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Daily Newsletter, Thursday, 08/19/2004

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The Option Investor Newsletter                Thursday 08-19-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Oil is spoiling all the fun
Futures Wrap: See Note
Index Wrap: Investor's roll out RED carpet for Google!
Market Sentiment: Out of their system


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
     08-19-2004            High     Low     Volume Advance/Decline
DJIA    10040.82 – 42.33 10082.78  9989.87 1.55 bln   1159/1599
NASDAQ   1819.89 – 11.48  1829.13  1811.68 1.40 bln   1183/1812
S&P 100   533.10 -  1.74   534.84   530.38   Totals   2342/3411
S&P 500  1091.23 -  3.94  1095.17  1086.28
RUS 2000  537.44 -  4.17   541.61   536.14
DJ TRANS 3052.43 – 42.04  3092.69  3032.99
VIX        16.96 +  0.73    17.55    16.31
VXO        17.27 +  0.79    17.64    16.56
VXN        23.91 -  0.26    25.10    23.80
Total Volume 3,238M
Total UpVol  1,202M
Total DnVol  1,989M
52wk Highs      94
52wk Lows      102
TRIN          1.05
PUT/CALL      0.89
************************************************************

Oil is spoiling all the fun.
Jane Fox

Today's News

Although I will not belabor oil prices for I'm sure they will get
a very good summary in the futures wrap I would like a minute to
address some issues. Crude oil prices have surged about 30% in
the past six weeks and stand about 50% higher than they were a
year ago. The four major reasons for this surge are: higher
demand, led mostly by increased consumption in China; low oil
inventories world-wide; violence in Iraq and the ongoing problems
of the Russian oil giant Yukos. The run-up in oil has taken its
toll on stock prices and even the Federal Reserve jumped on the
bandwagon when, last week, it blamed oil prices for slowing
economic growth. Of course in the whole scheme of things, oil has
a long way to go before it reaches its inflation-adjusted high of
$80.00, the price, in today's dollars, it reached in 1980 after
the Iranian revolution. September Crude Oil hit a high of $48.80
today.

In other news, Google (GOOG) set an IPO price far lower than it
had anticipated to $85 a share, 37% lower than the top of the
$108-to-$135 it had declared to regulators last month as the
expected range. Because of a lower expected price, Google also
announced they were more than halving the number of shares they
planned to sell. GOOG actually hit the street at $100.00 today
and ended the day at $100.36 with 22 million shares changing
hands.

Amazon.com Inc. (AMZN) has agreed to buy Joyo.com Ltd., China's
largest online retailer of books, music and videos, for $72
million. Joyo operates the Joyo.com Web sites in cooperation with
Chinese subsidiaries and affiliates. AMZN ended the day down -
0.70 at $38.66.

Nortel Networks Corp. (NT) announced a restructuring plan that
will cost $300 million to $400 million, which should result in
annualized cost savings of about $450 million $500 million and
reduce its work force by about 10%, or 3,500 jobs. The
restructuring, effective Oct. 1, will combine its wireless,
wireline and optical businesses into one carrier-networks
organization. NT ended the day up +0.14 at 3.74.

The SEC has sent a warning to Freddie Mac (FRE) that the company
is likely to face civil charges involving alleged violations of
securities law stemming from its disclosure last year of
accounting manipulation. FRE ended the day down -0.92 at $66.63.

Economic Reports

Although economists predicted the Conference Board's composite
index of leading indicator's July index would slide by 0.2% it
actually fell by 0.3% to 116.0. June's index was also revised to
a drop of 0.1%. Conference Board economist Ken Goldstein was
quoted as saying, "The data for June and July reflect a slowing
down of what had been a strong pace of economic activity through
May." The Conference Board is painting a fairly bleak assessment
of current circumstances because rising energy prices, rising
interest rates, the end to tax-cut stimulus and terrorism threats
are slowing the economy's forward momentum.

The Federal Reserve Bank of Philadelphia August's index, which
measures activity in the region's manufacturing sector, slowed to
28.5 from July's 36.1 reading and fell short of the 30.3
predicted by economists. The reading indicates growth but at a
slower pace relative to the prior month. Philadelphia-area
manufacturers have seen expanding growth for the last 15 straight
months.

The Labor Department's weekly Initial Claims showed initial
jobless claims, for the week ending August 14, dropped for a
third consecutive week to 331,000, marking the lowest level since
the week of July 3. The four-week average declined for the second
week in a row, falling 2,500 to 337,250.

Earnings

Claire's Stores (CLE) and Limited Brands were the latest
companies to offer 2nd quarter results that topped analyst
estimates. Shares of Claire's Stores hit a 52-week high of 25.58
but ended the day up +1.47 at $24.62. Limited Brands (LTD) ended
the day off -0.25 at $20.00.

Mainly due to a debt-redemption charge, the nation's largest book
chain, Barnes & Noble Inc.(BKS), reported a 35% drop in second-
quarter earnings. However, sales were lifted by sales of high
profile titles and BKS was able to raise its full-year guidance.
BKS ended the day down -0.34 at $34.65.

Despite reporting that its August sales are running at the low
end of its earlier forecast, Hot Topic (HOTT) backed its previous
earnings outlook for the second half of the year. HOTT ended the day
up +1.41 at $15.90.

On to the charts.

Annotated Daily Chart of the NYA :



Here is a bullish chart. Support at 6215 (magenta line) has been
successfully tested 6 times with MACD and CCI positive
divergences all over the place. The only problem is the blue line
joining the April lows with the August 2nd highs converges with
the 200 and 50 MAs and could be an enormous hurdle to jump.

Annotated Daily Chart of the Russell 2000:



On this chart I have drawn the same blue line connecting the
March lows with the August 2nd highs and as you can see RUT has
the same hurdle to overcome as does the NYA; resistance
culminating with the 200 and 50 MAs. The noticeable difference
here, however, is the direction of the magenta arrow connecting
the bottoms. The RUT is making a lower low and is therefore
weaker than the NYA.

You can see the same larger MACD and CCI divergences but the
smaller ones that show up on the NYA chart do not show up here.

Annotated Daily Chart of the SPX:



Things are not quite as clear here as they are in the NYA chart
and a much less bullish picture. The May lows and the July lows
(blue line) were a clear line of resistance that has been broken
to the upside and should now become support and I think a very
important support. The next resistance will be converging 200 and
50 MAs and a swing high at ~1108-1110. We are in an area of no-
man's land and for the bulls to win they need to break above the
"red box" and hold support at 1076-1078.

Annotated Daily Chart of the Dow:




Qcharts has a lot of missing data on the INDU chart so I am
reverting to the DJX, which should give us the same general
picture.

I see resistance at the August 2nd swing high that matches up
with the converging 200 and 50 MAs. What bothers me the most
about this chart is the longer term MACD divergence (magenta
arrows) is suggesting that strength is returning but on the
short-term those divergences do not show up. If strength indeed
were returning to this market I would think the swing lows at
July 26 and August 13 would be showing a very nice MACD
divergence but they are not.

Annotated Daily Chart of the Nasdaq:



I don't see anything bullish about this chart at all. I see no
MACD or CCI divergence to hint at strength, usually the first
indication that strength is returning. I do see a clear
resistance at ~1900 where the March lows and August highs line up
with the 50 MA. 1900 is also the 50% retracement from June highs
to August lows.

Outlook

If the major indices can make it through all the "red boxes" I
think we have a chance but until then I am keeping my powder dry.
My bear claws are not as sharp as they were before but I sure
don't have bull's horns growing yet.

There are no economic reports slated for tomorrow.

Jane Fox


************
FUTURES WRAP
************

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


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

Investor's roll out RED carpet for Google!

Google and oil.  Google and oil.  Google and oil.  That's what
grabbed the bulk of today's headlines.

As I struggle for any theme to today's trade, it would have been
neat if the Dow Industials (INDU) 10,040.82 -0.41% could have
closed at 10,000, and Google (NASDAQ:GOOG) $100.36 +18.08% close
out at $100.00.

I'm growing a bit frustrated with people saying something, and
then not doing what they say they will do.

Today, the interim Iraq government may have had enough with Mr.
al-Sadr's militia.  A letter purportedly from Sadr urged his
militia to hand the Imam Ali shire to Najaf's religious
authorities, but Sadr rejected demands that he disband the Mehdi
Army and join Iraq's political process.

But the letter, circulating in Najaf, carried a seal that was not
consistent with marks of previous letters from Sadr and fighting
escalated in the city.

Crude oil surged to record highs on reports that battles between
coalition forces and Iraqi insurgence were picking up.  At times,
trading became rather choppy, as headlines out of Iraq aren't
necessarily accurate as to what caught fire, or what has
exploded.

One trade that has been consistent is oil rising regardless of
how accurate the immediate news items are, while stock and bond
traders see more of a knee-jerk reaction and some intra-day
volatility.

U.S. Market Watch - 08/19/04 Close



As I said, investors rolled out the red carpet for Google's debut
with the bulk of equity-based indices finishing in the red.

Some oil futures traders were cited as saying today's further
jump in futures was attributed to some last minute short covering
into contract rollovers from September expiration.  This might
make some sense if a speculator has been trying to catch a top
and lacks any of the commodity to deliver against.  Heck, even if
you do have the commodity itself, at the rate things are going,
you might just buy the previously sold contract back at a loss
and wait a day or two.

Whether you're a bond, stock, or commodity trader, its NEVER fun
to be short when you're short at 52-week highs and overhead
supply is limited.

Miners found gains in today's session, with precious and
industrial metals finding gains.

Market Snapshot / Internals - 08/19/04 Close



The CRB Index got a double-dose of bullishness today with gold
and oil rising.  After trading limit up on Monday and Tuesday,
September Lumber futures (lb04u) 442.00 traded a contract high
this morning at 448.80, but finished flat.

Good gravy!  September Lumber futures settled around 407 on
Friday and one hurricane later, they're up 8.8%.

Nothing too exciting from the internals, but the NYSE 10-day
NH/NL ratio did get a close above 38%, so there's some bullish
leadership among 1, 2 and 3-lettered stocks.  We can perhaps see
a slight falloff, or pickup in new lows from the 02:00 PM EDT
mark, where as the TRIN made a mid-session relative high, it was
kind of like taking a little hammer and tapping a nail into a
piece of wood.

QQQ at $33.22?

Pivot Matrix -



Hmmmm... three support correlation for the NDX/QQQ at their DAILY
S2, WEEKLY R1 and MONTHLY S1.  Is that a gravitation point into
tomorrow's QQQ option expiration?

Since adding the TRIN to the Pivot Matrix, I've had little luck
getting the TRIN DAILY levels to line up with the QCharts'
derived pivot levels, and boy oh, boy, has the TRIN been treating
intra-day trader's well.

I think I figured out how to get the Pivot Matrix TRIN levels to
line up with QCharts, and while I update traders with a QCharts
TRIN chart in the Market Monitor in the morning, I'll update all
OptionInvestor.com traders in the 11:00 AM EDT update, if my
DAILY TRIN levels posted above are different than those displayed
by QCharts.

Right now, I'd have to say I'm going to be entering tomorrow's
trade with a bearish bias.  Conviction isn't overly strong,
simply because of option expiration, but here's why I have a
bearish bias.

NYSE Short Term Trade Index (TRIN) - 15-minute intervals



TRIN closes above the "waterline" of 1.00 today, so I'm a little
bearish.  The goofy TRIN DAILY Pivot levels didn't do too bad
today.

You intra-day traders may have noted in the past, or even this
week as I've used TRIN observations a little more frequently in
this week's Market Monitor, is that when a relative intra-day
high takes place when TRIN is ABOVE or BELOW its DAILY Pivot, a
decent move takes place.

OK then.  If our Pivot Analysis Matrix is correctly tabulated for
the TRIN tomorrow, the DAILY Pivot for TRIN will be 0.95, or
pretty close.

Look at how TRIN has traded this week, Bull days were Monday and
Wednesday.  Tuesday was flat for the QQQ, and today was -0.52%.
Get a feel for how the TRIN Daily pivot can give traders some
feel for bullishness and bearishness in relation to 1.00?

That is... when BELOW 1.00 some bullish tint is taken AWAY, when
TRIN is ABOVE its DAILY Pivot.  When TRIN is BELOW its DAILY
Pivot AND the 1.00 mark, a nice bullish session can be found.

Ok, now I'm thinking TRIN 1.00 and QQQ DAILY Pivot for tomorrow
are EQUIVALENT.

NASDAQ-100 Tracker (QQQ) - 15-minute intervals



I'm using the QCharts DAILY Pivot analysis levels just to give us
a quick look at this week's trade, get a feel for how even the
QQQ, which is full of NASDAQ stocks can still be traded against
the TRIN.  This was a question asked this week.

A point I would make as it relates to "oil higher equity lower"
and option expiration is this.

Option expiration week can be a TOUGH trade can't it?  If a
trader were trading short the QQQ simply based on oil's rise,
that would have been a tough trade so far.

The QQQ's rise to August's calculated "Max Pain" of $34.00 sure
looks like it has been in play doesn't it?

Keep that in mind tomorrow, and try to let the TRIN be your
friend.

Jeff Bailey


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

Out of their system
 - J. Brown

Okay, if you haven't heard Google's IPO has finally come to
market.  There I said it and if you haven't heard about GOOG's
first day of trading then you've been living in a cave somewhere.
Now someone please tell the financial media to get it out of
their system.  I mean really most of the investors they polled
said they weren't interested buyers anyway.  I'll step down off
my soapbox now.

Aside from the Google "excitement" the day was pretty lackluster.
Stocks were widely lower in some profit taking after four days of
gains.  The economic data that came out this morning wasn't very
positive.  The Philly Fed activity index dropped from 36.1 in
July to 28.5 in August.  If you believe the economy is slowing
there's some proof for you.  Meanwhile the July leading economic
indicators slipped 0.3% versus economists' expectations for a
small climb.

The other top story today was oil and while it's an old story it
should have more impact on the markets than Google.  Crude oil
rose to a new all-time high up $1.43 to $48.70.  I was guessing
we'd see $50 before the end of the month but another day like
today and we will see $50 a barrel by the weekend.  Driving oil
higher was disappointing developments in Iraq.  The opposition
cleric Al-Sadr has rejected the Iraqi government truce (big
surprise there) but his militia says they will torch oil wells
and blow up pipelines if the government and the U.S. forces don't
back down from their plans to remove him from the city of Najaf.
Late this afternoon while the market was still open news reports
were coming in that Iraqi militants had burned down some Iraq
South Oil Company buildings.

The general consensus from what I've heard and read is that last
Friday was a short-term bottom but no one can find any reasons
for the markets to rally.  This is especially true now.  The
recent bounce was sparked on hopes that oil may have peaked and
now it has pushed to another new high.  We're starting to hear
talk of oil trading above $50.  Almost everyone agrees that there
is very little catalysts to get the market moving (higher) again
before Labor day.  The Olympics, while a security success thus
far, are still going on and the Republican National Convention in
New York is coming soon.  The RNC is going to be the next big
terrorist target between here and the November election and
speculation suggests that trading will be extremely light during
the convention.

Traders should remain cautious.  The last week or so has seen a
lot of false signals both up and down.  The name of the game
between now and mid-September is capital preservation!


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9230
Current     : 10040

Moving Averages:
(Simple)

 10-dma:  9921
 50-dma: 10111
200-dma: 10243



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  983
Current     : 1091

Moving Averages:
(Simple)

 10-dma: 1075
 50-dma: 1099
200-dma: 1109



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1256
Current     : 1353

Moving Averages:
(Simple)

 10-dma: 1329
 50-dma: 1393
200-dma: 1442



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

CBOE Market Volatility Index (VIX) = 16.96 +0.73
CBOE Mkt Volatility old VIX  (VXO) = 17.27 +0.79
Nasdaq Volatility Index (VXN)      = 23.91 –0.26


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.89        711,771       678,781
Equity Only    0.89        824,248       731,637
OEX            1.08         55,938        60,631
QQQ            1.28         69,746        89,000


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

Bullish Percent Data

           Current   Change   Status
NYSE          53.5    + 1     Bear Confirmed
NASDAQ-100    27.0    + 1     Bear Confirmed
Dow Indust.   46.7    + 0     Bear Confirmed
S&P 500       47.8    + 0     Bear Confirmed
S&P 100       45.0    + 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: 0.62
10-dma: 1.22
21-dma: 1.26
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    1159      1183
Decliners    1601      1812

New Highs      41        39
New Lows       20        72

Up Volume    651M      495M
Down Vol.    866M      894M

Total Vol.  1546M     1399M
M = millions


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

Commitments Of Traders Report: 08/10/04

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

There has been almost no change in the commercial traders'
positions for the large S&P 500 futures contracts.  They remain
marginally bearish.  Meanwhile small traders have upped their
bets in both longs and shorts but remain net bullish.


Commercials   Long      Short      Net     % Of OI
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%)
08/10/04      397,576   419,734   (22,158)   (2.7%)

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
07/22/04      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%
08/10/04      135,689    93,897    41,792    18.2%

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 upped their stakes in both their
long and short positions but the net results was a small decrease
in bearishness.  Small traders pared back their longs and added
to their shorts to decrease their bullish stance some but they
remain net bullish (albeit the least bullish in a month).


Commercials   Long      Short      Net     % Of OI
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%)
08/10/04      369,547   441,055   ( 71,508)  ( 8.8%)

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
07/22/04      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%
08/10/04      179,940     89,239    90,701    33.7%


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


NASDAQ-100

There was very little movement from the commercial traders.
They did add positions on both sides but the result was a
small move closer to neutral.  Small traders are really
undecided and a very close to a dead heat.


Commercials   Long      Short      Net     % of OI
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%
08/10/04       43,968     38,351     5,617    6.8%


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
07/22/04        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%)
08/10/04       10,081    10,858    (  777)  ( 3.7%)


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

Commercial traders reduced their short positions but a few
thousand which increased their bullish stature.  Small traders
naturally moved the opposite direction and increased their
shorts to boost their bearish outlook.


Commercials   Long      Short      Net     % of OI
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%
08/10/04       30,634    22,994    7,640      14.2%

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
07/22/04        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%)
08/10/04        6,450     8,488   (2,038)   (13.6%)

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 08-19-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: None
Call Play Updates: AET, MHK, POT, TDS, TXT, ZBRA
New Calls Plays: RAI
Put Play Updates: HIG, SPW
New Put Plays: None


****************
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:
*****

None


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

Aetna - AET - close: 92.45 change: -1.03 stop: 88.95

AET had risen 7 out of the last 8 sessions so today's 1 percent
decline while the broader indices take a breather is not
worrisome.  The stock looks very strong and should we see a
stronger dip we'd look for the $90.00 level to act as support.
It may be noteworthy that the IUX insurance index was one of the
few sector indices to close in the green today.  No change in our
stop loss at $88.95.

Picked on August 15th at $90.72
Change since picked:     + 1.73
Earnings Date          07/29/04 (confirmed)
Average Daily Volume =      1.4 million
Chart =


--

Mohawk Industries - MHK - close: 73.26 change: -1.34 stop: 72.45

MHK is one of the new calls we added on Wednesday but we did so
with a TRIGGER to open the play.  We used a trigger because we
suspected the broader market might be due for a pull back. Shares
of MHK have slipped back from resistance near $75.00 and its
simple 200-dma but the stock is still above its exponential 200-
dma. If MHK continues to dip we'd look for a bounce in the
$71.50-72.00 range, of course this play isn't active for us until
$75.51.

Picked on August xxth at $xx.xx <-- See TRIGGER
Change since picked:     + 0.00
Earnings Date          07/21/04 (confirmed)
Average Daily Volume =      397 thousand
Chart =


---

Potash - POT - close: 50.77 change: +0.24 stop: 48.75

POT isn't showing any post-split depression yet.  Actually the
stock's three-week trend of higher lows is still intact.  The dip
to $50.00 looks like a potential entry point just as we
suggested.  However, before committing new capital make sure the
broader market is heading your direction.  Be sure to double
check your option symbols with your broker if you have an open
position or if you are considering one.

Picked on August 10th at $ 51.08
Change since picked:      - 0.31
Earnings Date           07/29/04 (confirmed)
Average Daily Volume =       180 thousand
Chart =


--

Telephone & Data Sys - TDS - cls: 77.20 change: -0.20 stop: 74.00

TDS is another of our recently added call plays.  Once again we
decided to use a TRIGGER to capture a bullish breakout over
resistance.  In TDS' case that would be a breakout over short-
term resistance at $78.00.  Our trigger is actually 78.05.
Yesterday's play description mentions that this is an aggressive
play with high-risk money.  Not only does TDS have very low
trading volume but the options are lightly traded as well.  Plus,
there is potential resistance at the $80.00 level.  No change yet
in the bullish P&F chart that points to a $94 target.  We remain
un-triggered at this time.

Picked on August xxth at $xx.xx <-- see TRIGGER
Change since picked:     + 0.00
Earnings Date          07/21/04 (confirmed)
Average Daily Volume =      195 thousand
Chart =


---

Textron - TXT - close: 62.87 change: -0.63 stop: 59.99

The good news about TXT is that the stock is holding on to its
gains for the most part anyway.  Shares did lose about 1% as the
broader market suffered some weakness.  In the news TXT announced
that it had won a $49.9 million contract from the Air Force to
develop new laser technology.  Readers looking for another entry
point can watch for a bounce at the simple 21-dma near $61.75.

Picked on July 26th at $60.72
Change since picked:   + 2.15
Earnings Date        07/22/04 (confirmed)
Average Daily Volume =    622 thousand
Chart =


---

Zebra Tech. - ZBRA - close: 82.62 chg: -0.60 stop: 79.95

The market's step backwards today halted ZBRA's advance but
shares of the technology stock have held on to most of their
gains.  Furthermore ZBRA has bounced from its intraday low near
$82.00 and its simple 50-dma.  The MACD is still bullish but
we're waiting for ZBRA to breakout over resistance at $84.00 to
hit our TRIGGER at $84.35 before officially opening the play.

Picked on August xxth at $xx.xx <-- see TRIGGER
Change since picked:     + 0.00
Earnings Date          07/28/04 (confirmed)
Average Daily Volume =      419 thousand
Chart =



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

Reynolds American - RAI - close: 72.88 change: +0.98 stop: 69.36

Company Description:
Reynolds American Inc. is the parent company of R.J. Reynolds
Tobacco Company, Santa Fe Natural Tobacco Company, Inc., Lane
Limited and R.J. Reynolds Global Products, Inc. R.J. Reynolds
Tobacco Company, the second- largest U.S. tobacco company,
manufactures about one of every three cigarettes sold in the
United States, including five of the nation's 10 best-selling
brands: Camel, Winston, KOOL, Salem and Doral. Santa Fe Natural
Tobacco Company, Inc. manufactures Natural American Spirit
cigarettes and other tobacco products, and markets them both
nationally and internationally. Lane Limited manufactures several
roll-your-own, pipe tobacco and little cigar brands, and
distributes Dunhill tobacco products. R.J. Reynolds Global
Products, Inc. manufactures, sells and distributes American-blend
cigarettes and other tobacco products to a variety of customers
worldwide. (source: company press release)

Why We Like It:
Up on a down day.  That's what caught our attention in shares of
Reynolds American, the newly combined RJR Reynolds and Brown &
Williamson Tobacco.  Shares hit a new high in early August and
have slowly faded back toward support near $70.00.  Now we're
seeing investors buy the dip.  The company recently said its on
its way toward reaching its goal of $1 billion in cost savings by
the end of the year and it should also save an additional $500
million or so in merger-related savings.  The newly combined
entity is supposed to be a leaner, meaner fighting machine to
compete with larger rival Phillip Morris (a.k.a. Altria Group).
Investors are also attracted to RAI for its dividend yield.  With
the market going south to sideways a 5.2% yield is pretty
attractive.  RAI just recently announced that its next quarterly
cash dividend payment will be delivered on October 1st to
shareholders on record as of September 10th.

We like the relative strength evident in RAI and the bounce from
support/resistance near $70 looks like an entry point.  The P&F
chart is bullish and points to a $103 target.  Right now we'd
probably be happy with a run toward $77.50-80.00.  Now there are
risks involved when trading a tobacco company.  One never knows
when the U.S. government might announce some new legislation or
some court decision but from the looks of RAI's stock price there
doesn't seem to be any imminent threats.

Suggested Options:
We like the September and November calls although our favorites
are probably the September 70s and 75s.

BUY CALL SEP 70 RAI-IN OI=1267 current ask $4.10
BUY CALL SEP 75 RAI-IO OI=1223 current ask $1.35

BUY CALL NOV 70 RAI-KN OI=8148 current ask $5.90
BUY CALL NOV 75 RAI-KO OI=1721 current ask $3.30

Annotated Chart:



Picked on August 19 at $72.88
Change since picked:   + 0.00
Earnings Date        08/02/04 (confirmed)
Average Daily Volume =    1.2 million
Chart =



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

Hartford - HIG - close: 59.83 change: -0.26 stop: 62.01

Insurance stocks were generally higher today and the IUX
insurance index was one of the few sector-specific indices to
close in the green.  That's why we're somewhat encouraged that
HIG's early morning strength to $60.55 failed and shares have
once again closed under the $60.00 level.  However, HIG isn't
showing the kind of weakness we were expecting.  We're suggesting
caution and readers may want to postpone any new positions until
we see a drop back under $59.00 or $58.50.

Picked on August 12 at $59.17
Change since picked:   + 0.66
Earnings Date        07/21/04 (confirmed)
Average Daily Volume =    1.4 million
Chart =


--

SPX Corp - SPW - close: 36.92 change: -0.69 stop: 38.26

SPW appears to be failing under resistance near $38.00 and the
stock is producing a new lower high.  This is good news for the
bears but we're still waiting for SPW to breakdown under support
at $36.00.  Our trigger to buy puts is at $35.75 (there was a
typo in the Tuesday update that said 37.75 but then that wouldn't
be under support at $36.00 would it?)  More aggressive traders
might want to consider positions with today's drop but use a very
tight stop.  We're willing to wait.

Picked on August xxth at $xx.xx <-- see TRIGGER
Change since picked:     - 0.00
Earnings Date          08/02/04 (confirmed)
Average Daily Volume =      814 thousand
Chart =



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

None


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**********

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The Option Investor Newsletter                  Thursday 08-19-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Gold to Oil and more!
Traders Corner: A question and broadening tops/bottoms


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

Gold to Oil 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.
___________________________________________________________________


Newmont Mining - NEM - close: 44.03 change: +1.76

WHAT TO WATCH: We came very close to adding NEM to the play list
tonight as a call play.  The breakout over resistance near $42.50
and its simple 200-dma on strong volume is impressive.  What
makes it more impressive is the move also breaks past the
descending trendline of resistance (across the peaks) dating back
to January.  We even like the bullish P&F chart (a lot) that
points to $53.00.  Unfortunately, the XAU gold & silver index
still has a lot of resistance at the 95 level and its simple 200-
dma and gold itself has price resistance near $412 an ounce.
More aggressive players might want to keep an eye on NEM and gold
futures.

Chart=


---

Wal-Mart - WMT - close: 54.86 change: +0.40

WHAT TO WATCH: Dow-component and retail titan WMT is on the move.
Shares lead the retail sector higher last week and they're
maintaining their gains with new support at old resistance near
$54.  Bulls can watch for a breakout over the simple 200-dma and
the trendline of resistance stretching across the peaks from
early March.  The P&F chart is still bearish and it will take a
move over $57 to reverse it.

Chart=


---

Caterpillar - CAT - close: 71.29 change: -1.21

WHAT TO WATCH: We're still keeping an eye on Dow-component CAT.
Last Sunday the UAW labor union voted down CAT's last and "final"
offer but said their workers would still show up to work on
Monday as they seek to continue negotiations.  This gave CAT a
little pop on Monday but shares produced a failed rally at
resistance near $74 and continue to fall.  Readers can watch for
a drop under the $70.00 mark as a potential bearish entry point.

Chart=


---

ChervonTexaco - CVX - close: 93.10 change: -1.07

WHAT TO WATCH: Oil giant CVX continues to slip despite the new
high in crude oil prices.  The stock has broken technical support
at the 50-dma but it still holding to minor price support near
$93.00.  The 100-dma, which was support back in May and June, may
still offer support near the $92 level.  Readers can look for a
bounce or a breakdown.  Bears will notice that volume has been
very strong and rising on the recent declines and that could be
bad news.

Chart=



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

EBAY $79.68 -0.23 - EBAY broke above the $80.00 level of
resistance this morning but couldn't hold it.

SYMC $47.76 +1.06 - Hmm.. Looks like we should have kept the SYMC
open.  The new rally has reversed its MACD "sell" signal.

WFMI $77.36 +0.19 - WFMI is still creeping forward and its MACD
has produced a new "buy" signal from oversold levels.


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

A question and broadening tops/bottoms
By Leigh Stevens
lstevens@OptionInvestor.com

SUBSCRIBER QUESTION:
"What do you mean when you say that your volume indicator makes a
bottom before the indexes?  It seems pretty interesting but the
volume graph you showed seemed to be lagging the market at the
most recent low."

"Also, since stocks have been so influenced by this big run up in
oil prices what do you suggest looking at to determine if they
are near a top?"

RESPONSE:
I say that "volume tend to 'precede' price". Meaning that up or
advancing volume, as a 10-day moving average, tends to contract
to a certain level, which then precedes or goes hand in hand with
a rally typically.

However, since I use a 10-day average of NYSE or NASDAQ up
volume, it's in the nature of a moving average to lag price
action. I watch the 10-day line coming down to the level (green)
line, as in the chart below, also knowing when a very low volume
day is matched by a normal to high up volume figure 10-days ago –




The following day, the figure from 10 days ago - the points
connected by the light blue line above - will be dropped and the
next day's (volume) will be averaged in. The average (dark
magenta line) will often then start moving up along or ahead of
prices.  Volume on a 10-day average basis expands again and a
rally follows after this much "contraction". I can't explain why
this is exactly. It just seems to be the way the market works –
it works with "weight" so to speak.

If you watch order flows, volume in stocks or options will tend
to surge before much of a price rise - this is because, for a
while, selling of stock completely matches increased buying
activity.  But, when buying continues, prices start advancing.
This is why experience "tape" watchers can often see a rally
coming as, very often, larger blocks of stocks start getting bid
for. It's typically a while later that prices start to rise, as
least in a market that has been in a downtrend for some time;
e.g., some weeks.

There is this story in the book by Jessie Livermore about a guy
who brought a stock tip to a big time trader that such and such
company had something big coming and the stock was going to go up
a lot. The trader immediately sold 10,000 shares – the tipster
said what the bleep are you doing, I said it was going to go UP.
The trader calmly replied that he was just determining what kind
of buying interest was there.  Sure enough the buyers absorbed
the selling without dropping the price. At that point, the trader
started buying in earnest. Later the stock began a noticeable and
extended rise.

DETERMINING WHEN OIL PRICES REACH A PEAK –

I look first at the nearby or lead futures contract or in the
case of oil which has monthly contracts, at the first two
contract-months.  What we can use to determine if this market
then is at or near a top is not much different than techniques
used for any other chart; e.g., an individual stock or an index –




The line that would suggest the top of the price channel for the
September contract is now not far away and is even closer in the
October futures you'll notice. The increasing rise or rate of
upward price increase suggests a short-covering, emotional and
fear type situation which suggests prices are coming to a
climatic peak.

A good way to then look for any "divergences" is to then look at
the oil price index (OIX) to see if the oil stocks are reflecting
the same pattern of an accelerating rise –




OPPS! What do we have here!?  A double top and pattern of lower
lows of late.  Note that prices fell under the 50-day moving
average (light magenta line) and then, subsequently, reversed
from this area – support had become resistance.  Since oil stocks
would keep going up if oil prices were going to continue to rise,
it suggest that either investors are wrong on the oil price trend
or that the oil price trend is not sustainable.


BROADENING BOTTOMS (AND TOPS) -

The broadening formation - a broadening top or broadening bottom,
is of interest as a chart pattern we see sometimes in the indexes
and more often in stocks, although its not the most common
pattern either.

As I started to get into in a recent Trader's Corner article
there was a study done on technical chart patterns that had a
good degree of predictability done by Dr. Andrew Lo, an MIT
professor.  He and his MIT group did a study of whether technical
price "patterns" had future predictive value – assuming you could
define the characteristics of a chart pattern well enough to set
up the conditions for a computer search of historical stock
market data; they used individual stocks.

The 5 technical patterns that yielded "statistically significant
test results" (for predicting a trend change) were the Head &
Shoulders (H&S) top and bottom pattern, 2.) a double top, 3.)
rectangle top, 4.) a rectangle bottom and 5.) the Broadening
bottom formation – they didn't find the top pattern to have the
same degree of reliability as the bottom formation of
this type.

I ran across a broadening top pattern in the hourly Dow chart
which will serve as an example of a top pattern that was dead on
in terms of predicting a top. The broadening top is made up of a
series of higher highs and lower lows and has the appearance of a
megaphone.  An example of a broadening top –




But, as I said, the Dr. Lo study found that a broadening bottom
pattern was the one that they found especially predictive for a
reversal pattern.

And, as I said, you may see the broadening pattern more often in
individual stocks rather than the indices –




This pattern is basically the same as what can be called a
reverse symmetrical triangle.  The pattern of lower lows and
higher highs marks a wide-swinging price range before a rally
begins – the clue to the trend is when prices break out above the
upper line and a pattern of higher relative highs begins after
that.

Another historical example, even more pronounced, was seen in my
book (Essential Technical Analysis) –





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experienced service for both securities* and futures trading
within the same firm. Licensed Option Principals Andrew Aronson
and Alan Knuckman specialize in live assistance of stock*,
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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http://www.OneStopOption.com

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

Please read our disclaimer at:
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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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