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Daily Newsletter, Thursday, 08/26/2004

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The Option Investor Newsletter                Thursday 08-26-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Bulls Applying Pressure
Futures Wrap: See Note
Index Wrap: Expect the unexpected
Market Sentiment: Volume Evaporates


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      08-26-2004           High     Low     Volume   Adv/Dcl
DJIA    10173.41 -  8.30 10193.54 10155.86 1.24 bln 1781/1424
NASDAQ   1852.92 -  7.80  1860.39  1848.88 1.18 bln 1231/1762
S&P 100   539.46 -  0.11   540.45   538.18   Totals 3012/3186
S&P 500  1105.09 +  0.13  1106.78  1102.43
W5000   10721.63 + 83.26 10737.04 10699.87
SOX       380.40 -  3.90   384.28   378.16
RUS 2000  547.25 -  2.89   550.14   546.00
DJ TRANS 3108.84 -  5.20  3130.55  3098.79
VIX        14.91 -  0.07    15.22    14.76
VXO (VIX-O)14.87 +  0.24    15.23    14.56
VXN        21.60 +  0.19    21.77    21.36
Total Volume 2,625M
Total UpVol  1,100M
Total DnVol  1,466M
Total Adv  3467
Total Dcl  3580
52wk Highs  143
52wk Lows    79
TRIN       0.99
NAZTRIN    1.55
PUT/CALL   0.84
************************************************************

Bulls Applying Pressure
by Jim Brown

The major indexes may have finished in the red but it was
only by a narrow margin. Sellers were unable to capitalize
on a slow day and take back some of the gains from the
last week. Oil prices, weak earnings, weak economics and
potential terror events failed to remove the underlying
bid that kept the markets near their highs for the week.

Dow Chart – Daily


Nasdaq Chart – Daily


SPX Chart – Daily


Russell Chart – Daily



Jobless Claims jumped again to the 340,000 level and
well above estimates for another drop to 330,000. The
market tried to ignore the news because much of the
increase was related to Hurricane Charlie. Despite the
thousands of temporary hires in Florida the jump to
343K was the highest level in four weeks. Discounting
the impact of Florida to the headline number the trend
has been steadily downward. This tells us that layoffs
are continuing to slow despite the lack of strong jobs
growth. Rising oil prices and geopolitical concerns
may be keeping employers from adding to the workforce
but they are not cutting workers at the same rate they
were earlier in the year. This suggests we could see
some additional jobs growth in the Jobs Report next
Friday. The estimate for +125,000 new jobs is well
below last months optimistic level but still above
the +32,000 jobs actually reported.

Another employment report released today was the Help
Wanted Index and it fell to only 37. This is the lowest
level since December and only one point below the low
of 36 set in May of 2003. With the move to job ads on
the Internet instead of papers this index has been
demoted to a footnote but it is still an indication of
a lack of hiring. The recent high of 40 in March was
inline with the rising job creation at the time. A
continued drop is just another confirmation employers
are still cost conscious and concerned about the future.

For Friday we are scheduled to get the GDP update and
the consensus is for another drop to +2.8% from the
+3.0% last time around. With anecdotal evidence from
several weak sectors there is some concern the number
could drop even lower. A low number here could help
fuel speculation that the Fed will not raise rates
at the Sept-21st meeting. The current consensus is
for another hike because the Fed views is as removing
accommodation not raising rates. They view the current
1.50% as woefully low and in need of correction. The
Fed funds futures after the morning reports are showing
a 70% chance of another quarter point increase in Sept.

We will also see the final Consumer Sentiment for August
and it is not expected to change from the 94 in the
earlier release.

Greenspan is scheduled to talk at the Jackson Hole
conference and that speech will be dissected for further
insight on his comments earlier in the week. His Jackson
Hole remarks have moved the markets in the past as he
tends to be less formal and deviate from the party line
at these conferences. His rebuttal letter to the Senate
Banking Committee earlier this week suggested home
prices were too high in some areas as a result of
the recent housing bubble. He also said he thought
Japan could be hurt significantly if oil prices continued
to climb. Japan has no oil and is dependent on imports.
He also said the economic cycle in Asia is slowing and
oil prices could accelerate that weakness. He said
growth in China had "braked sharply" and there was a
risk of a hard landing. The letter was a constant set
of good news/bad news comments where he made positive
comments about an area of economic concern and then
hedged his bet by giving a caution about that same area
in the very next paragraph. This fence straddling will
hopefully be resolved with any update on those topics
tomorrow. Unfortunately I would not bet on it.

Today was a bad news bulls type of day. Earnings misses
and warnings from several high profile companies gave
the bulls a wall of worry to climb and while they did
not quite make it to the top they ended on the last
step. Starbucks produced some bitter coffee for investors
with sales growth that was the weakest since May 2003.
SBUX dropped -$2.58 or -5.6% on the news. The slowing
growth was undoubtedly due to consumers paying more
at the pump and less at the counter over the last
three months. $3 coffee may be a casualty of $2 gas.

Krispy Kreme donuts failed to satisfy the sweet tooth
of investors after turning in a dismal +0.1% growth in
revenue. The stock was knocked for a -10% loss after
reporting earnings and guidance that was far below
estimates. KKD only earned $5.7 million this quarter
compared to $13 million in the same quarter last year.
This was a -55% drop in earnings. They also posted
large increases in costs and big drops in margins
from 19.3% to only 10.4% in company owned stores.
They said they suffered losses in closing some non
performing locations. Wow, have times changed. They
also said stores purchased from franchisees had been
under performing. If I reworded that sentence it would
look something like this. Stores repossessed by KKD
and those abandoned by franchisees were doing poorly
as one would expect when taking over failed locations.
Since boarding up a failed KKD store could produce very
negative sentiment for other KKD stores in the area they
are sometimes forced to run a location rather than close
it. Shades of Boston Chicken all over again. At $13
today they are well off their $50 2003 highs and odds
are good they will go lower. KKD blamed their problems
on the Atkins diet and with that trend slowing they
will have a chance for a sweet rebound in the future.

Fred's missed estimates by a penny and blamed the
results on slower sales in home furnishings and apparel.
No real surprise here after WMT and TGT warned that
sales were slowing earlier in the week. The impact of
higher gas prices is likely to produce a flood of these
type of earnings reports when earnings begin again in
October. We are still a couple weeks ahead of the start
of earnings warning season in mid September but I think
everyone already knows how it is going to turn out. With
home heating oil running +30% over last year there will
be a lot of coal in the Christmas stockings and some
people will be glad to get it.

Kirkland's (KIRK) dropped -19% after warning that sales
in August were down sharply. You may not have heard of
them but they sell home furnishings. They said sales
have "slowed considerably" and "customer traffic remains
a concern, ESPECIALLY in mall stores" (my capitals) They
also said they were "not optimistic they could produce
comparable same store sales in the near term". They
expect same store sales to drop -10% to -15% in the 3Q.
Try telling them and other retailers that gas prices
are not a problem for the retail community. I have seen
several reports that mall traffic has slowed considerably
across the country.

Semi stocks took yet another hit today as various
analysts continued their cautionary stance for chips.
BofA cut their ratings on AMD, INTC, TXN, BRCM and MU.
They feel the chip sector has peaked early for this
cycle and expect capex spending to decline. They are
expecting 2005 to exhibit a cycle trough like those
that began in 1995 and 1997. I quickly tracked down
a chart for that period and there were some significant
declines after the 1995 and 1997 peaks. If they are
correct then there are some rough times ahead.

SOX Chart - Weekly 1995-1999


SOX Chart - Weekly 2001-2004



Do we have to wait for 2005 to determine what is going
to happen in chips? Not if we believe the mid quarter
updates currently in progress. NVLS gave their mid
quarter update after the bell with mixed results. The
stock dropped initially after the bad news but rebounded
in later trading. Novellus said customer order patterns
were becoming more cautious and the outlook was much
different than the upbeat guidance in July. NVLS said
they were seeing some push outs of orders, some as far
as 1Q of 2005. They were still positive about the outlook
but turning cautious as well. Bookings are now expected
to be at the low end of the range at $420 million but
shipments will be below previous guidance. 3Q revenue
was also expected to be lower than previously forecast
but only slightly. (they still have time to let
investors down slowly) Q3 earnings were lowered to 37
cents compared to the current analyst consensus of 40
cents.

On Wednesday CMOS also warned that conditions were
deteriorating with order push outs and lower visibility.
There is that "visibility" word again. It means we are
not getting the orders we want but we are still hoping
we can produce a miracle before time to report earnings
again.

The big dog, Intel, will have their mid quarter update
on Thursday Sept 2nd and all eyes will be on how they
are handling their inventory problem and how bookings
are progressing. The back to school build out season
is over and we are moving into the holiday build cycle.
Time to get down and dirty on pricing to blow out those
excess chips. Expect some killer computer deals this
fall.

AMR also warned after the bell that conditions were
getting worse. With oil still hovering in the mid $40s
AMR expects 3Q fuel costs to be $300 million over the
same quarter in 2003. AMR said its full year fuel costs
would be in the $3.8 billion range. They did say traffic
loads were up about +7% but revenue per available seat
mile (RASM) would be below last years levels. Obviously
a continued rise in oil prices would be very detrimental.

Unfortunately that is probably what is going to happen.
Crude oil fell again today despite sabotage in Iraq
cutting production again. Oil prices rose on the news
but fell back again before the close on news of the
ceasefire in Iraq. With oil demand continuing to rise
on a daily basis this price pullback may only be
temporary. I have discussed Hubbert's Peak several
times in this commentary over the last several weeks.
There is a scenario in the current peak forecast that
predicts a push out of that production peak for several
years if OPEC allows oil prices to run out of control.
I believe we are seeing that today. Because the oil
nations can see the future in terms of depletion they
are determined to get every last dollar they can before
the wells run dry. Does anybody really think this oil
"crisis" just happened overnight? Of course not.

Oil was $7 a barrel in 1997. What changed? Supply
temporarily exceeded demand because OPEC was not
managing production correctly. Now they have the price
going in the right direction (for them) and there is
no end in sight other than a dry hole. Sure prices may
fluctuate but the last chapter has already been written.
Below is a chart of Hubbert's Peak. The swing point
extension is a prediction that very high prices could
squelch demand and prolong the pain but the end result
is the same. Remember it is not when the last oil well
runs dry but when demand exceeds production that all
hell will begin to break loose. Currently that is
projected for 2007-2008. For a complete description
of the projection go here:
http://www.hubbertpeak.com/campbell/camfull.htm

Hubbert's Peak Chart




Not to spend all my space on negative events TIVO beat
estimates by 12 cents and Ace Cash Express (AACE) beat
by 8 cents. That tells me consumers are short on cash
to buy gas and that benefits ACE and they are staying
home more and that benefits TIVO. Need I say more? A
study I saw last week said a $10 rise in the price of
oil subtracted two cents from average corporate earnings
and 50% from cash available to spend by consumers. That
sounds a little strong to me on the consumer side but
we all know almost every blue collar worker is supposedly
only two paychecks away from bankruptcy. That may be an
over exaggeration but I have heard it many times. Most
consumers tend to spend what cash is available and max
out their credit cards for the rest. When unexpected
events happen there is very little cash available to
fill the gap. Using that analogy I guess it is possible
for the 50% study to be at least close. Using that same
analogy UBS downgraded Capital One today from a buy to
a neutral due to credit risks ahead. Capital One supplies
credit cards to weaker credits.

Considering all the bad news today I think the market
performance was nothing short of spectacular. We may not
have closed in positive territory but just holding the
high ground with nothing positive in the headlines was
a major achievement. The Dow closed at 10177 and continued
to hold near that strong resistance range of 10200-10250.
The Nasdaq was slightly weaker but managed to hold over
1850. Were it not for the SOX losing another -1% the
Nasdaq might have made it back to positive territory.
There was simply no profit taking from the gains of the
last week and not even any sign of real weakness.

These performances were even more amazing to me with
the Olympics winding down to the closing ceremonies on
Sunday and the Republican Convention starting on Monday.
Add in the GDP and Greenspan speech on Friday and traders
have a mine field of event risk ahead. Personally I am
expecting a rally next week once the convention gets
underway with no problems and I expect it to continue
the week after Labor Day. Maybe the strong underlying
bid this week is from institutional investors who are
anticipating that rally and trying to sneak into positions
ahead of the herd. It makes as much sense to me as any
other theory.

With only one trading day left before those two big
events I would expect some event risk selling on Friday.
However what I would expect and what we get may be two
different things. With the futures shaking off the NVLS
news after the bell and trading back in positive territory
only a couple points away from the high for the month
there is no evident event fear. One of our readers in
the Futures Monitor today probably said it best. If all
the bears are already short in anticipation of a drop
on Friday are we not in danger of sinking our own boat?
I paraphrased but you get the point.

With the rebound to SPX 1105 this week every bear in
the market was ready to jump on that very strong
resistance in anticipation of both profit taking from
the rebound and event risk selling into the weekend
close. Neither has occurred and there are probably
more than a few bears getting very nervous tonight.
Should we get a positive GDP surprise tomorrow morning
or Greenspan gets out of bed in a bullish mood then
there may be some bearish road kill for lunch. I for
one will be going long on any break over SPX 1110 if
I have to close my eyes and hold my nose to do it.
There is strong resistance at 10200-10250 but there
was also strong resistance at 10150 and we blew right
past it yesterday and never looked back. If bulls need
a wall of worry to climb then this is it. Cinch up
those climbing spikes and get ready for a run if the
markets open higher tomorrow. It will defy logic but
then most rallies normally do. If we do get a dip
instead it will just a better buying opportunity for
Monday.

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

Expect the unexpected

The S&P Banks Index (BIX.X) 359.55 +0.12 came within 2.23 points
of trading its all-time high and looks extended after trading a
May 10th intra-day low of 322.50.

One would expect some type of profit taking in the banks after an
impressive 10.7% gain in just over 3-months, but with Toronto-
based Toronto-Dominion (NYSE:TD) $33.35 -2.39% formally
announcing it would take a 51% stake in Banknorth Group
(NYSE:BNK) $33.90 -2.8% in what industry analysts see as a way
for Toronto-Dominion to gain access to further acquisitions in
the U.S., bank bulls seem hard-pressed to relinquish their hold
on the group.

As the BIX.X looks to challenge its all-time highs, Banc of
America Securities threw in the white towel by cutting earnings
estimates and lowering price targets on several semiconductor
stocks.  I'm not sure, but CNBC reported that Banc of America
might have been the last broker to make such a call in the last
few months.

Ahead of this evening's quarterly update from chip-equipment
maker Novellus (NASDAQ:NVLS) $24.65 -1.94%, Deutsche Bank
unexpectedly upgraded Novellus' rival KLA-Tencor (NASDAQ:KLAC)
$37.50 -0.55% saying KLAC should be well positioned for an up-
cycle as a recent flux in forecasted orders from chip foundries
brings uncertainty, and combined with the lowering of
expectations from the semiconductor industry has stock prices in
the sector depressed.

Perplexing to Deutsche Bank's call on KLAC was the firm expecting
stocks to be subject to catalyst driven trading in the near term.

U.S. Market Watch - 08/26/04



While Deutsche Bank looks for a catalyst to bring gains to KLA-
Tencor (KLAC) and perhaps the semiconductor itself, its the
Semiconductor Index (SOX.X) that has been the weak spot the last
5-sessions.

The semiconductors are perhaps ripe for a bounce, but from deeply
oversold bullish % levels of 6%, one needs only to wait for this
sector's bullish % to begin reversing up from these levels to
still be way ahead of the eventually known catalyst.

Stocks traded in a very narrow range today with the Dow
Industrials giving less than a 40-point intra-day move with
breadth ending with 16 gainers, 13 decliners and General Electric
(NYSE:GE) $32.79 finishing unchanged.

How fitting for GE, with the largest market cap weighting in the
S&P 100 Index (OEX.X) 539.46 -0.02% to also finish nearly
unchanged, down a fractional 0.11 points.

Market Snapshot/Internals - 08/26/04 Close



If looking for clues to any directional bias, don't look at the
TRIN.  On a light volume trade, TRIN closed 1.00, a reading
interpreted as "neutral" by most TRIN followers.

Take the NASDAQ's finishing advance/decline line, flip it around
and you get something close to the more bullish NYSE advance
decline line.

Put both the NYSE Composite ($NYA.X) 6,439.80 +0.12% and NASDAQ
Composite ($COMPX) 1,852.92 -0.41%, and we'd most likely get
something that looked like the Wilshire 5000 Total Market
($DWC.X) 10,721.63 -0.01% in today's trade.  Not unlike the very
narrow Dow Industrials (INDU), it too traded in a tight 37-point
range.

Pivot Analysis Matrix - 08/27/04



Good gravy!  Today's tight trade would have the DAILY S2 to DAILY
R2 easily in play, and with the preliminary second quarter GDP
due out before tomorrow's opening bell, with economists'
expecting the initial figures of 3.0% growth to be revised lower
to 2.7%, regardless of what we expect, this week's trade,
excluding yesterday afternoon's little pop higher, has the MARKET
looking like it doesn't necessarily know what to expect.

The retailers as depicted by the S&P Retail Index (RLX.X) 392.06
+0.11% have given some indication of strength.  It's no easy task
to move above a correlative 50-day SMA and 200-day SMA.

S&P Banks Index (BIX.X) - Daily Intervals



Maybe the economy is growing at such a sluggish pace that market
participants have piled into the banks.  On the other hand, this
meteoric rise in the banks comes from the very level that some
analysts felt was the beginning of a Fed-engineered economic and
financial crisis.

S&P 500 Index Chart - Daily Intervals



I've drawn a BROWN horizontal line at tomorrow's DAILY S2, which
would roughly market the top of Friday, Monday and Tuesday's
highs.  Tomorrow's DAILY R2 once again builds a third level of
resistance at WEEKLY R1.

As the SPX now tried to get back above my "old" downward trend,
I'd have to at least view near-term support in front of a
relatively important economic report to that trend and the 1,096
level.  So far this week, buyers have been steady at the MONTHLY
61.8% retracement of 1,093.

Keep and eye on your BIX.X tomorrow, where I would at least tie
its MONTHLY R2/DAILY S1 correlation to the SPX's DAILY S2.

For those that don't expect the unexpected, look for a BIX.X
break above 362 to have the SPX surging above 1,111 should it
decide to get back on trend above that rising 200-day SMA.

Volumes have been light and there seemed to be little interest.
It does seem crazy to even think there wouldn't be some type of
computer selling above 1,111, but a break of DAILY R2, and WEEKLY
R1 may have computers turning on with upside risk immediately
assessed to 1,122.

Jeff Bailey


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

Volume Evaporates
- J. Brown

Volume has been very low all week and it is still sinking.  A lot
of investors have already placed their bets and or moved to the
sidelines ahead of the Republican National Convention next week
so there isn't a lot to do but sit and wait.  "But look at oil!"
you say?  The sharp decline in oil is great news but with crude
down five days in a row I'm surprised that the markets aren't
higher.  So that brings the question, "Is this just a dip in the
bull market for oil?"  Or "Are terror concerns about next week's
convention really that high and keeping traders out of the
markets?"  Both questions are valid.  Unfortunately, I don't have
solid answers for either although I tend to believe a lot of
folks are willing to sit out and not do any trading until after
Labor Day.  Our market wrap column on OptionInvestor.com has been
saying that there aren't any strong catalysts to spur any buying
until after Labor day for a while now.

If you're an optimist then you can feel good that the NASDAQ is
back over the 1850 level and the S&P 500 is back above the 1100
mark but that's about it.  Yes, there are a number of stocks that
appear to have put in a new bottom in August or was that just a
new relative low?  Until we see some new relative highs the
prevailing downtrend is the one we need to be careful with.  I
might feel better if the Dow Industrials can breakout over 10,200
but the warm fuzzy feeling probably won't last long.

Today's market was certainly mixed.  Advancing stocks outnumbered
decliners 15 to 13 on the NYSE but lost 12 to 18 on the NASDAQ.
Likewise up volume outweighed down volume on the NYSE but it was
reversed on the tech-heavy NASDAQ.  Overall volume was pathetic
with less than 2.5 billion shares trading on both exchanges.

I will say that the strength in financials has been bullish but
the banking indices are now looking over extended and just under
resistance.   The recent breakout in the Dow Transports is also
bullish but the gains have been more muted than I would have
expected given the sharp pull back in crude prices.

There definitely seem to be a lot of cross-currents in the market
right now and none of them are very strong.  Everyone seems to be
waiting for something.  Now whether that's the RNC or the Labor
Day weekend is up for debate.

Look for tomorrow's trading to be influenced by the GDP revision
and the sentiment numbers.  Next week's volume is going to be
worse than this week with rumors floating around that Wall Street
is taking the week off to avoid the traffic delays caused by the
RNC security.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9233
Current     : 10173

Moving Averages:
(Simple)

 10-dma: 10051
 50-dma: 10149
200-dma: 10251



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  983
Current     : 1105

Moving Averages:
(Simple)

 10-dma: 1091
 50-dma: 1104
200-dma: 1110



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1280
Current     : 1369

Moving Averages:
(Simple)

 10-dma: 1356
 50-dma: 1406
200-dma: 1441



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

CBOE Market Volatility Index (VIX) = 14.91 –0.07
CBOE Mkt Volatility old VIX  (VXO) = 14.87 +0.24
Nasdaq Volatility Index (VXN)      = 21.60 +0.19


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.84        563,139       472,778
Equity Only    0.70        441,929       309,162
OEX            0.99         21,186        20,831
QQQ            2.77         18,290        50,526


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

Bullish Percent Data

           Current   Change   Status
NYSE          54.9    + 0     Bear Confirmed
NASDAQ-100    32.0    + 3     Bear Confirmed
Dow Indust.   46.6    + 0     Bear Confirmed
S&P 500       50.6    + 1     Bear Confirmed
S&P 100       49.0    + 3     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: 0.94
10-dma: 0.82
21-dma: 1.20
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    1485      1212
Decliners    1308      1775

New Highs      91        36
New Lows       18        34

Up Volume    653M      349M
Down Vol.    544M      799M

Total Vol.  1224M     1173M
M = millions


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

Commitments Of Traders Report: 08/17/04

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 very little change in the commercial traders'
positions.  They remain slightly net short while small traders
are net long (bullish).

Commercials   Long      Short      Net     % Of OI
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%)
08/17/04      398,472   416,109   (17,637)   (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
07/27/04      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%
08/17/04      138,550    97,792    40,758    17.2%

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

In the e-mini contracts we see commercial traders upping
both their long and short positions but they remain net
bearish.  Small traders have done the same by increasing
positions overall and they have increased their bullish
sentiment.

Commercials   Long      Short      Net     % Of OI
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%)
08/17/04      404,065   457,372   ( 53,307)  ( 6.2%)

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
07/27/04      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%
08/17/04      192,939     92,361   100,578    35.3%

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 increased both their longs and
shorts in the NDX but shorts made a stronger comeback.
Commercial traders remain net bullish but the strength of
their sentiment is decreasing at least as of Aug. 17th.
Small traders have turned sharply bullish with a big switch
in positions.

Commercials   Long      Short      Net     % of OI
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%
08/17/04       44,743     41,535     3,208    3.7%

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
07/27/04       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%)
08/17/04       12,256     8,352     3,904    18.9%

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 are at a virtual standstill during the
latest period and remain net bullish on the Industrials.
Naturally small traders are making the opposite bet and have
turned more bearish.

Commercials   Long      Short      Net     % of OI
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%
08/17/04       30,271    22,809    7,462      14.1%

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
07/27/04        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%)
08/17/04        4,388     7,089   (2,701)   (23.5%)

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 08-26-2004
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, BOL, FMC, INSP, MHK, POT, RAI, TDS, ZBRA
New Calls Plays: PD
Put Play Updates: KLAC, 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: 92.28 change: +0.18 stop: 89.95

AET is going nowhere fast.  We expected some profit taking near
$95.00 so we were not surprised with Tuesday's decline.  We
expected a bounce near $91.50 and we got it.  Yet the last day
and a half AET has been trading sideways in a 50-cent range.
This could be the lack of volume this week.  Readers have time to
be patient.  If AET dips to $90.00 then look for a bounce.  If
not then look for AET to climb back above the $93.50 level.  In
the news yesterday was an announcement that AET's chairman and
CEO would exercise some stock options and sell 225,000 shares of
stock, which equates to 10 percent of his AET holdings.  Normally
investors (and stocks) don't react well to that kind of news.

Picked on August 15th at $90.72
Change since picked:     + 1.56
Earnings Date          07/29/04 (confirmed)
Average Daily Volume =      1.4 million
Chart =


---

Bausch Lomb - BOL - close: 65.13 change: -0.47 stop: 62.50

We remain un-triggered in BOL.  The stock has been consolidating
sideways above the $65.00 level.  That's okay with us but the
micro-trend of lower highs could be a concern.  Right now it
doesn't matter since we're still sitting on the sidelines waiting
for BOL to trade at $66.51 or above.  If BOL trades under $63.50
we may drop the play.

Picked on August xxth at $xx.xx <-- see TRIGGER
Change since picked:     + 0.00
Earnings Date          07/29/04 (confirmed)
Average Daily Volume =      397 thousand
Chart =


---

F M C Corp - FMC - close: 46.38 change: +0.32 stop: 42.00

We can't complain with the action in FMC.  Tuesday's breakout
over resistance at $45.00 is holding.  Shares of FMC are slowly
creeping higher, which is good.  Unfortunately, volume is
dropping and that's not so good.  Odds are the volume is a
seasonal issue, which is common in late August, and not a sign of
weakening in FMC.  We remain bullish on FMC and readers may want
to initiate positions at current levels or on a dip to $45.00.
However, this is a dangerous time for stocks as we approach the
Republican convention next week.  Be aware of your risk.

Picked on August 24 at $45.87
Change since picked:   + 0.51
Earnings Date        07/27/04 (confirmed)
Average Daily Volume =    265 thousand
Chart =


---

InfoSpace - INSP - close: 38.52 change: -0.88 stop: 36.50

It may look like INSP is struggling with resistance at the $40.00
level and it is but the stock's trend of higher lows is still
holding up.  Readers can look for a dip back to $38.00 tomorrow
and if it doesn't bounce then we can worry.  Or we can look to
see if the simple 10-dma near $37.65 will act as support.  More
conservative traders, actually most traders, may want to wait for
INSPI to trade back over $40.00 before considering new bullish
positions.

Picked on August 23rd at $40.10
Change since picked:     - 1.58
Earnings Date          07/28/04 (confirmed)
Average Daily Volume =      1.1 million
Chart =


--

Mohawk Industries - MHK - close: 77.20 change: +0.20 stop: 73.00

Now that we've seen the bullish breakout and some follow through
in MHK now what?  We were encouraged to see traders buy the dip
to $75.00 yesterday and if MHK dips again we'll watch the $76.00
level to see if it happens again.  Bulls with open positions need
to be patient and expect some ups and downs.

Picked on August 24th at $75.51
Change since picked:     + 1.69
Earnings Date          07/21/04 (confirmed)
Average Daily Volume =      397 thousand
Chart =


---

Potash - POT - close: 53.62 change: +1.93 stop: 49.99 *new*

Time to adjust your stop loss!  POT surged more than 3.7 percent
on Thursday for no apparent reason.  The breakout above the
$52.00 level is very bullish and volume was way above average but
that could be skewed by the recent stock split.  Shares of POT
are now within striking distance of our target at $55.00 and
readers need to be ready to exit.  We're going to raise our stop
loss to $49.99 for now but more conservative traders may want to
put theirs under the 21-dma at $50.51.

Picked on August 10th at $ 51.08
Change since picked:      + 2.54
Earnings Date           07/29/04 (confirmed)
Average Daily Volume =       180 thousand
Chart =


--

Reynolds American - RAI - close: 73.37 change: +0.59 stop: 69.36

Slowly but surely shares of RAI seem to be consolidating higher.
The next test will be a breakout over the $74.00 level.  The
defensive nature of this stock could help us if traders turn
cautious next week.  There was some bad news out yesterday.
Moody's Investors Service lowered their credit rating outlook on
RJ Reynolds from "stable" to "negative" over cost concerns with
the recent tax rulling and potential damages from litigation.
We're encouraged that RAI was able to shake off the news and post
a gain today.

Picked on August 19 at $72.88
Change since picked:   + 0.49
Earnings Date        08/02/04 (confirmed)
Average Daily Volume =    1.2 million
Chart =


--

Telephone & Data Sys - TDS - cls: 77.51 change: -0.47 stop: 74.00

TDS, in spite of the recent breakout over $78.00, is going
nowhere.  Shares are back under the $78.00 level and have spent
the last six sessions in a $1.50 trading range.  More aggressive
readers can eye a bounce from $77.00 as a potential entry point
but we feel more comfortable waiting for a new high over $78.40.

Picked on August 24th at $78.05
Change since picked:     - 0.54
Earnings Date          07/21/04 (confirmed)
Average Daily Volume =      195 thousand
Chart =


---

Zebra Tech. - ZBRA - close: 56.46 chg: -0.08 stop: 53.25

ZBRA experience a strong, high-volume surge on Wednesday and
broke through resistance at $83.50 and the $84.00 level to hit
our TRIGGER at $84.35.  On a post-split basis this changes our
entry point to $56.18 and our stop loss to $53.25.  Readers can
choose to initiate positions at current levels or look for a dip
to $55.00 as an entry point.  Our target is $60.

Picked on August 25th at $56.18
Change since picked:     + 0.28
Earnings Date          07/28/04 (confirmed)
Average Daily Volume =      419 thousand
Chart =



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

Phelps Dodge - PD - close: 82.10 chg: +2.26 stop: 77.00

Company Description:
Phelps Dodge Corp. is the world's second-largest producer of
copper, a world leader in the production of molybdenum, the
largest producer of molybdenum-based chemicals and continuous-
cast copper rod, and among the leading producers of magnet wire
and carbon black. The company and its two divisions, Phelps Dodge
Mining Co. and Phelps Dodge Industries, employ more than 13,500
people in 27 countries. (source: company press release)

Why We Like It:
If you're a MarketMonitor subscriber then you know we've been
following PD as it flirts with the $80.00 level the last couple
of weeks.  Today Jeff Bailey mentioned the new high and bullish
P&F buy signal.  Investors bid up shares of PD and other miners
due to a rise in copper prices.  Copper surged to a new eight-
year high ($1.403 a lb.) because of news that workers at two
Southern Peru Copper Corp mines have threatened a strike on
August 31st if the company doesn't cough up some wage increases.

The obvious risk here is that the Southern Peru Copper Corp
capitulates pretty quickly and copper prices subside again.  We
don't know if or when that can happen.  All we do know is that
global demand for copper is very strong right now and any
disruption would be a boon for those companies still producing.
Plus, we have the very obvious bullish breakout over $80-82 in
shares of PD and the triple-top breakout buy signal on its P&F
chart.  Actually, if you're counting it's a quintuple-top
breakout.  The P&F chart's bullish target is $93.00 but we would
target the $87.50-90.00 range.

We're willing to speculate on a continued rise with an immediate
stop under $77.00, which was the recent low on Wednesday.

Suggested Options:
We're going to suggest the September or October calls.  The
$80 and $85 strikes should work well.

BUY CALL SEP 80 PD-IP OI=7414 current ask $4.00
BUY CALL SEP 85 PD-IQ OI=3119 current ask $1.45

BUY CALL OCT 80 PD-JP OI=3046 current ask $5.65
BUY CALL OCT 85 PD-JQ OI=1932 current ask $3.10

Annotated Chart:



Picked on August 26th at $82.10
Change since picked:     + 0.00
Earnings Date          07/27/04 (confirmed)
Average Daily Volume =      2.1 million
Chart =



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

KLA-Tencor - KLAC - close: 37.50 change: -0.21 stop: 38.51

There seem to be a lot of mixed messages here.  Chipmaker CMOS
fell to a new low after reporting disappointing earnings.  CSFB
essentially downgraded INTC when they warned investors the
company would likely report Q3 sales in the lower half of their
guidance range.  AMD was downgraded this morning from a "buy" to
a "neutral" by BAC.  BAC's semiconductor analyst also said they
believe the chip cycle has peaked.  With all this negativity why
isn't KLAC falling lower?  On the other hand DB upgraded KLAC to
a "buy" this morning yet the stock isn't climbing either.  Shares
of KLAC seem to be coiling sideways and we do expect a breakout
but it could be either way.  It may be noteworthy that KLAC is
still inside its descending channel.  Remember this was a
slightly more aggressive play but considering the trend and
investor caution betting on a drop may be (should be?) the better
bet here.

Picked on August 24 at $37.01
Change since picked:   + 0.49
Earnings Date        07/29/04 (confirmed)
Average Daily Volume =    6.7 million
Chart =


--


SPX Corp - SPW - close: 36.76 change: -0.17 stop: 38.26

SPW continues to coil against support near $36.00 with a trend of
lower highs that should blossom into a downside breakout.  Until
then we remain un-triggered.  Our entry point to buy puts is a
drop to $35.75 or lower.

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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**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


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The Option Investor Newsletter                  Thursday 08-26-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Oil Services to Homebuilders and more
Traders Corner: Charting – Trendlines: Part 1; Construction & types
Combos: Is Directional Trading A Correctable Personality Flaw?

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

Oil Services to Homebuilders 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.
___________________________________________________________________



Schlumberger - SLB - close: 62.16 change: +0.98

WHAT TO WATCH: Here's a paradox - oil and oil service stocks were
some of Thursday's best performers even though crude oil slipped
for its fifth day in a row.  Maybe it's not a paradox.  Maybe
investors are betting that this dip in oil is only temporary and
they're done with the profit taking cycle in energy stocks.  SLB
is certainly tempting.  The stock is rebounding from a test of
long-term support near its simple 200-dma.  The MACD indicator
has produced a new "buy" signal.  The P&F chart shows the same
line of support.  This could be an entry point for a run toward
the highs near $66.00.

Chart=


---

Bard C R - BCR - close: 54.94 change: +0.33

WHAT TO WATCH: This medical device maker has rebounded sharply in
the past two weeks and has broken through technical resistance at
its simple 10, 21, 40, 50 and 100-dma's.  Now BCR is challenging
resistance at the $55.00 mark.  The P&F chart is bearish and
looks very overbought but the drop is already showing a "low-pole
reversal".  That's a warning sign for the bears.  This could be a
stock to watch for a bullish breakout.

Chart=


---

Cardinal Health - CAH - close: 45.80 change: +0.77

WHAT TO WATCH: Do you like "fill in the gap" type plays?  Then
CAH may be one to watch for you.  The stock appears to have put
in a bottom between $42 and $44.  Now shares have broken to new
five-week highs and round-number resistance at $45.00.  CAH has
also broken into the gap and has a chance to fill it.  Optimistic
bulls can target a run to $50.00 but we'd watch out for potential
resistance at $47.50.

Chart=


---

Standard Pacific - SPF - close: 50.85 change: +0.82

WHAT TO WATCH: Construction company and homebuilder SPF looks
like a tempting bullish candidate.  The recent breakout over its
100 and 200-dma's combined with the push through round-number
resistance at $50.00 is certainly positive.  The homebuilders did
not see any follow through on yesterday's declines caused by the
lousy home sales numbers.  We'd be watching SPF for a breakout
over $51.50 and target a run to $55 or higher.  The P&F chart
shows a strong rebound from its rising support and a bullish
target at $64.00.

Chart=



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

BA $52.07 -0.43 - We're still bullish on BA and the dip on
Thursday may be an entry point but we're willing to wait and see
if it retests the $51.00 level first.

EBAY $86.41 +0.75 - EBAY has been climbing, almost daily, for
three weeks in a row.  The stock is very short-term overbought
but it seems bent on reaching the $90.00 level first.

AXP $50.12 +0.17 - AXP has been trading in a very tight $1.25
range for the last four weeks.  The technicals are mixed and the
stock could breakout either way but today's move over the 50 and
100-dma's might be hinting at an upside breakout.  Bears can
watch for a drop under $49.00.



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

Charting – Trendlines: Part 1; Construction & types
By Leigh Stevens
lstevens@OptionInvestor.com


I use trendlines a lot but have learned from past experience that
not everyone knows the theory related to how and why these lines
work to show a trend or the break of a trend in the market.
Many, if not most traders, assume that the markets are somewhat
random or that only news and events matter, not some lines that
only take a straight edge to draw – how simple is that!  For that
matter how could something so simple mean too much anyway.

However, trendlines are one of the most basic and useful tools in
assessing trends and trend reversals in stocks, stock indexes and
other financial instruments; e.g., bonds, currencies, etc. If you
look at my last Trader's Corner article that had one bit that
analyzed the Oil futures charts, you'll notice that oil prices
stopped right AT those trendlines and reversed – imagine that!
And, we thought that the reversal was just a function of events
and what an interesting coincidence that there was no further
news that caused prices to keep going up and news that drove
prices down.  Well, I used to believe in those things too. The
fundamentals. Not to discount market influences but there is more
to markets than meets the eye – that I know for sure!

That prior Trader's Corner article is found at –
http://www.OptionInvestor.com/traderscorner/tc_081904_1.asp
and, I'll update that chart here –





DEFINITION and BASICS –
A trendline is, as the name implies, a line that attempts to
measure and define a price trend in any market that involves
prices set by the free actions of buyers and sellers. "Free"
market as defined by what is not - for example, the fed funds
rate is not something set by the free action of buyers and
sellers. Gold used to be a fixed price, set by government action.

A trendline is also by definition a line that either slopes up or
down to some degree in keeping with the primary definition of a
trend as meaning a predominant up or down price direction.
Lines drawn across the highs and lows of a sideways trend or
across the tops/bottoms of a defined trading range, are referred
to simply as horizontal or level lines.

A (I’m tempted to say “the”) basic technique of charting is the
use of trendlines.  However, not all trendlines are drawn the
same or rather, there is not ONE correct way to construct
trendlines.  I tend to be a bit creative in the construction of
trendlines in that I will use a type of construction that could
be called “best fit” analysis or use of “internal” trendlines.

A conventional trendline, what we learn in charting 101, is
to draw an initial trendline through the 2 or more (preferably a
minimum of 3 points) highest highs or lowest lows on a bar,
candlestick or line (close-only) chart.

An "internal" trendline draws a line through the MOST number of
highs or lows - more on this later but one example here before we
leave the subject of oil.

After this span of time on the chart below, the way I've
finalized the topmost and bottom-most trendlines is that they cut
through one or more intraday highs or lows, per the circles on
the chart of the Oil Stock Index (OIX)-

The downward pointing red arrow marking the 4th "touch" to upper
resistance trendline was followed by a decline after that.  This
occurred well before (e.g. weeks) the peak in oil prices per the
first chart above.

Here, we could say that this trendline in a related market (the
oil stock index) suggested that the oil price rise might not last
much longer, given the tendency for oil stocks to trend higher as
long as knowledgeable investors could foresee rising oil prices.




There are points that I'll come back to also that are in evidence
in the chart above, such as the tendency seen at the lower down
(red) arrow, for a trendline that was "acting" as support to
define an area of resistance once the up trendline was penetrated
(to the downside). Hence, the idea that support "becomes"
resistance and vice versa.

A rising up trendline is usually drawn by connecting 2 or more
lines – 3 if available. You can start with 2 points, such as two
of the lowest lows. The resulting line is then below the level of
the other periodic price drops that occur in a rising market.

What really defines a rising up trendline is not the advancing
price moves or price swings, but the low point of the downswings,
dips or pullbacks on the way up.  You hear the saying "buy dips"
or to buy weakness, referring to buying the corrections in a
rising trend or buying pullbacks to the up trendline.

Downside reactions in an uptrend will usually stop above, at or
near the rising up trendline.  A past chart here illustrates a
simple up trendline and connects 3 or more intraday lows – you
never have to search very far for examples of trendlines.




A down trendline slopes down as it measures a declining price
trend and is typically drawn by connecting 2 or more, usually
3 if available, of the highest highs of the periodic upswings
or rallies that occur in a downtrend.  The points that establish
the down trendline are the high points or peaks of the upswings,
or minor rallies that run counter to the general downward
direction.

The advice to "sell rallies" is usually in reference to a
declining trend and a rally to the area of the down trendline
would be a good way to do it - there are always some countertrend
movements. In a decline, trendlines that slope down in a very
steep manner are more common than those that have a radically
steep upward slope.  Rallies in a downtrend will usually stop
below, at or near a falling down trendline.  The chart below is
an example on a line chart, showing closing prices only -




The downtrend above gets its best definition so to speak, after a
line can be drawn through a 3rd high and that becomes the
"defining" point of a down trendline - note the steep decline  in
fact after that.  A downtrend is then assumed to be in effect
until around May on the above chart when there was a rally to
above the down trendline.

Note that the rebound from the resistance trendline on the lower
right of the chart illustrates the principal that support and
resistance trendlines can assume also opposite roles at a later
stage – here, the resistance trendline, once broken, later
defines a support area.

This brings us an obvious question of which chart TYPE to use and
does it make a difference?  Generally it does not make a
difference whether you use a bar, candlestick or line chart,
assuming you have enough points to construct a trendline – one is
not better than the another.

With a candlestick chart you can play with drawing trendlines
only at the lower/upper "bodies" or through the "shadows" (lowest
lows and highest highs for the candlestick period; e.g., hourly,
daily, etc.). Line chart trendlines mean that you are mostly
looking for the close to tell you whether a trendline is intact
or penetrated.

I tend to use all the above types of charts and they may show me
slightly different things. A pullback in an uptrend may dip under
the trendline that uses the lows, but not be apparent on a close-
only line chart. I tend to use bar charts most often. For weekly
and monthly charts, I generally draw a line first with a bar
chart, than switch to a line chart for comparison.  If the line
chart gives me a clearer trendline "definition" I save and use
that one.

You can also draw trendlines of course on Point & Figure charts,
which makes another possible type of chart to use, as can be seen
in the chart below of the S&P 500 (SPX) Index. The upside
penetration of the down or resistance trendline at the extreme
right suggests a trend reversal from down to up. This breakout
was the start of the bull market up trend that has continued into
at least early this year (2004) -




Because the use of trendlines is often an art rather than a
science, traders can get frustrated when what they understand as
trendline "rules" do not seem to work.  Also, there is the fact
that it takes some months and years to see how trendlines work in
a variety of stocks/indices and market conditions.

Conventional or traditional trendlines are straight lines drawn
through at least two lows or highs, preferably three, and such a
trendline doesn’t bisect or "cut through" any part (price range)
of a bar chart or candlestick – or, any close on a line chart.

However, if we look at trendlines as angular measures of price
momentum and that momentum is often only loosely defined or
measured, we make a case for trendlines that sometimes cut
through some part of some bars. These are called "internal" or,
as I also say, "best fit" trendlines that touch the greatest
number of highs and lows.  And, I always remember that I am
trying to visually depict the DOMINANT momentum of the trend.

Although there is more than one way to draw a trendline – the
guidelines for best USE of trendlines are the same as seen in the
concluding charts drawn from my book (Essential Technical
Analysis). This is an unnamed stock in an undefined time span –
this is not name that stock and time, just a focus on the
trendline concept -




The guidelines for using trendlines regardless of how they are
precisely constructed, is to buy on declines to or near a support
(up) trendline and sell rallies that touch or approach a
resistance (down) trendline.  A decline that goes through
(breaks) an up trendline is an indication that the trend has
reversed and a shorting/put buy strategy is suggested –




At the end of this period shown above, the rally that penetrated
or broke out above its down trendline, was an indication that the
trend had probably reversed and was a buy – stock or the calls.

Use of trendlines in the chart below showed another place to sell
the stock later on when prices rebounded to the previously broken
up trendline.  Come to think of it, given history as hindsight,
wish I had shorted YHOO at 90 bucks, into at least '01 and $10!




In a next Trader’s Corner article on trendlines, I’ll discuss
what trendlines can and can’t do to help you spot trends and
trend reversals – sometimes trendlines don’t work in providing a
good definition of a trend, such as in choppy markets or sideways
trends. Nevertheless, there are ways to minimize losses in such
situations.


****************
Combos/Straddles
****************

Is Directional Trading A Correctable Personality Flaw?

By Mike Parnos

Can you wash the spots off a leopard?  I certainly hope so.  If not,
we’re wasting out time here.   Can people change?  Can you turn a poor
trader into a good trader?   Well, we may never be able to turn pigs-
in-a-blanket into caviar, but we can make progress.

Therapy can help, but only to a degree.  All I can do is try to create
a sense of awareness and present facts.  If you are aware, then you can
at least make an informed decision.   The problem is that most traders
are at the mercy of their emotions.   I can only attempt to place a few
logical speed bumps in the path and hope you will pause, and think,
before placing directional trades.

Zig Ziglar has said, “Confidence is going after Moby Dick in a rowboat,
and taking the tarter sauce with you.”  Unfortunately, that’s also the
definition of “stupidity.”   When people place directional trades, they
are pretty confident, don’t you think?  Hmmm . . .
___________________________________________________________

Dear Mike,
The Iron Condors you talk about in your articles require that the stock
remains within a range above the bull put spread and below the bear
call spread. Are all non-directional trades like this where the price
of the stock or index must not move up or down out of a range?

If there are non-directional trades that do not require this would you
please give me an example? At the end of your article you try to be
funny by saying you have a waiting room full of directional traders
that just can't understand why they lose money. But it seems that in
last week’s article you were dealing with a non-directional trader that
lost money! Could it be that the markets were being directional? –
Roger
____________________________________________________________

Hi Roger,
There are a few types of non-directional trades.  My favorite is the
Iron Condor -- preferably on a liquidly traded index.   As you wrote in
your letter, the idea is to create as wide a trading range as possible
while still taking in a reasonable amount of premium.  Recently, I've
been able to use the SPX with a trading range of over 100 points.  What
we're trying to do is to simply put the percentages in our favor as
much as possible.  If you have a 100-point range, the SPX can make
substantial moves, both up and down, and still close safely within the
trading range – and that translates into PROFIT.  We have a very high
percentage of success.  Is it infallible?  Of course not.  Remember
that we’re dealing with a market that we have absolutely no control
over.  At times, it can be a very helpless feeling.

If the market begins to trend, it can threaten and/or violate one of
the spread’s short strike prices.  The important thing is to have a
plan of what you will do if you find yourself in a potentially
threatening situation.  Those without contingency plans are doomed to
fail and destined to end up working under those golden arches during
their retirement years.  There are a number of ways to adjust your
condor positions – many of which have been discussed in previous Option
Therapy columns.

Place Your Bets and Kiss Your Money Goodbye
Directional traders are buying options and essentially placing bets –
just like gamblers do in Las Vegas.  They're betting that
the stock/index will go in a particular direction -- and they can only
make money IF it goes in that direction.  They will be right sometimes,
but, in the long run, they will likely lose money because they’re going
be wrong more often than they are right.   They may use dozens of
complicated indicators, expensive sophisticated software and have a
direct line to the Psychic Friends Network.  But that doesn't affect
the fact that they can profit only one way -- IF they guess right.

If you were to flip a coin three times and it turned up "heads" three
times, what are the chances it will be "heads" on the fourth flip?  The
reality is that you still only have a 50-50 chance of it being “heads.”
It may seem that the coin is “due” to come up “tails,” but logic tells
us different.   Hopefully, you do want to use logic in selecting your
trades.  The same concept holds true for picking direction on stocks or
indexes.  No matter what the “indicators” say, you have a limited
probability of success.

In Las Vegas, you can stand at the roulette wheel and bet on red or
black.  What are your chances of winning?  They’re less than 50-50.
Why?  Because the house builds in their profit percentage by having “0”
and “00” on the wheel.  When “0” or “00” is hit, everybody loses –
except the house.   Believe me, all those magnificent hotels in Las
Vegas weren’t built with money the house lost.

The bottom line is that the directional trader is putting himself at a
disadvantage.  Now, add to all of this the fact that it's rare that a
typical option trader will have the money management skills to bet in
the appropriate increments or the self-discipline to control their
losses.

Other Non-Directional Strategies
In previous sessions, I have written about two other non-directional
strategies – the “Siamese” Condor and the Low Risk Straddle.  The
“Siamese” Condor is a short-term trade that benefits by the lack of
movement of the underlying.  On the other hand, the Low Risk Straddle
is a short-term strategy that benefits from a large movement – in
either direction.
____________________________________________________________

SEPTEMBER CPTI POSITIONS
September Position #1 – SPX Iron Condor – 1105.09
The SPX has become our favorite index.  The premiums are respectable.
The spreads are wide enough to do a little shaving, and we can create
some huge trading ranges for safety purposes.

We sold 10 Sept. SPX 1015 puts and bought 10 September SPX 995 puts for
a credit of about: $1.10 ($1,100).  Then we sold 10 September SPX 1140
calls and bought 10 September SPX 1160 calls for a credit of about
$1.40 ($1,400).  Total credit and potential profit of $2,500.  Maximum
profit range: 1015 to 1040.  That’s a 125-point range.  It is going to
require $20,000 in maintenance.  The return on risk will be about
14.3%.

September Position #2 – RUT Iron Condor – 547.25
The RUT gave us a big scare in August.  A lot of traders rolled out
their 520 short puts when the price was violated a week ago.  It was
the prudent thing to do.  The huge bounce could not have been
predicted.  Those that held had a 50/50 chance of success.  They rolled
the dice and they won.

We sold 10 RUT September 500 puts and bought 10 RUT September 490 puts
for a credit of about: $1.00 ($1,000).  Then we sold 10 RUT September
580 calls and bought 10 RUT September 590 puts
Credit of about $1.00 ($1,150).   Total credit and profit potential of
$2,000.  It’s a nice size maximum profit range of 500 to 580.  The
maintenance requirement is only $10,000.  The return on risk will
depend on what premium you take in.  If you take in $2,000, the return
on risk will be 25%.

September Position #3 – SPX Credit Spread Boogie – 1105.09
In this August cycle, our Credit Spread Boogie play is going to be 100%
profitable.  It may have taken two months to make this money, but it
was well worth it.  So, let’s do it again.

We sold 3 September SPX 1105 calls and bought  3 September SPX 1130
calls for a credit of about $7.00 ($2,100).  This is based on the
feeling that, despite the recent bounce, the downtrend will continue.
We’ve taken in $2,100.  We’re going to remain in this position until it
costs $14.00 to unwind it.  That will be an indication that the trend
has likely changed and we will then reposition ourselves in the
opposite direction – playing enough contracts to replenish what we
spent to close out the original spread.  The initial maintenance
requirement is $7,500.  However, keep some of your powder dry.  If we
have to shift positions, we will need additional maintenance dollars
for the additional contracts.

September Position #4 – OEX Iron Condor – 539.46
This position is in response to some requests for an OEX play.

We sold 10 September OEX 505 puts and bought 10 September OEX 495 puts
for a credit of about: $.65 ($650).  Then we sold 10 September OEX 555
calls and bought 10 September OEX 565 calls for a credit of about $.75
($750).

Total net credit of about $1.40 ($1,400).  Maximum profit range: 505 to
555.  Potential return on risk of about 16%.  It’s been a long time
since I’ve traded the OEX in a condor.  I don’t remember how generous
they are in shaving the bid/ask spreads.  Good luck.

ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $34.40
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 – 539.46
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 had a total of $7,440.  We now add the $950
for the August expiration for a new total of $8,390.

New Zero Plus Positions For September
September bull put spread 505/495 for credit of $.75 x 5 contracts =
$375.  Short 555 call for credit of $1.20 x 5 = $600.  If all goes
well, we’ll be able to add $975 to our cash position as we wait for the
market to move up – hopefully in this lifetime.
_______________________________________________________________

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, 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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