Option Investor

Daily Newsletter, Thursday, 08/05/2004

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The Option Investor Newsletter                Thursday 08-05-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Markets Fears Pink Slips
Futures Wrap: See Note
Index Wrap: Oil and bonds gain, while stocks decline
Market Sentiment: One-Two Punch

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      08-05-2004           High     Low     Volume   Adv/Dcl
DJIA     9963.03 -163.50 10129.09  9955.73 1.69 bln  864/2308
NASDAQ   1821.63 - 33.43  1859.77  1820.21 1.57 bln  830/2230
S&P 100   530.19 -  8.30   538.52   529.79   Totals 1694/4538
S&P 500  1080.70 - 17.93  1098.83  1079.98
W5000   10472.27 -173.52 10649.56 10466.40
SOX       402.39 -  4.40   412.22   401.86
RUS 2000  532.36 - 10.31   542.74   532.09
DJ TRANS 3054.83 - 64.60  3120.41  3054.21
VIX        18.32 +  2.11    18.41    16.17
VXO (VIX-O)18.12 +  2.34    18.20    15.84
VXN        26.19 +  1.14    26.25    24.96
Total Volume 3,539M
Total UpVol    433M
Total DnVol  3,035M
Total Adv  1868
Total Dcl  5019
52wk Highs   43
52wk Lows   234
TRIN       2.67
NAZTRIN    2.18
PUT/CALL   0.86

Markets Fears Pink Slips
by Jim Brown

There were multiple reasons given for the market slide
today and fear of a disastrous Jobs report on Friday
was one of them. Given the current environment of daily
terror news, oil at new highs and election polls changing
leaders daily the last thing investors want to worry
about is losing jobs in a weak economy.

Dow Chart

Nasdaq Chart

It was a day that started out ugly and got worse. The
Jobless Claims came in -4,000 below expectations and
-11,000 from last week and that was the best news for
the day. Last weeks number was revised up +2,000 to
347,000. The Jobless Claims have been volatile over
the last several weeks and the slight dip today did
nothing to assure traders that the jobs report on
Friday was going to hit estimates. The higher trend
on Jobless Claims is said to be due to temporary
layoffs in the auto industry as they retool for 2005
production models. Tomorrow at 8:30 AM we will know
for sure.

Another leading indicator for Jobs was the Monster
Employment Index which fell from 136 to 134 for July.
This was a very minor drop and 136 was the recent high.
A summer slow down from those highs was to be expected.
There are no seasonal adjustments to the Index so the
number was likely better than any adjusted number as
the Nonfarm Payroll will be. The larger companies
continued to increase their listings but postings
from medium to small companies fell slightly. This
is a very broad sample gathered from over 1500
websites in addition to Monster.com.

Friday's Jobs report is expected to show +220,000 new
jobs and well over the +112,000 created in June. The
markets have been expressing some fear that this will
be a disaster of a report based on anecdotal reports
of an economic slowdown. Recently the actual economics
have been mixed and about as consistent as Forrest
Gump's box of chocolates. The June Jobs report itself
showed a drop in jobs for the second consecutive month
and a drop in manufacturing payrolls for the first time
since January. The whisper numbers for tomorrow are
running about 260K to 280K on the high side and well
under 100K on the low end. This sets up the potential
for a volatile trading day. Any number over 200K is
sure to produce an immediate bounce from our very
oversold close on Thursday. The market was pricing in
the risk of jobs miss and based on the closing drop
they must have been afraid of a potentially negative

Also hurting the market were July Chain Store Sales
that came in at +3.1% and slightly better than June's
+3.0%. Considering all the negative press on consumer
weakness I would have thought traders would have
cheered the positive number. Instead they dumped
retail stocks once again. The +3.1% number was about
half of the first five months average and despite the
firming at the lows the sector was depressed.

Helping to fuel that depression was another new high
on oil at $44.55 and the feeling that consumers were
going to be pouring money into the gas tank rather
than in the stores. This was a 21 year high for the
crude contract and a complete reversal of the selling
seen on Wednesday. The sharp jump in oil came from a
news report from Russia that officials have decided
NOT to allow Yukos to spend any money and their
oil production was again in danger. Adding to the
fear was increased concerns about terrorist attacks
on production/transportation facilities in Saudi
Arabia in front of our elections.

There is also an increasing fear that we are reaching
Hubbert's Peak in oil. In 1956 M. King Hubbert, a
geophysicist working for Shell Oil predicted oil
production in the U.S. would peak in the early 1970s.
Nearly everyone on the planet disagreed with him until
the prediction came true in 1970 and U.S. oil production
has declined ever since. Basically all the easy money
has been made and every oil find since has cost more
money to find and produce with finds becoming smaller
and harder. This has since been referred to as Hubbert's
Peak. There are two recent books on this subject with
predictions for a decline in world production much
nearer than previously thought.

The last big oil field, 87 billion barrels, was found
in 1960 in Ghwar, Saudi Arabia. With 45 years of
fevered searching since then the number and quality
of finds has continued to decrease. At our present
rate of consumption a find of another field of that
size would only push the eventual peak out by 2-3
years assuming it could be extracted almost immediately.
With oil demand escalating sharply and proven reserves
slowing the general scientific consensus for the peak
in global production is estimated to be around 2007.
This may come as a shock for most readers and it will
be a huge shock for most Americans when oil prices
pass $50 before the decade is out. Heck, they could
pass $50 before the month is out if the trend continues.

According to experts current world oil demand as of
April was 80.9 million barrels per day. That is about
2.5 BILLION barrels per month. With demand rising and
supply slowing the future is clear. Searchers cannot
find new supplies of 2.5 billion barrels per month
indefinitely. The challenge is not going to be the
day where we run out of oil as that could be decades
away. The challenge for the U.S. and the world is
rising demand and shrinking supplies will continue
to push prices higher. Prices may retreat once this
current rally ends on higher production by OPEC but
it will only be temporary. Companies who depend on
oil for their products are starting to feel the heat
and it will not be long before earnings reports start
to be revised down from higher energy prices. $50 oil
may be here much sooner than expected and while
consumers may have become accustomed to $2.00 gas
they may dream of that level by 2010. I may have
gotten a little carried away in this explanation but
traders need to know the facts behind the current oil
bubble may be real and the bubble may only shrink
temporarily and not burst.

So, with oil hitting new highs, news of terror arrests
in the U.S. and other countries, suspicious packages
in two airports, mixed economics, earnings warnings
and fear of the jobs report it is no wonder the markets
sold off once again. Add in the fear of the Fed next
Tuesday and the start of the Olympics next week and
investors fled to the safety of the sidelines. We
also saw a survey today that said 32% of affluent
investors were moving to the safety of cash on the
sidelines during August. This was up from only 22%
for July. 29% of investors were planning on keeping
new cash off the playing field completely compared to
26% in July. As if that was not enough we are faced
with the normal -30% lower volume in August compared
to July. We all know how bad volume was in July and
a -30% drop from those levels suggests volatility
could be extreme.

That volatility hit today with the VXO jumping +2.34
to 18.12. That is the highest level since May but long
time readers realize that it is still low by historical
standards. The Dow lost -165 points on Thursday and
closed back below 10,000 at 9960. Still well above
the May lows and slightly above the 9913 low from
last week. This was the biggest one day drop for the
Dow in five months.

The Nasdaq fell -33 points to 1821 and the lowest
close since September 2003. Multiple levels of
resistance have been broken and 1800 is now the
next potential support. Tech stocks have seen negative
cash flow from mutual funds for the last 27 straight
weeks. The SOX, normally a directional leader for the
Nasdaq did not set a new low and closed at 402 and
a surprising performance considering the implosion
in the other indexes. After the bell today NVDA missed
earnings by 12 cents and did not have positive things
to say so the SOX may be a little weaker tomorrow.
The Russell, also a contributor to the Nasdaq was a
detractor today with a drop to the May and July lows
at 532. The Russell suffers from a liquidity drain
during summer months and this year it is compounded
from event risk.

Despite all the negatives above there was no real
fear in the market. That is surprising considering
the down volume was nearly 9:1 over up volume and
the jump in the VXO. I am basing this on the tame
put/call ratio at 0.86. This is just a normal reading
of late and shows no panic to buy puts. It also
suggests investors have already positioned their
portfolios and are waiting on the sidelines for
fall. There are simply no buyers. I have mentioned
before that many mutual funds are sitting on hoards
of cash approaching +30% in some cases. I saw an
interview yesterday with a Wyndam manager who said
he was 80% in cash. I was expecting some of this
cash to be put to work this week with the Democratic
convention behind us. That plan was shredded on
Monday with the announcement of the NY terror plans
against financial institutions. Chalk up another
historical trend fallen by the wayside and a
casualty of a news event.

SPX Chart – weekly

For Friday we have the Jobs report hurdle at 8:30
and a strongly positive number could give us an
oversold rebound. A miss is already priced in but
a negative number could really be earth shaking.
Tuesday the Fed will likely hike rates again and
the surprise there would be no hike. They could
get away with it based on the oil price inflation.
Back to Friday, I would be satisfied just to see
us escape another new low on the Dow and S&P. I
have pointed out several times that the real support
for the market is 1068-1070 on the SPX and we are
really close with our 1080 close. Another very
important support line is the 200 week moving average
on the SPX at, you guessed it, 1080. All the indexes
have lower highs in place from last weeks bounce and
could easily continue downward. However, the retest
of the May/July lows today could be seen as a successful
double bottom in some cases and a launch point for a
temporary trading rally. I say temporary because of
the multiple high risk events should keep a lid on
any rebound.

The game plan from last Sunday was still to remain
long over 1100 and short/flat under 1100. I would
change that today based on the multiple support
tests. I would look to be long over SPX 1080 and
short below 1068. Don't get married to your positions
because this is a pure trading environment. For traders
this is a great environment for profits. We may be
getting close to a bottom of this correction and
new bargains are being created every day but it is
too soon to buy and hold. Set your sights a little
lower and let's see if we can steal some bargains
over the next four weeks.

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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Oil and bonds gain, while stocks decline

For stocks, it was a down day on Wall Street where September
Crude Oil futures (cl04u) $44.41 +3.75% had oil rising more than
$1.50 per barrel and settling at new highs, but doing little to
boost stock investor's sentiment.

Investors turned to Treasuries, and bonds in general with the
benchmark 10-year Treasury yield ($TNX.X) falling 2.9 basis

Higher grade corporate bonds found buying as the InvesTop
Corporate Bond Fund iShares (AMEX:LQD) $108.94 +0.03%, which we
track in the "Beetle's Benchmark Fund" edging up 4 cents, while
our "junk bond" Pacholder High Yield (AMEX:PFH) $9.14 +0.88%
tries to reclaim its 200-day SMA ($9.15) with an 8-cent gain.

Upbeat inventory data from homebuilder Toll Brothers (NYSE:TOL)
$41.00 +0.07% for its recently completed July quarter, impressed
traders early on as Toll's shares traded a session high of
$42.99, helping lead the Dow Jones Homebuilders Index ($DJUSHB)
573.23 -0.44% to a session high of 589.82.  At one point during
the session I thought certain I could lose stock to a an August
$40 covered call written on the underlying shares I hold in Toll
Brothers, but as oil prices continued higher during the session
and sentiment soured, that certainty turns a bit doubtful.

U.S. Market Watch - 08/05/04 Close

Not even the Oil Index (OIX.X) 358.87 -0.92%, or Oil Service
Index (OSX.X) 106.89 -1.61% could weather today's storm of
negative sentiment.

Market Snapshot / Internals - 08/05/04 Close

As the hours passed, bearish just continued to build.  Today was
a "classic" bearish reading from the TRIN where unlike
yesterday's jump higher at the open (more bearish) the TRIN
gapped lower, THEN move higher while stocks held relatively
steady for the first 90-minutes of trade.

Traders that have been observing 5-day and 10-day NH/NL ratios
also noted deterioration in the ratios, especially at the NYSE
where at 11:00 AM the NYSE's 5-day NH/NL ratio started out at
56.3%, but slowly deteriorated during the session.  Not a good
sign when the much stronger NYSE under-performs the NASDAQ for
bullish leadership.

With gold pinned below $400 per ounce and the CRB Index ($cr00y)
or $CRB at www.stockcharts.com hovering around 270.00, I'd have
to think "inflation" still not an overriding concern for the Fed
at Tuesday's meeting.

Tomorrow's nonfarm payroll data will get multiple views on just
what the numbers are saying.  Economists currently forecast the
economy to have generated 243 new jobs in July.

With sentiment still looking very negative (see XBD.X and SPX.X)
keep an eye on the U.S. Dollar Index (dx00y) 89.64 -0.04%.  I
would think one way the market might tip its hand as to what the
Fed is going to do on Tuesday (raise a quarter, or keep rates
unchanged) is dollar action.

The dollar has had a nice move higher the past two weeks, where
this action is DIVERGENCE to the "short dollar and buy oil" trade
that had been discussed months ago, where traders believed the
dollar's weakness or strength came on oil strength or weakness.

With the U.S. Dollar Index below its May relative highs of 92.00,
yet oil well off its May relative lows of $36.00, it has to be my
analysis, based on observation, that the dollar/oil trade hasn't
been in play.

It would also be my analysis, based on observation, that after
some analysts suddenly felt the dollar's strength in May was a
signal of inflation and that the markets would dictate Fed action
and have the Fed aggressively tightening interest rates, that
current trade in the dollar does not signal hyper inflation, nor
aggressive Fed tightening on the way.

So, I think the recent dollar strength has been from market
participants anticipating a Fed tightening, where tomorrow's
nonfarm payroll figures could draw some insightful action.

I don't trade currencies.  I'd be willing to bet that probably
80% of market participants don't trade currencies.  Therefore, we
might get a more "natural" response in the dollar, than perhaps a
more emotional trade from equities.

A level of trade for dollar weakness to perhaps sign "no move"
from the Fed might be found in the Pivot Matrix.

Pivot Analysis Matrix -

MONTHLY Pivot and WEEKLY S1 correlations in the U.S. Dollar Index
(dx00y) 89.64 -0.04% have been noted and with tomorrow's July
nonfarm payroll figures a rather key economic report, I think we
should at least be alert to dollar action, where the dollar might
filter out some "sentiment" trade.

Observations from today's (Thursday) trade was that oil set the
negative tone early and while the weakest NASDAQ-100 Index
(NDX.X) 1,353.44 -1.86% was the only index to show some near-term
correlative resistance at its DAILY R1 (1,387.40) not even the
weaker Semiconductor Index (SOX.X) 402.39 -1.06% could turn tech
sentiment bullish as it did trade its DAILY R1 (411.81).

Jeff Bailey


One-Two Punch
 - J. Brown

Stocks too a nosedive on Thursday as investors dealt with the
one-two punch of skyrocketing oil and fears of worse than
expected job growth.  Without a doubt the oversold bounce is dead
and the major indices are now looking at setting new relative

Impacting stocks across the board was a new all-time high in
crude oil above $44 a barrel.  The move was exaggerated by news
that the Kremlin is playing Russian roulette with oil giant
Yukos.  The government once again froze its bank accounts and the
move is expected to impact Yukos' ability to continue oil
production.  Should production stall it would immediately remove
any remaining capacity in the global markets creating an
environment ripe for oil "shocks" should terrorists make a move
to interrupt supply.  While some speculate that crude could hit
$50 a barrel the other side feels that these highs are temporary
and that crude will be back around $35 a barrel by our November

The jobs question is a big one that will be answered tomorrow.
The non-farm payrolls report comes out Friday morning about an
hour before the market open.  This presents an opportunity for a
gap up or down depending on the numbers.  Right now estimates are
for the economy to have added 245,000 jobs in July but last month
the report was disappointing.  A bad number would raise new
questions about the strength of the economy and undermine
President Bush's re-election efforts.  A positive number could
spark a short-term reversal in stocks depending how strong growth
comes in.  Whatever the number happens to be the FOMC will be
watching and evaluating how it affects their stance on monetary
policy.  Currently the market is expecting a 25-basis point hike
at the Fed meeting next week.

The market internals today were very bearish.  Declining stocks
outnumbered advancers by more than 3-to-1 on the NYSE and almost
as bad on the NASDAQ. Down volume was 7-to-1 over up volume on
the NYSE and about 4-to-1 on the NASDAQ.  Not one sector index
managed to close in the green indicating the breadth of the sell-

It is interesting to note that the volatility indices all hit new
two-month highs.  Yet they still have a ways to go yet before
hitting their May or March highs when the stock market indices
bottomed.  This might suggest that stocks will hit a new relative
low before reversing.  Fortunately, that may be sooner rather
than later as some of the moving averages on the ARMS index are
nearing bullish levels.


Market Averages


52-week High: 10753
52-week Low :  8997
Current     :  9963

Moving Averages:

 10-dma: 10076
 50-dma: 10205
200-dma: 10228

S&P 500 ($SPX)

52-week High: 1163
52-week Low :  960
Current     : 1080

Moving Averages:

 10-dma: 1095
 50-dma: 1112
200-dma: 1107

Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1204
Current     : 1353

Moving Averages:

 10-dma: 1389
 50-dma: 1429
200-dma: 1446


CBOE Market Volatility Index (VIX) = 18.32 +2.11
CBOE Mkt Volatility old VIX  (VXO) = 18.09 +2.31
Nasdaq Volatility Index (VXN)      = 26.19 +1.14


          Put/Call Ratio  Call Volume   Put Volume

Total          0.86        611,312       525,243
Equity Only    0.70        462,895       321,930
OEX            0.72         32,743        23,625
QQQ            1.14         58,934        67,438


Bullish Percent Data

           Current   Change   Status
NYSE          57.3    - 2     Bear Confirmed
NASDAQ-100    33.0    - 1     Bear Confirmed
Dow Indust.   53.3    + 0     Bear Confirmed
S&P 500       52.4    - 1     Bear Confirmed
S&P 100       54.0    + 0     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: 1.50
10-dma: 1.36
21-dma: 1.32
55-dma: 1.17

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     634       809
Decliners    2135      2192

New Highs      22        22
New Lows       82       158

Up Volume    194M      224M
Down Vol.   1457M     1296M

Total Vol.  1685M     1551M
M = millions


Commitments Of Traders Report: 07/27/04

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

Commercials are turning a bit more bearish with a decrease in
long positions and a small increase in shorts.  Small traders
are naturally turning a bit more bullish with a decrease in

Commercials   Long      Short      Net     % Of OI
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%)
07/27/04      397,354   422,914   (25,560)   (3.1%)

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
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%
07/27/04      135,136    90,433    44,703    19.8%

Most bearish reading of the year:  (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02

E-MINI S&P 500

Commercial traders have decreased their bearishness by
upping their long contacts by about 20K.  Small traders
are hedging their bets a bit by reducing their bullish

Commercials   Long      Short      Net     % Of OI
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%)
07/27/04      337,615   429,477   ( 91,862)  (12.0%)

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
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%
07/27/04      186,211     68,930   117,281    46.0%

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


Commercial traders are still hovering around the same level
of cautious bullishness for the last three weeks.  Small
traders have moved from bearish to less bearish to neutral
in the last three weeks (thus a bullish progression in

Commercials   Long      Short      Net     % of OI
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%
07/27/04       43,042     35,935     7,107    9.0%

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
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%)
07/27/04       14,543    14,518        25     0.0%

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


The bullish sentiment from the commercial traders dipped
a tad this past week with an increase in their short positions.
Meanwhile small traders have significantly adjusted their
positions to be less bearish.

Commercials   Long      Short      Net     % of OI
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%
07/27/04       27,577    21,427    6,150      12.5%

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
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%)
07/27/04        5,310     6,099   (  789)   ( 6.9%)

Most bearish reading of the year: (12,106) -  3/09/04
Most bullish reading of the year:   8,523  -  8/26/03



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The Option Investor Newsletter                 Thursday 08-05-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: IR
Dropped Puts: None
Call Play Updates: ADSK, CCMP, ETN, FDX, HUG, IMO, SYMC, TXT
New Calls Plays: None
Put Play Updates: AMZN, AZO, CAT, EBAY
New Put Plays: CI, RIMM


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.


Ingersoll-Rand - IR - close: 65.28 chg: -2.22 stop: 66.99

Time to go.  The pull back in shares of IR have turned into a
retreat.  Technicals have turned bearish and its MACD has
produced a new "sell" signal.  Plus, today's 3.28 percent drop
has broken through the simple 200-dma.  We were waiting for IR to
breakout over the $70.00 level and trigger the play.  Right now
we're closing the play un-opened.

Picked on July 29 at $ xx.xx <-- see TRIGGER
Change since picked:  + 0.00
Earnings Date       07/22/04 (confirmed)
Average Daily Volume:    1.3 million
Chart =




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Autodesk - ADSK - close: 38.55 change: -1.37 stop: 36.99

Danger! Danger, Will Robinson!  Traders with bullish positions
need to be paying attention.  Today's market meltdown did a lot
of damage and it was very widespread.  The 3.4 percent drop in
ADSK pushed it through the simple 40 and 50-dma's.  We would NOT
suggest new bullish plays here and recommend you double-check
your stop placement.  If the NASDAQ and/or the GSO software index
doesn't bounce soon then ADSK will be in danger of testing its
simple 100-dma (and stopping us out).

Picked on July 30 at $ 40.05
Change since picked:  - 1.50
Earnings Date       08/19/04 (confirmed)
Average Daily Volume:    2.1 million
Chart =


Cabot Micro - CCMP - close: 34.37 change: -0.11 stop: 31.75

Oddly enough the SOX semiconductor index held up better than many
of its technology-related peers.  The chip sector seems so
oversold it may have been temporarily exhausted of sellers.
Unfortunately, if the NASDAQ continues to drop it will pull the
SOX down with it (and vice versa).  We would be cautious here but
more aggressive traders might want to consider a bounce from
$32.50-33.00 as an entry point.

Picked on August 1st at $35.46
Change since picked:    - 1.09
Earnings Date         07/22/04 (confirmed)
Average Daily Volume =     935 thousand
Chart =


Eaton Corp - ETN - close: 63.95 change: -0.86 stop: 61.99

ETN, while out performing most of the market, is still suffering
from the meltdown today.  Technicals are looking weak and the
stock has closed under its simple 10-dma and the $64.00 level,
which has been minor support.  Traders can look for a potential
bounce above $62.50 as the next entry point.

Picked on July 29 at $ 64.98
Change since picked:  - 1.03
Earnings Date       07/15/04 (confirmed)
Average Daily Volume:    925 thousand
Chart =


Fedex Corp - FDX - close: 79.25 change: -2.23 stop: 79.00

The Dow Transports index fell more than 2 percent and crashed
through the 3100 and several moving averages, most importantly
the simple 50-dma, which was support last month.  In a similar
move FDX crashed through support at the $80.00 mark and its
simple 40-dma.  Unless there is a miraculous turnaround tomorrow
we expected to be stopped out at $79.00 soon.

Picked on July 20 at $ 82.81
Change since picked:  - 3.56
Earnings Date       06/23/04 (confirmed)
Average Daily Volume:    1.1 million
Chart =


Hughes Supply - HUG - close: 58.85 change: -0.77 stop: 57.75

Once again market weakness has weighed heavily on shares of HUG
and the stock is back under the $60.00 level.  One can hope that
minor support at $58.40 will hold yet again, especially this time
now that it's bolstered by the simple 40-dma.  If it does not
then readers can use it as an early warning system that the trend
may have changed.  More patient traders may want to just exit now
and wait for HUG to eventually pull back to its simple 100-dma
and buy a bounce.

Picked on July 15 at $ 60.51
Change since picked:  - 1.66
Earnings Date       08/24/04 (unconfirmed)
Average Daily Volume:    288 thousand
Chart =


Imperial Oil - IMO - close: 48.39 change: -0.25 stop: 46.75

Many oil stocks have pulled back sharply in the last couple of
sessions with a lot of damage being done in today's market drop.
Thankfully IMO only fell 25 cents and remains above the $48.00
level.  Readers can look for a bounce in the $47.50-48.00 range
as a new entry point but we suggest you confirm market direction
and or movement in the OIX/OSX indices before committing capital.
You probably don't want to open new longs if either the market or
the sector is sinking.

Picked on August 1st at $49.49
Change since picked:    - 1.10
Earnings Date         07/22/04 (confirmed)
Average Daily Volume =      55 thousand
Chart =


Symantec - SYMC - close: 45.41 change: -0.59 stop: 42.45

In spite of the poor performance in the NASDAQ and the GSO
software index shares of SYMC have actually held up reasonably
well.  The fact that SYMC is still above the $45.00 mark and its
simple 10 and 100-dma's is very encouraging.  We're also
encouraged by comments from SoundView who said the software
sector is very oversold and overdue for a rally.  Let's hope it
happens soon.  The technicals in SYMC, like much of the sector,
have turned bearish.  Conservative traders may want to tighten
their stops.  We suspect that if the NASDAQ continues to drop
then SYMC will retest the $44 level.

Picked on July 27 at $ 44.91
Change since picked:  + 0.50
Earnings Date       07/21/04 (confirmed)
Average Daily Volume:    5.4 million
Chart =


Textron - TXT - close: 62.03 change: -1.34 stop: 59.49

TXT was going to see some profit taking sooner or later.  To only
fall about 2 percent when the Industrials drop more than 160
points is not that bad.  We suspect that TXT could see more
weakness tomorrow.  Readers can look for a bounce in the $60.50-
61.00 range as a potential entry point for new positions.
Yesterday we raised the stop to $59.49 and we're going to leave
it there for now.

Picked on July 26th at $60.72
Change since picked:   + 1.31
Earnings Date        07/22/04 (confirmed)
Average Daily Volume =    622 thousand
Chart =




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Amazon.com - AMZN - close: 35.61 change: -1.51 stop: 39.08*new*

Internet stocks continued to lead the decline and the INX
Internet index fell more than 3 percent on Thursday.  AMZN was
leading the way with a big bearish engulfing candlestick and a 4
percent loss.  We're content with the action thus far in our
recently added put play but be forewarned.  AMZN is nearing what
could be round-number support at the $35.00 level.  Furthermore,
the market wrap this evening is suggesting that the markets could
see a bounce soon.  We may have to exit sooner than we'd like if
tech stocks turn around.  Manage your risk carefully.  We're
going to lower our stop to Tuesday's high at $39.08.

Picked on August 3rd at $37.61
Change since picked:    - 2.00
Earnings Date         07/22/04 (confirmed)
Average Daily Volume =     8.3 million
Chart =


AutoZone - AZO - close: 72.25 change: -2.35 stop: 76.51 *new*

Our AZO put play is off to a good start.  Today's 3.15 percent
drop is a nice follow through to yesterday's breakdown under the
$75 level.  Volume on today's decline was about 80 percent above
normal, which is certainly bearish.  The MACD has produced a new
"sell" signal.  While AZO is starting to look a little oversold
again we should see it continue toward the $70 region.  We're
going to lower the stop loss to $76.51.

Picked on August 4th at $74.60
Change since picked:    - 2.35
Earnings Date         05/26/04 (confirmed)
Average Daily Volume =     1.0 million
Chart =


Caterpillar - CAT - close: 69.62 change: -2.08 stop: 73.25*new*

News that CAT had delivered its "last, best and final" offer to
the UAW union and managed to avoid a 12:00 noon strike by its
workers failed to save the stock price.  Shares broke down under
support at $71.00 and broke down through round-number support at
$70.00.  Our trigger to go short was $70.75 and so far CAT looks
pretty good.  The  move really confirms the recent P&F chart
breakdown down and today's drop actually extended the bearish
target from $64 to $60.  Our target remains the $65 level for
now.  We are going to lower our stop loss a $1.00 to $73.25.
Readers should take note that the contract dispute is a big
headline risk.  Whichever way the UAW union chooses go go (accept
or reject the CAT offer) could have a big impact on the stock
price.  We initiated the play on a technical breakdown but we
can't ignore what's going on in the real world.  Be careful.

Picked on August 5th at $70.75
Change since picked:    - 1.07
Earnings Date         07/22/04 (confirmed)
Average Daily Volume =     2.4 million
Chart =


eBay Inc - EBAY - close: 73.79 change: -2.01 stop: 79.30*new*

Our EBAY put play is moving right along.  The weakness in the
Internet sector could not be avoided in EBAY and shares have
fallen now three days in a row.  Today's drop was significant
because it broke down through potential round-number support at
the $75.00 level.  If you look at the intraday chart you'll see
how shares churned sideways under the $75 level for most of the
afternoon before the final drop towards the close.  Remember that
we're targeting a drop to the $71.50 region and EBAY could be
there tomorrow.  Readers need to be ready to exit should that
occur.  We're going to lower our stop to $79.30 at the 21-dma.

Picked on August 3rd at $77.08
Change since picked:    - 3.29
Earnings Date         07/21/04 (confirmed)
Average Daily Volume =     9.1 million
Chart =


Cigna Corp - CI - close: 60.13 change: -0.47 stop: 62.51

Company Description:
CIGNA Corporation headquartered in Philadelphia, and its
subsidiaries constitute one of the largest publicly owned
providers of health care, disability, life and accident insurance
benefits in the United States and selected markets around the
world. (source: company press release)

Why We Like It:
If you read the earnings report you probably feel that CI belongs
on the call list not the put list.  The company blew away
estimates and raised its outlook for 2004.  So why did shares
paint a massive bearish engulfing candlestick yesterday after the
results came out?  Good question.  It would appear that CI is
dealing with a continuing decline in its membership and predicted
that it would continue.  Today shares saw an early morning
(oversold?) bounce but it faded with the market's decline.  Now
we want to list CI as a potential bearish breakdown candidate.
The P&F chart already shows CI in a double-bottom breakdown sell
signal with a $50.00 target.  We think that traders might be able
to get a quick drop to the $55.00 level if CI breaks support
again at the $60.00 level and its simple 200-dma.  However, the
jobs number is coming out tomorrow and if it's good then stocks
should rebound.  If the jobs number is bad...well.. look out
below.  We will use a TRIGGER under the recent July low.  Our
entry point will be a drop under $59.70 with a quick exit point
at $55.00.

Suggested Options:
This should be a quick play if it happens but we'll feel more
comfortable with the September puts.

BUY PUT SEP 60 CI-UL OI=1248 current ask $2.55
BUY PUT SEP 55 CI-UK OI= 622 current ask $0.95

Annotated Chart:

Picked on August xth at $xx.xx <-- see TRIGGER
Change since picked:    - 0.00
Earnings Date         08/04/04 (confirmed)
Average Daily Volume =     985 thousand
Chart =


Research In Motion - RIMM - close: 56.33 chg: -3.97 stop: 58.51

Company Description:
Research In Motion is a leading designer, manufacturer and
marketer of innovative wireless solutions for the worldwide
mobile communications market. Through the development of
integrated hardware, software and services that support multiple
wireless network standards, RIM provides platforms and solutions
for seamless access to time-sensitive information including
email, phone, SMS messaging, Internet and intranet-based
applications. RIM technology also enables a broad array of third
party developers and manufacturers to enhance their products and
services with wireless connectivity to data. RIM's portfolio of
award-winning products, services and embedded technologies are
used by thousands of organizations around the world and include
the BlackBerry. wireless platform, the RIM Wireless Handheld(TM)
product line, software development tools, radio-modems and
software/hardware licensing agreements. Founded in 1984 and based
in Waterloo, Ontario, RIM operates offices in North America,
Europe and Asia Pacific. (source: company press release)

Why We Like It:
This is purely a technical play on RIMM's bearish posture.  The
earnings news faded as soon as we moved into the month of July.
The oversold bounce from the last week of July has faded.  Now
RIMM has fallen under the $60.00 level again and is nearing
significant support at the $55.00 level and its simple 100-dma.
It is also important to note that RIMM's point-and-figure chart
is showing a descending triple-bottom breakdown with a $49 price

We are going to use a TRIGGER to enter this play because
tomorrow's jobs report could change everything.  We only want to
buy puts if RIMM breaks down under the simple 100-dma.  This
technical level held up pretty well back in May.  We'll use a
TRIGGER at $54.50 as our entry point.  Short-term traders can
target a quick drop to $50.  We suspect that RIMM could trade
down to its simple 200-dma near $45.

Suggested Options:
We like the September strikes.  We think the 57.50s, 55s, 52.50s
and even the 50s can work well for this play.

BUY PUT SEP 57.50 RUP-UY OI=5495 current ask $5.00
BUY PUT SEP 55.00 RUP-UK OI=5326 current ask $3.70
BUY PUT SEP 52.50 RUP-UX OI=2788 current ask $2.70
BUY PUT SEP 50.00 RUP-UJ OI=6186 current ask $1.95

Annotated Chart:

Picked on August xth at $xx.xx <-- see TRIGGER
Change since picked:    - 0.00
Earnings Date         06/29/04 (confirmed)
Average Daily Volume =     6.7 million
Chart =


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The Option Investor Newsletter                  Thursday 08-05-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Watch List: Big Board Stocks
Traders Corner: Market bottoms without high bearishness?


Big Board Stocks


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.

Goldman Sachs - GS - close: 85.80 change: -1.85

WHAT TO WATCH: Once again the XBD broker-dealer index has
reversed course.  Wall Street firm GS has seen its stock fail at
the $90.00 level and is now closing at new lows for the year.
This looks like a bearish entry point for a move toward the
$80.00 level.  Its P&F chart would certainly agree with a $78
target.  Just watch out for the trendline of lower lows.



Whirlpool Corp - WHR - close: 59.71 change: -2.55

WHAT TO WATCH: We strongly considered adding WHR to the play list
as a put.  The breakdown under support at $61.00 and
psychological round-number support at $60.00 is very bearish.
Volume was more than double the norm on today's 4% drop.  The
stock has also broken under its simple 200-week moving average.
Meanwhile its P&F chart shows a fresh double-bottom breakdown
sell signal and a $53 target.



3M Co - MMM - close: 81.57 change: -1.61

WHAT TO WATCH: The close under the 10,000 level for the
Industrials could spell bad news for this Dow-component.  MMM has
been consolidating sideways the last couple of weeks but the
consolidation could be ready to break lower.  Today's move back
under the simple 200-dma and the bearish twist in its short-term
technicals like the RSI and stochastics look somewhat ominous.
The P&F chart is already bearish with a $71 target.  We would
suggest readers watch for a breakdown below the $80.00 mark.



American Intl Group - AIG - close: 69.30 change: -1.58

WHAT TO WATCH: Uh-oh! This could be bad news for bullish
investors in AIG.  AIG, another Dow-component, has fallen through
the bottom of its recent trading range and broken support at the
$70.00 mark.  Shares still have some support at the simple 200-
dma and the $68.75-68.50 level.  Watch for a drop through the
latter and consider it a potential entry point for bearish
positions.  P&F chart traders may want to abstain or wait for a
drop through $65.00.


RADAR SCREEN - more stocks to watch

IBM $85.19 -0.78 - Big blue has broken its short-term trend of
lower highs and could be falling out of its bear flag pattern
after all.


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Market bottoms without high bearishness?
By Leigh Stevens

"You wrote in your recent Trader's article about the key things
you thought showed a market low and that you thought that those
things were pointing to a bottom recently.  What do you think of
today's market being sharply down?  And that the call/put ratio
you use has not shown as much put volume as some prior market
bottoms – I gather there is usually more of this than we've seen

My goal was of course, first and foremost to explain what I
thought were the key elements that would suggest a significant
market low.  All of them: Pattern, Oscillator reading of
overbought/oversold (e.g., RSI), Volume (10-day average of total
exchange up volume) and Sentiment (my call to put daily volume
ratio) – use the acronym "POVS" to remember; i.e., "Prisoners of
War" but vith a "V".

Market sentiment is the real world of trading, how much betting
is occurring on calls versus puts and this is probably the most
key of my indicators. Price is #1 and we can look at today's
chart to check where we are.

Next is "sentiment" – rarely does the market bottom if there is
not one or more bullish readings; i.e., abnormally high put
volume relative to call volume for equities options only (not
index options also).

In fact, my call-put indicator was the weak link in my thought
that the recent lows were about it for the downside. We had one
and only one reading that would qualify and it was 6 trading days
before what could have been the actual potential double bottom
low, versus the more common occurrence of such a call-put reading
happening 1-5 days in advance of a low in the S&P or Composite.

Speaking of double bottoms – we no longer have one as the closing
low was under the prior closing bottom, per the chart below.  I
can't guess where, price-wise, the market may bottom, but I can
predict that that price is likely to occur after put volume
builds up more than has in some days.  It seems to be human – I
mean – "trader" nature to have much more bearishness and put
activity before we see an upside reversal.

The rising line on my call/put indicator (highlighted with the
circle) is unusual if and during when the market is trying to
find a bottom after a significant decline.  It suggests too much
"complacency" and a "buy the dip" mind set.  This would be fine
in a rational world I suppose but hey, we're talking about the
MARKET here! There is typically more fear (of a further drop), at
major market lows, hence more put activity.

The prior Trader's Corner article on my "POVS" checklist of
pattern and indicators is found at –

Since I'm on the topic, here is the total update for the other
indicators that are part of the my checklist for the S&P: RSI
Oscillator and NYSE Up Volume (for the Nasdaq, Nasdaq up volume
is used) –

The RSI is heading back down again to an oversold extreme and the
10-day average (magenta line) of total (NYSE) Up Volume is headed
back and may again reach, or exceed, the 530 million "baseline".

Sometimes you get a kind of rolling bottom or maybe we're back
into a significant bear trend – although this seems doubtful
without a more significant rally first.  But, that's the market!
If it were so predictable everyone who traded would be rich or
richer than is the case.  Better to have the challenge!

I was going to get into the topic of using the Up Volume
indicator for the Nasdaq and about "broadening tops and bottoms"
which we could be seeing here even (a broadening bottom) - but
duty and a deadline calls.

Next time, for a look at using the Nasdaq Up volume indicator for
its use in calling Nasdaq bottoms – as with the NYSE, this (Up
Volume) indicator is mostly of interest in assessing whether the
market has bottomed. As well, the "broadening" formation or
broadening tops and bottoms.


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Financial global presence and the convenience of one group for
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