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Daily Newsletter, Thursday, 08/12/2004

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The Option Investor Newsletter                Thursday 08-12-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Hewlett Packard Disappoints
Futures Wrap: See Note
Index Wrap: H-P-uewwww
Market Sentiment: Markets Slide Again


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      08-12-2004           High     Low     Volume   Adv/Dcl
DJIA     9814.59 -123.70  9936.48  9808.54 1.71 bln  898/2308
NASDAQ   1752.49 - 29.90  1774.68  1751.95 1.63 bln  825/2220
S&P 100   519.56 -  6.98   526.54   519.47   Totals 1723/4528
S&P 500  1063.23 - 12.56  1075.79  1062.82
W5000   10293.52 -159.20 10416.62 10291.76
SOX       365.27 -  7.40   372.67   363.39
RUS 2000  517.10 -  9.53   526.63   517.07
DJ TRANS 2995.44 - 54.50  3050.03  2993.93
VIX        19.08 +  1.04    19.30    18.36
VXO (VIX-O)19.16 +  1.63    19.53    18.13
VXN        28.28 +  1.32    28.54    27.41
Total Volume 3,629M
Total UpVol    472M
Total DnVol  3,125M
Total Adv  1986
Total Dcl  5133
52wk Highs   34
52wk Lows   463
TRIN       2.54
NAZTRIN    1.63
PUT/CALL   1.06
************************************************************

Hewlett Packard Disappoints
by Jim Brown

Disappoint is probably the wrong word for the HPQ earnings
this morning. Not only did the news knock -16% off HPQ
stock but knocked tech stocks back to August 2003 levels.
New lows are beginning to be the norm and the event risk
is only increasing as the month progresses.

Dow Chart – Daily


Nasdaq Chart – Daily


SPX Chart – Daily




The morning started calmly with Jobless Claims neutral
at a slightly lower 333,000 for the week and slightly
below consensus estimates. No news here but plenty of
other events to worry the market.

Import and Export prices rose +0.2% in July and erased
the June loss. Unfortunately the main component for the
rise was higher oil prices. The gain for the last year
stands at +5.5% but only +2.6% when you remove the oil
impact. This is good news for the economy because it
shows the recent soft patch took nearly all signs of
inflation out of prices. Import prices for consumer
goods ex-autos were unchanged for the second consecutive
month. This was good news for the market but the news
was still rising prices due to higher oil.

Retail Sales for July rose +0.7% and erased the -0.5%
decline in June. A strong jump in auto sales was the
main cause as dealers piled on the incentives to dump
excess inventory in front of the change in model years.
Remove auto sales and the headline number would have
only risen +0.2%. Consumers are still on hold without
a powerful incentive to part with their cash as in the
$5,000+ rebates on autos. The next report will show
any back to school rise but weekly reports have yet
to show any material gains.

Business Inventories rose +0.9% and well over consensus
estimates of +0.6%. This was the largest gain in more
than two years and the gains were accompanied by only
a minimal +0.1% jump in sales. The ramp in inventories
could help to boost the next GDP revision but overall
it is not a good sign when not accompanied by a rise
in sales. We have seen Cisco and Intel and various
other tech companies complain about rising inventory
levels as a result of slow sales and this is confirmation
on a much broader scale. It is time for consumers to
rush into the gap or recession fears will return to
the market. If inventories are rising because dealers
are experiencing a pickup in sales then this number
would be highly positive. Unfortunately it appears
the buildup was unintentional and could put the brakes
on manufacturers prematurely.

The FOMC minutes for June contained some bearish news
with several members openly concerned about the jump
in inflation. Several argued to remove the "measured
pace" phrase to allow them to hike rates faster as in
1994. This is very negative to market sentiment as it
shows the Fed is ready to aggressively hike and only
the June swoon in the economy kept them from moving
faster at the last meeting. The Fed, constantly looking
down from their ivory tower, continues to see strongly
bullish signs in the economy. This report was seen as
bearish with the dissention among the ranks as to the
pace of hikes.

The major event risk to the market is no longer the
Olympics but appears to have shifted to any remaining
tech earnings. HPQ surprised the markets this morning
with earnings a week before they were expected and
with a huge earnings miss. They also warned that the
tech weakness would continue through the current
quarter. Carly Fiorina said demand had dropped sharply
at the end of the quarter as the economy stumbled.
Earnings after items were only 24 cents and analysts
were expecting 31 cents. HPQ stock was pounded for a
-16% haircut and the tech ripples pushed many other
high profile tech stocks to new 52-week lows. Many
claim the problem was related to HPQ only. They saw
declines in enterprise servers and storage which is
exactly where IBM and Dell are showing gains. Still
the negative sentiment was indelibly etched on the
market consciousness at the open and it lasted all
day.

Even the news from IBM failed to rally techs. IBM
said they were hiring 18,800 new employees in 2004,
up +8,800 from their prior forecast. IBM is seeing
strength in its global services business and its
enterprise server division. This will bring IBM
employment back to highs not seen since 1991 when
they had 344,000 workers. In IBM's heyday in the
mid 1980s they employed over 400,000. The bad news
was only one third of the 18,800 new hires would be
in the U.S. The rest would be half in Asia and the
remainder dotted around the globe.

Dell also reported earnings tonight with results
inline with estimates at 31 cents per share. Dell
is showing growth in servers, storage and printing
and continuing to take market share. After the HPQ
news today we know where most of their share came
from. The company said demand improved on a global
basis with a +19% increase in shipments. Shipments
to Europe, Middle East and Africa rose +30%. Dell
saw a +44% increase in server shipments and a +60%
increase in storage products. What was unsaid was
the majority of Dell's growth was outside the U.S.
They did report gains in the U.S. but they were far
below the gains in the global market.

With those three major companies above you have the
good news and bad news about the current tech story.
Dell is a winner and met estimates with strong overseas
sales and lower component costs. IBM is adding nearly
13,000 workers to handle business outside the U.S.
and is seeing its biggest gains in its services
business. HPQ, stumbled and both IBM and DELL took
advantage of the situation. Did business improve to
the point that IBM and Dell profited from the gains
or did they just capture the share that HPQ lost?
It is not a zero sum game but with all three companies
running neck and neck it should diminish the overall
impact of Dell's report. The Dell CFO was the first
to say that they were continuing to gain market share
at a rapid pace.

Also tanking the market was another new high in the
price of oil. Oil soared to $45.75 and closed at
$45.45 as bad news for the sector continues to mount.
The Yukos saga continued with increasing fears that
they may have to cease production in as much as half
of their 1.7 million barrels per day due to a freeze
on their assets. The war heated up again in Iraq
with a raid against Al Sadar and fears of retaliation
with oil sabotage helped to spike prices. Twin storms
Bonnie and Charlie are shutting down production in
the gulf for two days this week as they churn across
the oil fields. The one piece of good news came from
Venezuela which said there would be no impact to oil
shipments from the coming election. Analysts had
feared a slowdown depending on the victor.

TrimTabs.com said today that $1 billion flowed out
of equity funds for the week ended Wednesday. My
initial thought was "is that all?" With the strong
downtrend in place I would have thought it would have
been higher but I forgot about the two day rally in
the middle. Money flow is like the wind, it changes
on a whim with the ebb and flow of market fortunes.

Those fortunes have been highly volatile recently
with Thursday's -123 point Dow drop the fourth triple
digit day in the last two weeks. Heck we have not
had that kind of volatility in ages. Welcome to
August and the start of the three most bearish months
of the year. With only two weeks behind us and a lot
of potential potholes ahead it could be a rough month.

The Dow closed at 9814 and only a little more than
a dozen points from a nine month low. 9800 is the
last support level before we risk a sharp drop to
9500 and a 38% retracement of the 2003 rally. That
may sound like a lot but considering the strength
and length of that rally, from the 7416 March low
to the 10753 February high the Dow rebounded +45%.
In perspective giving back a thousand points of
that +3300 point gain does not seem so drastic.

The Nasdaq has been the focus of the tech wreck and
the bloodshed does not appear to be over. The Nasdaq
closed at 1752 and a level not seen since last AUGUST.
Sound familiar? Even during the strong bull run in
2003 the Nasdaq dropped about -7% in the first two
weeks of August before charging higher. Without the
same economic dynamics in place today, warnings every
day and major event risk in our future the odds of
a similar rebound are slim. The Nasdaq has risk to
1600 which is major support. 1700 was my initial
target as the 50% retracement but we are already
very close to that level with a lot of bumpy road
ahead. The equivalent level on the SPX would be 965
and that seems light years away from today's 1063
close. I am not predicting it but just pointing out
the worst case scenario.

The SOX continues to be the weakest link with a
break below 385 support on Wednesday and a close
at 365 on Thursday. I am now targeting SOX 350 for
bargain hunters to appear.

SOX Chart – Daily



Our problem for the coming weeks is not specifically
the various high risk events but the constant earnings
warnings as the current cycle draws to a close and the
lack of any meaningful catalyst to push us higher.
Everyone knows that earnings are slowing and the
warnings serve to punctuate that fact on a daily
basis. Despite the slowing they are still strong
but that factor is lost on investors facing the "why
buy" question. Add in the potential for $50 oil before
the month is out and we could see even more warnings
from those companies that depend on oil for their
products. The economy continues to sputter and traders
can't decide if we are growing or recessing and the
Fed is determined to continue its rate hike scenario.
Now under this shaky set of market building blocks
place several firecrackers of event risk with fuses
already smoldering. The stage is set and the potential
for further, possibly significant, market events to the
downside far outweigh the upside potential over the
next three weeks.

We also have a market milestone coming next week when
Google prices its IPO. They said after the close today
that the auction would begin tomorrow and the IPO would
be priced next week. With the smoke swirling around the
deal this could send a very negative message to the
street should the IPO not find enough buyers to meet
the posted prices. With two thirds of investors polled
saying they would not touch the IPO and the majority
of those left saying they would buy only at a much lower
prices, GOOG may have a challenge ahead. If the auction
does go off successfully it will take $3 billion out of
the tech marketplace at a time when techs need all the
help they can get. Should be interesting.

As an investor I would not worry about any impending
future dips and use them as buying opportunities for
bargain stocks. Look for blue chips beaten down from
the last several months of selling and tech stocks with
rapidly increasing earnings. Look for lower lows over
the next three weeks and plan on entering in small
increments as your target prices are reached. You do
not have to be a trader to profit from a bear market.
You only have to be willing to buy good stocks in a
down market.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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


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

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

H-P-uewwww

The Dow Industrials (INDU) 9,814.59 -1.24% fell 124 points,
erasing all of this weeks gains, and despite some relative
strength from banks and retailers, the S&P 500 (SPX.X) 1,063.23
-1.16% also erased weekly gains in today's session.

A negative quarterly earnings surprise from Dow component Hewlett
Packard (NYSE:HPQ) $16.95 -13.16%, without so much as a pre-
quarter earnings warning, cast the continued stench on technology
stocks, like that of a stockyard on a warm summer day.

Not helping an equity bull's cause was the continued rise in
black gold, where September Crude Oil futures (cl04u) settled 98
cents higher at $45.50 and another new contract high.

U.S. Market Watch - 08/12/04 Close



The non-weighted Amex Gold Bugs Index ($HUI.X) 185.13 +1.95% and
weighted Gold/Silver Index ($HUI.X) 85.64 +0.87% recouped earlier
week losses.

HUI component Harmony Gold (NYSE:HMY) $11.60 +10.16% jumped $1.07
per share on speculation that it might be a potential takeover
target, while Bema Gold (AMEX:BGO) $2.00 -4.76% threatened to trade
a 52-week low ahead of tonight's quarterly earnings report.

Market Snapshot / Internals - 08/12/04 Close



The major indices saw a notable decline just after today's 10:00
AM EDT release of June business inventories was released.  I
think the troubling part of the report was that sales rose a
tepid 0.1%, which wasn't much of a follow through to May's robust
0.8% rise.  At 10:00 AM EDT, and intra-day study of September
Crude Oil Futures (cl04u) had the contract trading $45.18 and at
11:00 AM EDT had started inching higher still at $45.30.

Traders should be prepared for some August option expiration.
Several traders noted "sudden" volume spikes in NASDAQ-100
components Whole Foods Market (NASDAQ:WFMI) $74.42 -2.13% and
Paychex (NASDAQ:PAYX) $29.93 -0.82%, where combined with
"suspicious" pegging of their DAILY pivot levels with those found
in the QQQ, hints computers and traders are hard at work ahead of
next Friday's expiration.

The ONLY positive thing I saw today was that the Semiconductor
Index (SOX.X) 365.27 -1.98% found a buyer or two at its WEEKLY S2
later in the afternoon.

Pivot Analysis Matrix -



With the Dow Industrials (INDU) 9,814.59 -1.29% showing some
"strength" within the pivot matrix, I'm marking DAILY R1 and
MONTHLY S1 correlations as near-term and tentative resistance,
where a move 10-points above would be an alert to further
strength to the WEEKLY Pivot and DAILY R2.

The S&P Banks Index (BIX.X) 347.04 -0.58% while pulled lower on
broader-market weakness provides traders with the "critical"
support correlation at WEEKLY Pivot and DAILY S2.  Note today's
tight range in the BIX.X, so I'm correlating lower at DAILY S2.

I mark tomorrow's DAILY S1 in the QQQ for those that may be short
the QQQ by itself (without the offsetting selling of out-the-
money August $32 puts as profiled in the Market Monitor).  My
original swing trade bearish target for the QQQ was $32.25.

For traders that are short the QQQ at previously profiled $33.18,
stop $33.55, target $32.25 and did sell the out-the-money August
$32 puts (QAVTF) for $0.25 premium, we're not planning on doing
ANYTHING with the QQQ trade at this point, but if stopped out on
the QQQ underlying short, I will be closing out the August $30
puts at the same time.

Now... on the downside, here's what we would look to do.  EVEN IF
YOU don't hold this trade (short the QQQ, sold the August $30
puts) understand it, and be alert to this.

By being short the August $30 puts, I'm OBLIGATED to BUY QQQ at
$30.00 between now and next Friday's expiration.

QQQ short while having sold the August $32 puts



The QQQ trades higher at $32.62 (see bid) in tonight's extended
session after Dell Computer (NASDAQ:DELL) $33.12 -1.34%, which
trades higher at $34.00 reported upbeat quarterly earnings.

Now... you can probably pick out where my current $33.55 stop is,
in relation to the QQQ's WEEKLY Pivot of $33.47, where on Tuesday
(08/10/2004) I profiled the underlying QQQ short just ahead of
the FOMC announcement on interest rates, when the QQQ was trading
$33.18.  Later that afternoon, the QQQ pegged its weekly pivot
with a session high of $33.47, but has traded lower since.

Now, the following day, oil saw a rather sudden intra-day price
move lower on reports that Saudi Arabia was able to boost
production to keep oil prices from continuing to rise, and with
the Market Volatility Index (VIX.X), which I (Jeff Bailey) follow
more than the VXO.X and VIX.X slipping below the 18.00 level at
that point, I decided to profile the selling of the August $32
puts for $0.25 per contract, when the QQQ was starting to move
off its then lows of the session at $32.80.

Market Volatility Index (VIX.X) - Daily Intervals



I apologize for the rather "compressed" daily interval bar chart
of the VIX.X, but I wanted to give some historical perspective,
where over the years, I've shown this exact chart of the VIX.X,
where the BLUE retracement is one I've used to simply define
levels that for years, the VIX.X tends to find options market
makers implementing various strategies of buying/selling puts and
calls.

The main point it to understand that we may be nearing a level
where so far this year, we've seen the major indices find some
inflection point lows when the VIX.X has traded from 20 to 21.22
as marked by the 80.9% retracement level.

With oil at record highs, it is nearly IMPOSSIBLE for anyone to
see a top in oil prices.  That's the scary thing about supply and
demand, when demand is obviously strong and price of oil is
achieving new highs.

Options market makers that are selling puts to market
participants, where here too demand must be growing (higher
VIX.X) we simply want to be alert to a potential inflection
point, from the options market.

Let's face it.  There has been an uncanny correlation between
higher oil price and lower stock prices, yet the VIX.X is an
instrument/tool that provides somewhat of an offsetting
observation, where trend is not as apparent, but has tended to
see inflection points, where levels above 20 have tended to be
some near-term inflection points for the major indices.

Jeff Bailey


****************
MARKET SENTIMENT
****************

Markets Slide Again
- J. Brown

Ouch!  The Stock Traders Almanac wasn't kidding when it said
August was the worst month of the year for the Dow Industrials.
It also stated that August is the second worst for the NASDAQ.
As Jim pointed out in the wrap tonight we're only half way
through the month and we still have the Olympics and the
Republican National Convention ahead of us.

The sell-off this week has been fueled by disappointing earnings
from tech heavy weights CSCO and HPQ but it has been exacerbated
by the record high prices in crude oil.  Fears that corporate
earnings may slow down faster than previous expected on top of
fears that the economy may be slowing added to fears that we
could see a terrorist event in Athens, New York or somewhere
where in the global oil supply all add up to a big reason why
investors are not eager to buy stocks right now.

Looking at some of the investor sentiment gauges we see the
VIX/VXO/VXN all gaining sharply and nearing their recent highs.
While it could be a sign that we're near a bottom veteran traders
know that there's nothing to stop these volatility indices from
skyrocketing higher.  Likewise the ARMS index's moving averages
are all nearing bullish reversal levels but that doesn't mean we
can't see them climb even higher.

Market internals were obviously negative today.  Declining stocks
outnumbered advancers 20-to-7 on the NYSE and 22-to-8 on the
NASDAQ.  Down volume was about 7-to-1 over up volume on the NYSE
and about 6-to-1 on the NASDAQ.  Looking across the various
sector indices I'm seeing a lot of new bearish breakdowns and new
lows.  Plus, those sectors that had weathered the recent weakness
with any strength are starting to roll over as well.

Overall the market and most of the stocks I looked at today look
terrible and when everything starts to look this bad it makes me
suspect that we could be in for a bounce soon but until then the
"trend is your friend".  Keep in mind that doesn't mean we should
be opening huge bearish positions but if that's all the market is
providing (bearish opportunities) then we can choose to sit out
or initiate small, speculative plays.

Something to take note of is the Stock Trader Almanac's
observation that the last week in August has been very bearish
for six out of the last seven years.  Yes, this is definitely a
tough spot to confidently buy stocks right now.


-----------------------------------------------------------------

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9208
Current     :  9814

Moving Averages:
(Simple)

 10-dma:  9985
 50-dma: 10133
200-dma: 10227



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  979
Current     : 1063

Moving Averages:
(Simple)

 10-dma: 1083
 50-dma: 1102
200-dma: 1108



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1220
Current     : 1304

Moving Averages:
(Simple)

 10-dma: 1352
 50-dma: 1406
200-dma: 1444



-----------------------------------------------------------------

CBOE Market Volatility Index (VIX) = 19.08 +1.04
CBOE Mkt Volatility old VIX  (VXO) = 19.12 +1.59
Nasdaq Volatility Index (VXN)      = 28.28 +1.32


-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume

Total          1.06        658,641       695,880
Equity Only    0.98        506,274       495,092
OEX            0.72         42,035        30,373
QQQ            2.52         65,502       165,253


-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          53.2    - 1     Bear Confirmed
NASDAQ-100    26.0    - 1     Bear Confirmed
Dow Indust.   46.7    - 7     Bear Confirmed
S&P 500       47.2    - 1     Bear Confirmed
S&P 100       45.0    - 4     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: 1.74
10-dma: 1.63
21-dma: 1.42
55-dma: 1.25


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
points.


-----------------------------------------------------------------

Market Internals

            -NYSE-   -NASDAQ-
Advancers     749       803
Decliners    2050      2202

New Highs      29        13
New Lows       92       198

Up Volume    211M      235M
Down Vol.   1473M     1333M

Total Vol.  1700M     1578M
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

Commercial traders haven't made any big bets but the data
we're looking at doesn't reflect the big sell-off in the last
two days.  Small traders remain bullish as of this report.


Commercials   Long      Short      Net     % Of OI
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%)
08/03/04      401,619   419,429   (17,810)   (2.2%)

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
07/13/04      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%
08/03/04      128,510    88,833    39,677    18.3%

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

Not much movement in the e-minis from commercial traders.  Small
traders have turned a bit more bullish, but again this is before
the big sell-off.


Commercials   Long      Short      Net     % Of OI
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%)
08/03/04      340,053   428,736   ( 88,683)  (11.5%)

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
07/13/04      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%
08/03/04      195,105     68,717   126,388    47.9%

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


NASDAQ-100

Commercial traders have reversed their previous gain by
paring their longs and adding to their shorts.  Meanwhile
small traders have turned bearish again.


Commercials   Long      Short      Net     % of OI
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%
08/03/04       42,771     36,863     5,908    7.4%

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
07/13/04        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%
08/03/04        8,995    13,901    (4,906)  (21.4%)

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

DOW JONES INDUSTRIAL

Commercials seem to be taking some money off the table as
their bullish stances seems to waver a bit here.  Small traders
pared back their longs and their shorts but remained net
bearish.


Commercials   Long      Short      Net     % of OI
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%
08/03/04       30,118    25,029    5,089       9.2%

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
07/13/04        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%)
08/03/04        4,325     5,212   (  887)   ( 9.3%)

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 08-12-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: EBAY
Call Play Updates: POT, SYMC, TXT
New Calls Plays: None
Put Play Updates: AMZN, AZO, CAT, DGX, RIMM, WHR
New Put Plays: HIG, LM


****************
PICKS WE DROPPED
****************

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.


CALLS:
*****

None


PUTS:
*****

eBay Inc - EBAY - close: 77.51 change: +1.13 stop: 77.50

The EBAY momentum train strikes again.  EBAY has been bouncing
solidly in the face of a sharp decline in the NASDAQ and the rest
of the tech sector.  Is it just an oversold bounce or signs of a
potential bottom.  The argument could be made for both but bulls
will look at the August dip as a "higher low" and with technicals
starting to edge higher again the momentum traders start to get
eager for another run.  We've been stopped out at $77.50.

Picked on August 3rd at $77.08
Change since picked:    + 0.43
Earnings Date         07/21/04 (confirmed)
Average Daily Volume =     9.1 million
Chart =



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option* and futures traders. The combination of the proven Man
Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for
success.

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********************
PLAY UPDATES - CALLS
********************

Potash - POT - close: 99.86 change: -1.29 stop: 97.51

POT offered us the dip we were looking for.  Unfortunately, the
depth of the dip has been exaggerated by yet another triple-digit
drop in the Industrials.  The close under the $100.00 mark is a
psychological negative but POT still has a chance to bounce from
the $98.00 level.  Some traders may feel more confident sitting
on the sidelines until POT bounces back above the $100.00-101.00
levels and that's okay.  Remember that POT is due to split 2-for-
1 on August 18th.

Picked on August 10th at $102.17
Change since picked:      - 2.31
Earnings Date           07/29/04 (confirmed)
Average Daily Volume =       180 thousand
Chart =


--

Symantec - SYMC - close: 45.71 change: -0.44 stop: 44.49*new*

It's getting tougher every day for SYMC to hold on but hold on it
has.  The punishment being dealt to the NASDAQ and the GSO
software index has been severe but SYMC has been weathering the
storm very well.  The problem now is that we're starting to see a
little bit of weakness and the technicals are starting to fade a
bit.  It's extremely tough to be bullish with the markets
crashing lower so we're restating our caution.  We're also going
to put some action behind our sentiment by raising our stop loss
to $44.49, which is underneath the recent lows near $44.60.  We
still believe a bounce from $44.00 would look like an entry point
but we want to play it safe.  If we get stopped out for a minor
loss here we can re-enter when the market turns around.

Picked on July 27 at $ 44.91
Change since picked:  + 0.90
Earnings Date       07/21/04 (confirmed)
Average Daily Volume:    5.4 million
Chart =


---

Textron - TXT - close: 61.70 change: -0.70 stop: 59.49

As an industrial stock (not a component of the Dow) shares of TXT
have been holding up pretty well as the markets tumble lower.
The recent bounce from $61.00 looked like a call-buying entry
point.  Unfortunately, playing bullish positions with the markets
hitting new lows for the year is very tough.  Technicals are
starting to fade in TXT and conservative traders may want to cash
out and sit on the sidelines to wait it out.  We're going to keep
TXT alive for now since support at $61.00 and $60.00 is holding
but we're not suggesting new plays at this time.

Picked on July 26th at $60.72
Change since picked:   + 0.98
Earnings Date        07/22/04 (confirmed)
Average Daily Volume =    622 thousand
Chart =



**************
NEW CALL PLAYS
**************

None


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*******************
PLAY UPDATES - PUTS
*******************

Amazon.com - AMZN - close: 36.29 change: -0.27 stop: 38.25*new*

Hmm... the action in AMZN is peculiar.  The NASDAQ slid another
1.67% and the rest of the tech sectors fell even further but not
AMZN.  It's as if the sellers are taking a breather. Technicals
are almost ready to turn bullish because AMZN is so oversold.
Looking closer we see that AMZN could be building a bear-flag
pattern over the last few sessions as the flag.  A breakdown back
under $36.00 should begin the next leg down but we'd suggest
readers wait for a drop under $35.00.  In the meantime we're
going to lower our stop loss to $38.25.

Picked on August 3rd at $37.61
Change since picked:    - 1.32
Earnings Date         07/22/04 (confirmed)
Average Daily Volume =     8.3 million
Chart =


---

AutoZone - AZO - close: 73.60 change: -2.16 stop: 76.51

Good news for AZO bears today. The recent bounce turned out to be
a failed rally after all.  The stock has slipped back under the
pivotal $75.00 mark and confirmed the move with the close under
$74.00.  We see this as a new entry point for puts.

Picked on August 4th at $74.60
Change since picked:    - 1.00
Earnings Date         05/26/04 (confirmed)
Average Daily Volume =     1.0 million
Chart =


---

Caterpillar - CAT - close: 71.76 change: -0.30 stop: 73.25

We smell danger!  CAT has bucked the recent trend in the
Industrials and as a component that's no easy task.  Share appear
to be coiling for a breakout over the $72.00 level.  Technicals
look bullish with the MACD very close to a new "buy" signal.  The
lack of participation in today's market decline is bad news for
the bears.  We're suggesting to readers that it's okay to exit
now to keep losses to a minimum.  We're going to give CAT one
more day and if it doesn't turn lower ahead of the weekend we'll
close it.  FYI: it's odd that we've not heard any more news about
the current labor dispute.  Actually, that's not true since both
sides have been tight lipped with the media but the UAW union is
going to make a decision about CAT's last offer sooner rather
than later.

Picked on August 5th at $70.75
Change since picked:    + 1.01
Earnings Date         07/22/04 (confirmed)
Average Daily Volume =     2.4 million
Chart =


--

Quest Diagnostic - DGX - close: 81.66 chg -1.18 stop: 82.51

The oversold bounce is starting to fade in DGX.  The stock
couldn't breakout over the $83.00 level and in doing so has
produced a new lower high.  We should see DGX slip back toward
the $79.00 region again.  We are currently un-triggered as we
wait for DGX to break support at the $79.00 mark.

Picked on August xth at $xx.xx <-- see TRIGGER
Change since picked:    - 0.00
Earnings Date         07/22/04 (confirmed)
Average Daily Volume =     602 thousand
Chart =


---

Research In Motion - RIMM - close: 53.36 chg: -1.51 stop: 57.01*new*

RIMM is doing what any normal tech stock typically does when the
NASDAQ is breaking down to new lows.  RIMM is hitting new lows
too.  In this case RIMM has slipped 2.75% to trade at new 2 1/2
month lows. Furthermore the stock is back under the simple 100-
dma, which is technical support/resistance.  We should see RIMM
continue to fall toward the $50.00 level.  Meanwhile we are going
to tighten our stop s to $57.01, just above the recent bounce.

Picked on August 6th at $54.50
Change since picked:    - 1.14
Earnings Date         06/29/04 (confirmed)
Average Daily Volume =     6.7 million
Chart =


---

Whirlpool - WHR - close: 58.95 change: -0.46 stop: 61.51

WHR continues to slide and has reversed its oversold bounce into
a new put-buying opportunity.  We're encouraged by the drop under
the $60.00 and $59.00 levels and believe that WHR should continue
to trade toward the $55 region.

Picked on August 6th at $58.71
Change since picked:    - 0.24
Earnings Date         07/21/04 (confirmed)
Average Daily Volume =     849 thousand
Chart =



*************
NEW PUT PLAYS
*************

Hartford - HIG - close: 59.17 change: -1.50 stop: 62.01

Company Description:
The Hartford is one of the nation's largest financial services
and insurance companies, with 2003 revenues of $18.7 billion. The
company is a leading provider of investment products, life
insurance and group benefits; automobile and homeowners products;
and business property-casualty insurance.
(source: company press release)

Why We Like It:
We were drawn to HIG as a put play based on its bearish breakdown
under support at the $60.00 level.  The stock had been trading in
a wide range between $61 and $67 for months and has now fallen
through the bottom of this trading range.  The move has produced
a very bearish quadruple-bottom breakdown sell signal on its P&F
chart with a $53.00 price target.  We're further drawn toward HIG
as a put because we know why investors are selling.  Florida is
currently facing the possibility of two hurricanes hitting at the
same time with the larger threat from Hurricane Charley, which is
currently a category 2 storm.  The IUX insurance sector index is
trading lower on the news with State Farm and AllState as the two
biggest insurers to be hit by these storms in Florida.  HIG has a
large presence in Florida as well and if Charley turns into a
category 3 storm as meteorologists suspects it will then
investors may choose to sell first instead of wait it out.

We're going to start the play with a stop loss at $62.01 and a
target in the $55-53 range.

Suggested Options:
We're going to suggest the September puts.  It would appear that
our only choices are the $65s and $60s.

BUY PUT SEP 60 HIG-UL OI= 499 current ask $2.60
BUY PUT SEP 65 HIG-UM OI= 388 current ask $6.40

Annotated Chart:



Picked on August 12 at $59.17
Change since picked:   - 0.00
Earnings Date        07/21/04 (confirmed)
Average Daily Volume =    1.4 million
Chart =


--

Legg Mason - LM - close: 76.35 chg: -0.82 stop: 80.01

Company Description:
Legg Mason, Inc., headquartered in Baltimore, is a holding
company that provides asset management, securities brokerage,
investment banking and related financial services through its
subsidiaries. (source: company press release)

Why We Like It:
The XBD broker-dealer index is trading lower in a descending
channel.  More importantly it has been consolidating near the top
of the channel and it looks ready to drop lower.  Looking over
the various broker/investment stocks to find an appropriate play
to capture a drop in the group we found LM.  The company's recent
earnings report was disappointing and management tried to soften
the sting by announcing an increase in their cash dividend and a
3-for-2 stock split for the end of September.  It would appear
that investors aren't buying it.  The stock consolidated under
the $80.00 level for a couple of weeks and is now edging lower.
The daily chart also offers traders a bearish Head & Shoulders
pattern that should point to a $60.00 target (give or take a few
points).  The Point & Figure chart is bearish and points to a $57
target.  Given the outlook we feel confident shorting the recent
bounce and new lower high.  More conservative traders may want to
look for some confirmation with a drop under $75.00.

We're going to start the play with a stop loss at $80.01 and a
short-term target of $70.00 but we believe LM could trade lower.

Suggested Options:
We're going to suggest the September puts.  Our favorites would
be the $80s, 75s and 70s.

BUY PUT SEP 80 LM-UP OI= 167 current ask $5.20
BUY PUT SEP 75 LM-UO OI= 367 current ask $2.45
BUY PUT SEP 70 LM-UN OI=  16 current ask $0.90


Annotated Chart:



Picked on August 12 at $79.35
Change since picked:   - 0.00
Earnings Date        07/19/04 (confirmed)
Average Daily Volume =    508 thousand
Chart =



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

Please read our disclaimer at:
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The Option Investor Newsletter                  Thursday 08-12-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Something for bulls and bears
Option Spreads: Knowin’ When To Hold Em & When To Fold Em – It
    Ain’t Easy


**********
WATCH LIST
**********

Something for bulls and bears

___________________________________________________________________

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.
___________________________________________________________________


Pixar - PIXR - close: 69.44 change: +0.01

WHAT TO WATCH: Believe it or not PIXR almost broke out over major
resistance today.  If the broader markets hadn't been so weak it
probably would have been successful.  Readers can watch for PIXR
to trade above the $71.00 level as an entry point for bullish
positions.  Such a move should pave the way for PIXR to test its
highs near $75.00.  The bullish P&F chart currently points to an
$89 target.

Chart=


---

Omnicom - OMC - close: 67.15 change: -1.19

WHAT TO WATCH: Advertising giant OMC has broken down to new lows
after consolidating near the $67.50 level.  Technicals have
turned bearish again and its MACD has rolled over into a new
"sell" signal.  Its P&F chart is very bearish with a $53 target.
Readers could use today's drop as a momentum entry point with a
relatively tight stop.  Target $60.00.

Chart=


---

Occidental Petroleum - OXY - close: 49.66 change: -0.24

WHAT TO WATCH: OXY has been able to maintain its gains while many
of its oil and gas-related brethren have been hit hard by profit
taking.  Readers may want to watch OXY for a bullish breakout
over $50.50 and use it as a trigger to buy calls.  The P&F chart
points to a lofty $90 target.  We would target $55.

Chart=



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

HSIC $61.03 -1.76 - HSIC has reversed course.  Readers can watch
for a drop under $60.00 as a bearish entry point.

GDW $101.15 -3.84 - GDW has fallen out of its trading range.
Look for a drop under $100 as a potential bearish entry point.

AAUK $22.13 +0.80 - Bulls can watch for some confirmation from
today's rally over resistance at $22.00 and its simple 200-dma.


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************************
Option Spread Strategies
************************

Knowin’ When To Hold Em & When To Fold Em – It Ain’t Easy
By Mike Parnos

Where do I start?  Well, I’m back – as fat and sassy as ever.
What happened?  Well, if I told you, I’d have to kill you.  Let’s
just say that now the sun shines a little bit brighter and the
double cheeseburgers taste a little better knowing that I have the
support of my CPTI students.

In the meantime, the market has been having another hissy-fit.
I’ve been getting questions galore!  With the short strike prices
of some of our CPTI portfolio positions being threatened pretty
regularly, let’s look at a few issues we’ve all had to face
recently.

The question below deals with the emotional reaction to a positive
bounce of the RUT – after having closed out the position at a loss
two days prior.  We’ve all been there.
_________________________________________________________________

Mike,
The action of the last 2 days (Monday & Tuesday) is the type of
action that frustrates me with when to close out a position. I
chose to close out my put positions at a loss, and rolled out to
SPX condors.  BUT, the next 2 days brought the positions back up.
Should I have waited?  Frustrating after the fact.  Would have
been even more frustrating otherwise, if the markets had tanked
after Greenspan.

It's second guessing a decision, and that's bad, and emotional.
This is my primary issue with the strategy and one I must find a
reasonable internal solution to.

For my September rollout, I have a net credit of 5.4 for the whole
position.  Now, I'm trying to set my limit for bailout.  Got a
guideline or suggestion?  I know it's about risk tolerance, but I
don't like being that queezy.

This is my real sticking point in this whole strategy.  I feel,
after the fact, that I should have held out longer.  But then, I
could also get my shorts taken.  When to GTFO is the real issue.
For me anyway. -- Jack

Hi Jack,
I understand your frustration, but you did the right thing.  Just
because it bounced up, doesn't mean it's going to stay up. There’s
a week and a half left. Plus, there's still not much room for
error on the downside.  What you did was choose to move from a
position that you had a less than 50/50 chance of success, to a
position where you have a 90% chance of success -- and all it cost
you was a month's wait.  And I'll bet you'll sleep like a baby,
too.

What if the RUT was to continue down to 510 or 500?  You'd be
facing a possible 10-point (maximum) loss.  Then, how many
contracts of a September SPX Iron Condor would you have had to
trade to make that back up?  A hell of a lot.  Fortunately, the
size of your trading account has given you the flexibility of
increasing the number of contracts you can trade to replenish what
you spent to close out the RUT bull-put spread.  Not all traders
have that cushion.  Too many traders use up every dollar they have
in margin requirements – not allowing for potential adjustments
that may become necessary.

There is no rule etched in stone as to when to close a position.
Each situation is unique.  There are many variables.  But, if you
consistently put the percentages in your favor -- as you did in
this instance -- in the long run you'll be much better off and
your bottom line will show it.   Conservation of your trading
capital should be your number one priority.  In upcoming columns,
we’ll examine more adjustment strategies.

If you do decide to take a risk, like holding on longer, you must
recognize that it is contrary to the percentages.  You may win,
but, if you do, it wasn't calculated, it was just lucky.  And, if
you lose, you've pretty much got it coming.  Plus, you better keep
your sleeping pills and your Kaopectate handy.

I applaud your decision to roll from one index (RUT) to another
(SPX) that gives you the flexibility of establishing a very wide
range.  You now have the SPX Iron Condor consisting of the
September 1125/1140 bear call spread and the 995/975 bull put
spread.  That’s a 130 point range!

One of the things that I keep harping on with traders is that you
don’t have to make back a loss in the same vehicle.  Remember,
you’re not married to a particular index or stock.   You’re not
being unfaithful if you switch to another vehicle.  You won’t get
excommunicated from your church or hung for being a devil
worshiper.  You’ll likely get to pat yourself on the back for
being practical – in addition to probably recouping your loss, and
then some.

Note:  Since this letter arrived and was answered, the RUT (at
this writing) has come down and is at 517.10, well below the 520
short strike price.  Though the RUT may rally again, I bet Jack is
a pretty happy camper right now.
___________________________________________________________

NEW AUGUST POSITIONS
August Position #1:  SPX Iron Condor – 1063.23
We sold 5 SPX August 1050 puts and bought 5 SPX August 1025 puts
For a credit of about $2.40 ($1,200).  Then we sold 5 SPX August
1155 calls and bought 5 SPX August 1180 calls for a credit of
about $1.60 ($800).  Potential profit of $2,000.  Maximum profit
range: 1050 to 1155.  Breakeven points: 1046 & 1159.  Maintenance:
$12,500.

August Position #2 – RUT Iron Condor – 517.10
We sold 10 RUT August 520 puts and bought 10 RUT August 510 puts
for a credit of about $1.20 ($1,200).  Then we sold 10 RUT August
600 calls and bought 10 RUT August 610 calls for a credit of about
$.75 ($750).  Potential profit: $1,950.  Maximum profit range: 520
to 600.  Breakeven points: 518.05 & 601.95.  Maintenance: $10,000.

Note:  When you look at the bid/ask prices on RUT options, it
would seem we could shave a little more from the bid/ask spreads
of each option.  But, recently, it’s become increasingly difficult
to get fills on the RUT.  They have a bad attitude or a bug
buzzing where the sun don’t shine.  So, the idea is to not get too
greedy.  It’s better to get filled than to spend half the day
cursing at the market makers.

August Position #3 – BBH Iron Condor - $134.30
We sold 10 BBH August $130 puts and bought 10 BBH August $120 puts
for a credit of about $.60 ($600).  Then we sold 10 BBH August
$150 calls and bought 10 BBH August $160 calls for a credit of
about $.70 ($700).  Profit potential: $1,300.  Maximum profit
range: $130 to $150.  Breakeven points: $128.70 & $151.30.  This
is a nice wide range for the conservative investor.  Maintenance
$10,000.

August Position – SPX – 1063.23
Don’t forget that our “Credit Spread Boogie” position was rolled
out to August.  That should be fun to watch.  And, be alert.  We
have to be prepared to adjust when necessary.  Originally we had a
July bullish position, we then adjusted it to a bearish August
position.  If the SPX closes below 1125 (which seems likely), we
will keep our accumulated profit of $2,370.
___________________________________________________________

ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $32.47
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts
of the 2005 QQQ $29 calls for a total debit of $14,300.   We make
money by selling near term puts and calls every month.  Here’s
what we’ve done so far:  Oct. $33 puts and Oct. $34 calls – credit
of $1,900. Nov. $34 puts and calls – credit of $1,150. Dec. $34
puts and calls – credit of $1,500.  Jan. $34 puts and calls –
credit of $850.  Feb. $34 calls and $36 puts – credit of $750.
Mar. $34 calls and $37 puts – credit of $1,150. Apr. $34 calls and
$37 puts – credit of $750.  May $34 calls and $37 puts – credit of
$800.
June $34 calls and $37 puts -- total net credit of $750.  We
rolled out to the July $34 calls ($.20 credit) and $37 puts ($.60
credit) and took in a credit of $.80 ($800).  We rolled to the
August $34 calls and $37 puts, taking in a credit of $900.  For
the September cycle, we rolled to the Sept. $34 calls and $37
puts, only yielding $.45 or $450 for the cycle. Our new total
credit is now $11,750.

Note:  We haven’t included the proceeds from this long term QQQ
ITM Strangle in our profit calculations.  It’s a bonus!  And it’s
a great cash flow generating strategy.

ZERO-PLUS Strategy.  OEX – 519.56
In my Feb. 8th column, I outlined a strategy based on an initial
investment of $100,000.  $74,000 was spent on zero coupon bonds
maturing in seven years at a value of $100,000.  The principal
$100,000 investment is guaranteed.  We’re trading the remaining
$26,000 to generate a “risk free” return on the original
investment.
Our current position:  We own 3 OEX December 2006 540 calls @ $81
(x 300 = $24,300).  Our cash position as of May expiration was
$4,390 plus unused $1,700 = $6,090.  From the June option cycle,
we are able to officially add $1,175 to our cash position – that
now stands at $6,265 As of July expiration we were able to add
$1,350 to our previous balance of $6,090 for a total of $7,440.

New Zero Plus Positions For August
August bull put spread 515/505 for credit of $.80 x 5 contracts =
$400.  Short 565 call for credit of $1.10 x 5 = $550.  If all goes
well, we’ll be able to add $950 to our cash position as we wait
for the market to move up.
________________________________________

New To The CPTI?
Are you a new Couch Potato Trading Institute student? Do you have
questions about our educational plays or our strategies? To find
past CPTI (Mike Parnos) articles, first look under "Education" on
the OI home page and click on "Traders Corner." For more recent
columns, you can look under "Strategies" and click on "Spreads &
Combos." They're waiting for you 24/7.
____________________________________________________________

Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it's not the cards we're dealt. It's how we
play them.
Mike Parnos
Options Therapist and CPTI Master Strategist



Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the
numbers represented here may have been achieved or beaten by our
readers, we make no representation that any individual investor
achieved these exact results. The tracking for the plays listed in
this section uses closing prices for the day the newsletter is
published and it is not meant to imply that any reader actually
received those prices or participated in these recommendations.
The portfolio represented here is hypothetical and for investment
education purposes only. It is only an illustration of what type
of gains a knowledgeable investor might receive utilizing these
strategies.


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