless industry.  Biotech ICOS (ICOS) dropped
in after-hours trading after it announced a less-than-expected Q2
loss but also less-than-expected revenues.  Those results aren't
likely to help build optimism, but software company Aspen
Technologies (AZPN) beat expectations and was up over 20 percent
in after-hours trading.

Thurday's economic releases will be light.  At 8:30, the
Department of Labor releases the initial jobless claims number
for the week of 7/31.  Initial claims for the previous week had
bumped higher, to 345 thousand, but predictions for this week
suggest that claims might fall back to 340 thousand.  While these
numbers are sometimes watched closely, Friday's employment report
will probably draw most of the attention this week.

Natural gas inventories will also be released Thursday as will
the money supply figure, at 10:30 and 4:30, respectively.

Tomorrow's performance may be guided by jitters over Friday's
non-farm payrolls number, the SOX's ability or inability to
confirm its inverse H&S, the SPX's ability or inability to climb
above its 200-sma, the Dow's behavior near 10,000 or 10,200, and
the price action of crude futures. Crude futures traded lower in
after-hours, but approached the downside target of the H&S on the
10-minute chart and appeared to level off.

Unfortunately for those of us trying to guess market direction,
crude prices depend on geopolitical developments out of our
control or beyond our knowledge this evening.  A reassurance out
of Russia or from OPEC member could send futures lower.  A
terrorist strike against a pipeline somewhere could send them
higher.  I can imagine shorts waiting with held breath for a sign
that those futures will continue lower, ready with their trigger
fingers on the buy-to-cover buttons if they do not.

Extended losses in the crude futures may allow markets to steady
or even move higher, while a rebound in the crude futures will
pressure already-jittery markets.  Unless crude futures break
through their 50-dma, however, markets will remain under pressure
and gains may be tepid or quickly reversed.  The suspicion that
H&S's or bear flags may be building on some charts on some
intraday charts may be deepened. In that climate, perhaps only
adept scalpers should consider long positions until any breakout
has proven itself.

However, I would be careful about any position.  Indices appear
perched on the edge of precipice and some of those P&F downside
targets show just how deep such a precipice could be.  However,
we've been here before, convinced that markets were going to
tank, piling into short positions, only to find ourselves
squeezed along with the other shorts.  The charts I've displayed
above do not offer evidence that markets are yet being pushed
over the edge, although they do offer evidence of extreme
pressure and indecision about how to respond to that pressure.
The markets are at points that have been bought before, and
someone is trying to do some buying, but it may or may not stick.

The OEX, the index I watch most, is chopping along above weekly
support, and many others are chopping above known support, too.
In the Market Monitor on OIN, I'm advising subscribers to prepare
to be whipsawed if entering any position, have nearby profit
targets in mind, and make plans in advance of entering a position
to protect any profits, and that's what I advise here, too.  One
of these days, perhaps soon, markets will begin a directional
move, but expect those whipsaws until that happens.


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

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


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*****************
INDEX TRADER WRAP
*****************

At what price does oil need to decline, for stocks to bid?

The major indices found a decline at the open, by late afternoon
things were green, but by the close, the major indices were left
mixed with sector action splattered in red and green.

Today's most notable "divergence" was oil declining despite The
Energy Department saying its weekly crude oil statistics showed a
draw in the nation's oil supplies.  This "divergence" is a point
of focus in tonight's index trader wrap.

Market Snapshot / Internals - 08/04/04 Close



When reviewing last night's pivot analysis correlations, the
major indices stayed pretty much inside today's (Wednesday's)
DAILY pivot correlations identified last night, and I can only
surmise that the rather notable intra-day decline in the TRIN,
combined with a blast of buying depicted by the TICK came in
advance of Oil futures settlement.  The buying seemed rather
broad, lifting the A/D lines fractionally positive.

At this morning's open the TRIN spiked to as high as 2.60, which
I thought a bit excessive.

It just so-happened that the swing trade bearish trade I had
profiled in JP Morgan (NYSE:JPM) $37.18 +0.29% yesterday at
$37.25, traded my bearish target of $36.70 on its way to a
session low of $36.64 before the stock turned up to trade a
session high of $37.37 at 03:00 PM EDT.  I mention this only
because I reviewed the KBW Bank Index (BKX.X) 95.17 +0.26% in
some of yesterday's commentary.

Concerning to bulls is that while the NYSE 5-day NH/NL ratio
improved, its 10-day NH/NL ratio continued lower.

For a third-straight session, new lows begin to build at the
NASDAQ from Friday's improved 66 new lows, suggesting that the
NASDAQ's 5-day NH/NL ratio will most likely show weakness in
coming session as new highs have also been falling off since
Monday's 65.

In essence.... little sign of bullish leadership, and bulls (as
well as bears) are still looking for a bullish catalyst.

Pivot Analysis Matrix -



Both the Dow Industrials (INDU) 10,126.51 +0.06% and S&P 100
Index (OEX.X) 538.49 +0.10% pretty much pegged today's
(Wednesday's) pivot analysis correlations highlighted last night.
The S&P Banks Index (BIX.X) didn't quite get up to its DAILY R1
and WEEKLY R1 correlation, violated its DAILY S1/WEEKLY Pivot
correlation, but found buyers just above its WEEKLY S1.

Now... when I look at the QQQ DAILY Pivots for tomorrow, it
becomes rather evident that today's trade was HIGHLY computer
driven, and suddenly, we now have correlative support at DAILY S1
and WEEKLY Pivots for the INDU, DIA, SPX, OEX.  Meanwhile, the
NDQ/QQQ and SOX.X and BIX.X find support correlations at DAILY S1
and WEEKLY S1.

The only DAILY correlations for resistance are NDX.X DAILY R1 and
WEEKLY Pivot, then OEX DAILY R2 and WEEKLY R1.

OK..... now, all day I kept hearing CNBC's Bob Pisani reporting
from the floor of the NYSE that bulls were skittish of stocks
based on oil prices.

OK.... thanks Bob!

But that had me doing some investigative work.

Review those correlations above, as we're going to look at a bar
chart of relative strength for the S&P 500 Index (SPX.X) versus
the September Crude Oil futures (cl04u).

Remember!  Relative strength measures are just that!  We're
measuring relative strength.  Just because oil goes up or down
10% doesn't necessarily mean stocks will go up or down.  This is
why I want to you concentrate on the levels within the matrix.
Oil prices could fall to $36 and SPX remain unchanged in price,
but relative strength of SPX vs. Oil rise sharply.

We're looking for a SIGNAL from the equity market versus oil
market, where if that signal is given, we want to know WHERE
we're at.

Statement:  IF relative strength of SPX vs. Crude futures is
26.85, THEN turn the computers on for buying.

S&P 500 vs. Sept. Crude Oil (Relative Strength) - Daily Intervals



I've made some very basic time-period references between on the
relative strength chart of the SPX vs. Oil in respect to when the
RS chart would have moved ABOVE the 21-day SMA.  Imagine this as
a TRIGGER to look for Oil WEAKNESS and SPX PRICE ADVANCE.

See where I'm getting a relative strength "trigger" at 26.85?

Now, I also make note that despite the rise in oil prices from
their MAY relative highs of $40 to $44 (yesterday and briefly
today), The SPX is still holding its May lows.

Hypothesis:  Despite today's Energy Department statistics showing
a decline in crude oil inventories, September Crude Oil futures
(cl04u) fell from $43.62 to $42.80.  I (Jeff Bailey) do not know
"at what price" oil has to fall to find stocks making a
meaningful move higher, but the RS chart may give the clue on RS
reading above 26.85.

Trade thoughts:  IF the RS chart of SPX vs. OIL gives upside
trigger alert at 26.85, check where I am in relation to
identified support/resistance correlations.

GO LONG: if RS ring the bell at 26.85, IF SPX is at a PIVOT
ANALYSIS level of support.  Thinking here is that computers may
get turned on for buying.  Downside risk would immediately be
assessed to at least the DAILY S2s.

With my QCharts trading software, I think I can set a relative
strength upside alert at 26.85, which should be triggered 30-
minutes after the alert would have actually been generated (I'm
30-minutes delayed on futures).

In recent Index Trader Wraps, we've discussed the Securities
Broker/Dealer Index (XBD.X) 118.60 +0.48% and the S&P Retail
Index (RLX.X) 376.14 -0.72% as sectors that might reflect market
sentiment near-term, where a good test for technical strength in
the RLX.X would be the ability to move above its 200-day SMA
(387.07).

Another test for technical strength discussed yesterday was for
the very broad NYSE Composite ($NYA.X) 6,385.06 -0.27% to trade
above 6,436.

U.S. Market Watch - 08/04/04 Close



Here's how things looked at the close (futures are not
representative of Wednesday's trade).

Two points I find interesting, based on little news blurbs from
analysts.

I can't find a news item, but a couple of sessions ago, a
reporter mentioned that a major airline had implemented price
hikes, but a day or two later, reversed that decision when other
carriers didn't follow.  Talk about a tough business right now.
Try to raise fares to offset higher fuel costs and you
COMPETITION won't follow you?  Sounds like the competition is
putting the pressure on you too.

The CBOE Internet Index (INX.X) was a sector loser today (outside
of energy via decline in oil) where component IAC Inter Active
(NASDAQ:IACI) $22.80 -15.64% got smacked lower.

One item of note was that an analyst being interviewed on CNBC
thought the stock was pressured because the ECONOMY WAS SO
STRONG, and that hotel chains were not having to DISCOUNT room
rates.  In essence, part of IACI's business model is that it
benefits from higher hotel occupancy rates, when hotels are
willing to discount rooms in order to achieve a level of revenue.

As they say, sometimes "good news" isn't necessarily good news.

Jeff Bailey


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The Option Investor Newsletter                Wednesday 08-04-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Watch List: Education, Mortgages, and Biotech
Stop Loss Updates: IMO, TXT
Dropped Calls: None
Dropped Puts: MGA
New Put Play: AZO


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

Education, Mortgages, and Biotech

___________________________________________________________________

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.
___________________________________________________________________


Apollo Group - APOL - close: 74.28 change: -2.74

WHAT TO WATCH: We mentioned APOL as a bearish candidate in the
MarketMonitor today.  The oversold bounce from Monday's gap down
is already failing under round-number resistance at $80.00 and
its simple 200-dma.  Bears can look for APOL to test the $70.00
region as the next level of support.  Currently the P&F target is
only $71.00 but targets can be surpassed.

Chart=


---

Countrywide Financial - CFC - close: 68.28 change: -3.27

WHAT TO WATCH: Cracks in the armor? CFC dropped more than 4.5%
after Morgan Stanley downgraded the stock to "equal weight".
Oddly enough MWD raised their target on CFC from $78 to $81.
Today's drop in CFC has broken support at the simple 50-dma and
the intraday action suggests CFC will continue to fall tomorrow.
The next challenge for the bears will be previous resistance and
round-number support at $65.

Chart=


---

Coach Inc - COH - close: 38.12 change: -1.99

WHAT TO WATCH: Uh-oh!  Shares of luxury goods retailer COH have
broken support at the $40.00 mark and its simple 200-dma.  Volume
has been exceptionally high the last two sessions as investors
react to COH's earnings report.  The technical breakdown looks
very bearish and its P&F chart points to a $31 price target.

Chart=


---

Invitrogen - IVGN - close: 47.84 change: -1.36

WHAT TO WATCH: Look out below!  IVGN crashed last month after
reporting earnings and lowering revenue guidance for the next
quarter.  Now after two weeks of consolidating along support at
$50.00 the stock is breaking down.  Yesterday's breakdown under
$50.00 was the prime entry point but today's drop still looks
good.  The bearish P&F chart points to a $27 target.

Chart=




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

CHIR $45.60 +0.21 - Biotech stock CHIR has recently broken out
above resistance at $45.00 and spent the last few days coiling
sideways in a tight $1.00 range.  Bulls can look for a push
through $46.20.

HRB $49.50 +0.46 - The slow drift higher in HRB is nearing key
resistance at $50.00.  Watch for a breakout.

COST $41.15 +0.44 - COST has been stuck in a trading range
between $40-42 for the last month.  Watch for a breakout over $42
as a potential entry point.


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http://www.OneStopOption.com

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

IMO - call play -
 Heads up!  IMO fell more than 2.5 percent
 and is testing minor support near the $48.50 level.
 The move mirrors a similar drop in the OIX/OSX indices.
 Our stop loss is $46.75.

---

TXT - call play -
 The rally continues for shares of TXT.  The stock
 has been setting a string of new four-year highs
 on decent above average volume.  We're going to
 raise our stop loss from $57.49 to $59.49.  Remember
 that our target is a move into the $65-66 range.


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

None


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

Magna Intl - MGA - close: 80.22 change: -0.18 stop: 82.01

Per our strategy discussed in earlier updates we are closing MGA
as of Wednesday's close to avoid any earnings surprises when the
company reports tomorrow night after the closing bell.  More
aggressive players can keep the play open and close it tomorrow
afternoon.  Estimates are for MGA to earn $1.95 a share.

Picked on July 15 at $ 81.53
Change since picked:  - 1.31
Earnings Date       08/05/04 (confirmed)
Average Daily Volume:    182 thousand
Chart =



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NEW PUT PLAY
************

AutoZone - AZO - close: 74.60 change: -0.66 stop: 77.51

Company Description:
As of May 8, 2004, AutoZone sells auto and light truck parts,
chemicals and accessories through 3,337 AutoZone stores in 48
states plus the District of Columbia in the U.S. and 60 AutoZone
stores in Mexico. Each store carries an extensive product line
for cars, sport utility vehicles, vans and light trucks,
including new and remanufactured automotive hard parts,
maintenance items and accessories. Many domestic stores also have
a commercial sales program that provides commercial credit and
prompt delivery of parts and other products to local, regional
and national repair garages, dealers and service stations.
AutoZone also sells ALLDATA brand diagnostic and repair software.
(source: company press release)

Why We Like It:
AZO is such a trendsetter.  Late last June the company warned
about a slow down in sales and mainly blamed cool weather for the
weakness.  In the past month rivals Monro Muffler Brake Inc
(MNRO), CSK Auto Corp (CAO), Advance Auto Parts (AAP) and Pep
Boys (PBY) have all issued lowered or disappointing guidance or
had their earnings estimates lowered by analysts over a slow down
in sales.  We've been watching AZO ever since and regretted not
shorting the stock on the breakdown under $80.00.  Now after two
weeks of consolidating along support at the $75.00 level and
various appearances on our watch list AZO is giving us another
chance.

Today's breakdown under the $75.00 mark and the afternoon's
failed rebound looks like our entry point.  Short-term technicals
are looking bearish and its MACD is nearing a new sell signal.
The P&F chart is extremely bearish with a triple-bottom breakdown
sell signal pointing to a $59 target.  We want to initiate
positions now with a stop loss above yesterday's high at $77.51.
We'll target a quick drop to $70.00 but suspect AZO can trade
even lower (maybe $67.50-65.00) before its late September
earnings report.


Suggested Options:
Short-term traders can play the August puts if they like but
we're partial to the September strikes.

BUY PUT SEP 80 AZO-UP OI= 795 current ask $6.20
BUY PUT SEP 75 AZO-UO OI=1472 current ask $3.00
BUY PUT SEP 70 AZO-UN OI= 881 current ask $1.20

Annotated chart:



Picked on August 4th at $74.60
Change since picked:    - 0.00
Earnings Date         05/26/04 (confirmed)
Average Daily Volume =     1.0 million
Chart =




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