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Daily Newsletter, Monday, 08/09/2004

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The Option Investor Newsletter                   Monday 08-09-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: The Day After
Futures Wrap: See Note
Index Trader Wrap: Anemic volume finds fractional gains and losses


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     08-09-2004            High     Low     Volume Advance/Decline
DJIA     9814.66 -  0.67  9858.68  9811.12 1.30 bln   1284/1530
NASDAQ   1774.64 -  2.25  1787.44  1774.48 1.25 bln   1209/1777
S&P 100   522.42 +  0.59   524.73   521.83   Totals   2493/3307
S&P 500  1065.22 +  1.25  1069.46  1063.97
RUS 2000  518.38 -  1.27   522.56   518.15
DJ TRANS 2970.08 +  4.00  2987.32  2962.52
VIX        18.89 -  0.45    19.97    18.63
VXO        18.37 +  1.87    19.76    18.06
VXN        27.45 +  0.00    28.38    27.18
Total Volume 2,816M
Total UpVol  1,369M
Total DnVol  1,379M
52wk Highs      31
52wk Lows      443
TRIN          0.88
PUT/CALL      0.93
*******************************************************************

The Day After
Jonathan Levinson


The dust from Friday had a chance to settle today, with equities
rising weakly throughout the session and bonds, metals and
foreign currencies pulling back.  Friday was a big day, with news
released today from the Chicago Mercantile Exchange confirming
that Friday saw record volume for Eurodollar future contracts and
the second largest volume ever overall.  The CBOT reported record
volume for 10-year treasury note options and its third highest
overall volume ever.

The weak rise reversed at the close with the SPX closing slightly
positive and the Dow and Nasdaq finishing slightly negative.
Volatility fell sharply for the OEX (as reflected in the VXO),
aided not just by the absence of a sharp continuation drop but by
the absence of almost any action whatsoever.  Volume was lighter,
and the action looked and felt corrective.  I would have guessed
at a larger bounce following Friday's drop, and the intraday
oscillators rose from very bullish configurations.  But the price
refused to cooperate and the only thing that ran was the clock.

Weekly Dow Chart


The 10200-10250 level about which I was writing last week and the
rising weekly trendline held back last week's high, and bears
successfully ran the fumble to lower descending support on the
attempted weekly bull flag.  9800 support held, but the bounce
today, even before it reversed, was weak and entirely
uninspiring.  The weekly cycle oscillators resolved their
ambiguity to the downside, following the Nasdaq's lead, and new
lows for the year were set.  However, the drop in price got ahead
of the 10-week stochastic and while a downphase is in place, a
reversal from here would result in a bullish oscillator
divergence against the higher stochastic low.   That being said,
the weekly price and oscillator trend is down, and the only
source of strength is in the intraday cycles.   Round number
resistance at 9900 and at the Fibonacci levels of 10020 and 10150
are the levels to watch on any bounce.

Daily Dow Chart


The Dow held a miniscule gain through the session and almost
squeaked through with a small bullish harami. It was not to be,
however, and a small doji printed on the Dow's failure at the
highs and fractional closing loss.

The drop last week wiped out the daily cycle upphase that had
until then been delivering slow but steady gains.  Barring a
strong snapback rally tomorrow, the 10-day stochastic will
complete its bearish rollover and signal a new daily downphase
from a much lower price and oscillator high.  This action
confirms what the weekly chart above is telling us, as the weekly
cycle downphase crushes the daily cycle's upward attempts.  A
move above 9900 would likely be insufficient to avert the bearish
cross on the 10-day stochastic, while a break above 10175-10200,
in addition to baffling bulls and bears alike, would reverse the
current downphase, leaving a steep bullish stochastic divergence
and possibly threatening the weekly downphase as well.  That's
obviously the less likely scenario.  More likely is a
consolidation of the recent losses, a possible bounce to a lower
high below 10200, and a continuation of the downward influence of
the weekly cycle downphase.

Weekly Nasdaq Chart


The Nasdaq cracked last week as well, plunging to new lows for
the year.  The Fibonacci and confluence support at 1760 remains
key support below which the bullish interpretation of this year's
decline off the highs will be invalidated.  As with the Dow, the
weekly cycle has resolved itself into a clear downphase, the
plunge breaking the prior week's lows and reversing all of its
gains with a bearish engulfing candle for the week.  The weekly
cycle wants more downside, and the Fibonacci levels line up well
price confluence on the way down.  Any bounce from here would be
corrective within this timeframe, but with the decline still
availing itself of a bull-flag interpretation, bears need to be
vigilant for any daily cycle reversal to the upside that could
rise sufficiently to challenge the 1920 level.  There's strong
resistance from 1840 to 1890, however, and the powerful moves
have so far been to the downside.

Daily Nasdaq Chart


The Nasdaq's small loss resulted in weak doji as well-  it would have
been a gravestone doji had the upper range been higher, but there was
insufficient strength to result in so strong a reversal.  Volume was
considerably lower than we saw on Friday's breakaway downside gapper,
and as with the Dow, barring a very strong rally tomorrow, it's only a
matter of time before last week's steep drop reflects itself in an
equally steep stochastic downphase.  In retrospect, the daily cycle
upphase lasted just long enough to generate confirmation signals before
it fell apart.  While my personal feeling is that the vast majority of
news doesn't disrupt the cycles for long, in this case the overarching
weekly downphase helped to exacerbate the damage done by Friday's
employment report.  Furthermore, the decline was already in progress
before Friday- the drop only continued it, breaking the prior week's
lows.

Weekly TNX Chart


Last week's rally in bonds followed through on the previous
week's bullish reversal.  On the ten year note yield (TNX) chart,
that action is reflected as a bearish gravestone doji top in the
yield 2 weeks ago, followed by last week's precipitous plunge in
the TNX.  Today, the TNX closed higher by 2.7 bps at 4.244% as
part of what looked and felt like a corrective move across most
markets, but it's difficult and imprudent to judge the week's
candle after only one day out of 5's trades.   Resistance above
is at 4.34%, 4.4%, 4.48%, 4.5% and 4.65%, while support is at
4.18% and 4.0%-4.02%.  A break of that lower support of 4% could
turn out to be a bear wedge breakdown that would project an
implied target at the 2003 lows for the TNX (2003 highs for 10-
year treasury bonds).  The weekly cycle oscillators so far
suggest that such would be an overly-optimistic target for the
current move, but it remains a possibility.

The Commerce Department announced at 10AM that U.S. wholesale
inventories increased by 1.1% in June while sales were flat. May
inventories were revised up to 1.4% from 1.2% and sales were
revised down to 0.3% from the 0.5% previously reported.  The
inventory-to-sales ratio rose from 1.13 in May to 1.15 in June,
the highest reading since February 2004. In June, inventories of
durable goods increased 1.4% after a 1.9% increase in May, whiles
sales of durable goods rose 0.5% in June from May's flat reading.
The buildup of inventories against flat or declining sales
suggests an excess of optimism of companies producing more supply
than required by existing demand, and the market responded
negatively to the news on its initial release.  If the trend
continues, we would expect to see softness in future industrial
production and capacity utilization readings.

Oil was once again strong and in the news throughout the session,
with supply concerns dominating.  News of a Shiite Muslim
uprising targeting two pipelines that combine to deliver all of
Iraq's 1.9M bpd of exports was reported, and crude oil prices
spent the session above the 44 level and broke briefly above 45.
Iraq announced that it would halt production at the Southern Oil
Company in Basra because of threats from al-Sadr's Mehdi Army
militia, and that such halt would remain in effect until the
threat is over.

News that Russian YUKOS' deadline to pay transport fees is set to
expire on August 10th, and the consequent expectation of
uninterrupted supply of oil and refined products by rail from
that day forward didn't help.  This positive spin reported by
Reuters was countered by negative interpretations of the same
news to the effect that production would interrupted in the
interim due to the state-owned railway's refusal to deliver oil
for YUKOS on credit.  Further worries about the upcoming
Venezuelan election and possible challenges to Hugo Chavez also
made the news and were interpreted negatively for
supply/positively for price.

The overriding concern, however, appears to be the fact that OPEC
is currently pumping at its highest levels since 1979.  OPEC
accounts for half the global supply of crude oil, and while
there's talk of the cartel's willingness to consider increasing
production by 1 to 1.5M bpd at its September 15th meeting, there
is so far no evidence of weakness in the crude rally that today
challenged the $45 level.  It continues to appear that business
risk, terrorist threats, consumer demand and geopolitical
instability all mitigate in favor of higher oil, and the results
continue to be seen in the ongoing extension of the oil rally.

Weekly chart of Crude oil


Bear Stearns analyst David Strine was bearish on airlines today,
describing the sector as "broken" with oil above $40 per barrel.
The Amex Airline Index, XAL, was weaker through much of the
session as the broader indices rose but managed to close higher
by 20 cents at 401.  Strine felt that the index at current levels
would require oil at $30 to be attractively valued.  The XAL is
down nearly 30% since its end of June highs.  Just after noon, it
was reported that DAL would be dipping into its cash reserves to
pay certain current obligations, with 2004 cash flow being
compromised by lower yields and higher fuel prices.  DAL closed
lower by 28 cents or 6.81% as of this writing at 3.83, while
NYMEX September crude oil futures were trading 44.80 as of this
writing, with an intraday spike high of 45.25, a new contract
record.

There was trouble for UALAQ as well, with United's pilots union
promising to resist any move that would threaten its pilots'
pensions.  Captain Mark Bathurst, chairman of the pilots' union,
said that any such move could "potentially plunge labor relations
at United into years of hostility and chaos," countering bankrupt
UAL's effort to cut pension payments in an attempt to bolster its
cashflow.  UALAQ closed lower by .05 or 4.35% at 1.10.

Google announced that it would be adding an additional 1.06M
shares to its IPO for a total of 25.7M shares to be offered at an
estimated $108-$135 for estimated proceeds of max. $3.47B.  These
additional shares are to come from insiders of the company.  The
Company also announced that 2.7M shares with a maximum value of
$365M are to be issued under a settlement with YHOO pursuant to
which YHOO will dismiss its patent suit against Google and Google
will license several of YHOO's patents.  YHOO closed lower by
1.23% at 25.70.

For tomorrow, all eyes will be on the 2:15 FOMC rate
announcement, with the consensus expecting a 25 bp increase in
the overnight rate to 1.5%.  While the fates of most consumers
continue to be tied most directly to the market rates which have
declined since the April highs, the Fed's response to recent
economic data and, I imagine, asset prices most acutely
highlighted by the rally in oil will be closely watched across
all markets.  On the one hand, the recent wave of accommodation
and stimulus from the Fed has arguably spurred inflation
reflected in, among other things, housing, oil and other asset
prices.  On the other hand, as Friday's bleak employment report
emphasized, the productivity gains on which the Fed has been
focused have occurred while bypassing the key US labor market,
exposing the economy to the vulnerability of high levels of
consumer debt and a lack of wage inflation with which to offset
it.

The first order of business tomorrow will be the 8:30 release of
preliminary non-farm productivity for Q2, estimated at 2% from
Q1's 3.8% reading.  While at other points over the past year
we've seen disappointments in the economic data catching a bid in
the markets, presumably due to speculation that it would attract
further stimulus from the Fed, recent reactions have seen a
return to the more conventional behavior of buying good news and
selling bad.  With Q2 productivity obviously a key report in the
Fed's crosshairs, there's the potential for wild swings not just
at the 2:15PM FOMC announcement but also for the 8:30 data.
However, the Fed's open market operations of the past 2 sessions
do not suggest any great caution or fear on the part of the Fed,
with a net drain on Friday and a very slight add announced this
morning.  Based on this action, if forced to guess, I would think
that the 8:30 data will be inline with expectations.

Guessing aside, last week's move resolved a great deal of
uncertainty (ie. weekly timeframe) to the downside.  Today's
bounce was so weak that I could almost believe it to be a stealth
accumulation move toward a run higher.  However, the weekly and
daily cycles are both oriented bearishly here, and the widely
expected intraday bounce was of such a small range as to have
only been worthwhile on a scalp basis.  Until either the upper
resistance levels discussed above are broken or a surprise daily
cycle upside reversal occurs, bounces to resistance should be
sold.  While there's great bullish potential in catching the
bottom of a drop as steep as the one we saw last week, bullish
stochastic divergences and all, the risks of fighting the trend
and catching falling knives are the stuff of traders' clichis.
The trend is your friend, and any countertrend trades need to be
kept on a tight leash.


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

Anemic volume finds fractional gains and losses

The very broad NYSE Composite ($NYA.X) 6,227 squeaked out a 2-
point gain, while the also very broad NASDAQ Composite ($COMPQ)
1,775 extended its losing streak to five sessions, where anemic
volume hints investors were unwilling to make too many bets ahead
of tomorrow afternoon's FOMC decision on interest rates.

Market Snapshot / Internals - 08/09/04 Close



Economic data released at 10:00 AM EDT found little response when
the government said June wholesale inventories rose 1.1% while
sales remained flat, with the inventory to sales rising from
record low reading of 1.13 to 1.15.

Pivot Analysis Matrix -



The major indices traded tight intra-day ranges, where mid-
session gains faded toward the close.  The Dow Industrials (INDU)
traded a very narrow 47-point range, and like most of the major
indices in our pivot matrix had a difficult time retesting their
MONTHLY S1s.

Dow Industrials (INDU) Chart - Daily Intervals



The Dow Industrials (INDU) finished relatively unchanged, where
breadth ended up negative at 16 to 14 after running much more
positive throughout the bulk of the session.  Merck (NYSE:MRK)
$44.07 +1.07%, General Electric (NYSE:GE) $31.85 +1.04% and
Exxon/Mobil (NYSE:XOM) $45.56 +0.97% ended up being component
winners, while Intel (NASDAQ:INTC) $22.57 -0.87%, McDonald's
(NYSE:MCD) $26.16 -0.68% and Coca Cola (NYSE:KO) $43.22 -0.64%
made sure the Dow wouldn't finish in the green.

With Friday's nonfarm payroll figures weak, the Fed will most
likely be "wrong," regardless of its decision on interest rates
tomorrow.  Leave them unchanged and market participants will read
"the Fed sees recession on the horizon."  Raise a quarter point
and with sentiment negative, market participants will read "the
Fed has lost its mind as economy isn't generating jobs."

Jeff Bailey


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The Option Investor Newsletter                   Monday 08-09-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: AZO, EBAY, WHY, TXT
Dropped Calls: CCMP
Dropped Puts: None
Watch List: Oil to Airlines and more


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

AZO - put play -
 As mentioned in the MarketMonitor today, this
 failed rally near $75.00 could be a new bearish
 entry point.  Look for a drop under $74.00.

---

EBAY - put play -
 Be prepared to exit near $71.50.

---

WHR - put play -
 This rally back to resistance near $61.50 looks
 like a new bearish entry point.  Look for a drop
 under $59.75.

---

TXT - call play -
 Heads up!  TXT has slipped to support at $61.00.
 Bulls need to see it bounce above $60.00 soon.


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

Cabot Micro - CCMP - close: 32.04 change: -0.63 stop: 31.75

The SOX semiconductor index tried to rebound today but it didn't
get very far.  The intraday chart doesn't bode well for tomorrow
and we could see the sector hit new lows soon.  Meanwhile CCMP
has followed through on its Friday decline and broke through
support at the $32.00 level.  We were stopped out at $31.75.
Technicals are bearish and its MACD is near a new "sell" signal.
We would look for CCMP to retest the $30.00 level.

Picked on August 1st at $35.46
Change since picked:    - 3.42
Earnings Date         07/22/04 (confirmed)
Average Daily Volume =     935 thousand
Chart =



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

None


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

Oil to Airlines 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.
___________________________________________________________________

Amerada Hess - AHC - close: 79.26 change: +1.13

WHAT TO WATCH: We mentioned AHC in the MarketMonitor this
afternoon.  Shares of this oil/gas stock have slipped from their
recent highs in the sector-wide profit taking that hit last week.
While AHC has broken support at the $80.00 level it has not yet
broken support at its simple 50-dma.  Over the past several
months buying dips to the 50-dma has been a profitable strategy.
The question now is will that strategy work again or is AHC still
too overbought and in need of more "consolidation"?  Readers can
look for a rebound above today's high near $80.20 and target a
move to the highs at $84 and beyond.  Or look for a drop under
the 50-dma.  Be careful when considering bearish plays as the
100-dma may act as support.

Chart=


---

British Airways - BAB - close: 37.56 change: -1.39

WHAT TO WATCH: Airline stocks have been sinking for months as
crude prices and concerns over terrorism rise.  Yet many of them
are so low that they're too cheap to play or at least play
options on.  Now BAB doesn't have a lot of option volume but it
is still high enough on a price basis that option traders could
buy puts.  Shares of BAB have already broken down through support
at the $40.00 mark in the last two days.  However, this may not
be an entry point as BAB is now testing P&F support near $37.
Look for a bounce and failed rally under $40.00 or look for a
drop under $37.00.  The P&F chart points to a $31.00 target.

Chart=


---

Sunoco - SUN - close: 62.37 change: +1.54

WHAT TO WATCH: This oil/gas stock has fallen sharply in August
but buyers defended the stock at the $60.00 support level.
Today's bounce is a small confirmation of Friday's intraday
rebound but SUN still has overhead resistance at $64 and its
simple 100-dma.  While it may be tempting to try and buy the
bounce from support it may be more prudent to watch it for a more
convincing move.  Should it breakdown from here look for
technical support at the simple 200-dma near $57.50.  The P&F
chart is bearish and points to a $50 target but shows strong
support near $59.00.

Chart=


---

Vimpel Communications - VIP - close: 84.20 change: -1.46

WHAT TO WATCH: The four-month downtrend of lower highs in this
Russian telecom stock is about to push VIP back through its 200-
dma again.  Aggressive traders might consider positions now given
its bearish P&F chart points to a $71 target.  More conservative
traders can wait for VIP to breakdown under round-number
psychological support at the $80.00 mark.

Chart=



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

SIE $39.81 -1.69 - We mentioned SIE as a bearish candidate in the
MarketMonitor this morning.  The stock has broken through support
at the 100-dma and the $40.00 level on a downgrade.

ESRX $60.40 +0.19 - ESRX may be very oversold but if it breaks
the $60.00 mark it could be a new entry point for puts.


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would welcome you as a permanent subscriber.

The monthly subscription price is $49.95. The quarterly
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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**********

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