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Daily Newsletter, Monday, 08/30/2004

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The Option Investor Newsletter                   Monday 08-30-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Low volume, low prices
Futures Wrap: See Note
Index Trader Wrap: CONVENTIONally low volume 


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      08-30-2004           High     Low     Volume   Adv/Dcl
DJIA    10122.52 - 72.49 10196.78 10122.52 1.02 bln  986/1810
NASDAQ   1836.49 - 25.60  1855.78  1836.49  993 mln  945/2059
S&P 100   536.55 -  4.33   540.88   536.55   Totals 1931/3869
S&P 500  1099.15 -  8.62  1107.77  1099.15
SOX       373.64 -  8.70   382.34   373.64
RUS 2000  544.56 -  7.11   551.67   544.46
DJ TRANS 3085.35 - 23.45  3108.17  3080.06
VIX        15.44 +  0.73    15.58    15.30
VXO (VIX-O)15.11 +  0.32    15.28    14.71
VXN        23.14 +  1.87    23.18    22.31
Total Volume 2,015M
Total UpVol    316M
Total DnVol  1,678M
Total Adv  1931
Total Dcl  3869
52wk Highs   75
52wk Lows    46
TRIN       2.95
PUT/CALL   0.85 
*******************************************************************

Low volume, low prices
Jonathan Levinson

Extremely light volume probably attributable to heightened 
security for the GOP convention in New York coincided with losses 
across the indices as bonds rallied throughout the session.  
Crude oil extended last week's losses, closing below 43 and 
dipping below 42 intraday on the Nymex.

RBC's technical analyst Bob Dickey was out this morning saying 
that overhead resistance for equities was considerable at current 
levels but that pullbacks should provide good entry points as 
market conditions improve for the remainder of the year.

If so, then today provided the first such pullback, with the 
Nasdaq declining 1.37% to close at 1836.5 and the Dow .7% to 
10123.  The decline was set up by a bearish oscillator divergence 
on the 30 minute charts discussed this morning before the open in 
the Market Monitor.  It occurred within the context of the 
broader daily cycle upphase, which itself has been fighting with 
the weekly cycle downphase.  If today's weakness does not reverse 
from current levels either tomorrow or by Wednesday at the 
latest, then the daily cycle upphase that has fueled the market 
strength of the past 3 weeks should reverse, bringing with it a 
still-deeper "pullback" for RBC's analyst to buy.


Weekly Dow Chart



The weekly declining channel is in play at current levels, and 
despite last week's confirmation of the strong advance in the 
prior week, the bulls weren't able to break resistance this 
morning.  The session high of 10196 was right on the line, and 
while the weekly cycle oscillators remain in a downphase, a 
positive week finishing above 10200 should be enough to begin 
generating buy signals.  On the other hand, these oscillators 
aren't oversold by any stretch, and a break below last week's 
lows will suggest a retest of 9900 and possibly of the lows for 
the year at the lower descending channel support line.  These are 
critical levels, insofar as that 10200 resistance level could be 
considered bull flag  resistance as noted for the past several 
months in this current channel, while a failure to advance here 
will open the door to a bearish finish for 2004.  


Daily Dow Chart



The issue for the Dow is pretty clear on the daily chart, and it 
looks bearish as of today's admittedly light volume close.  The 
steeply rising support line in place since the year low was 
broken today with a bearish engulfing candle.  This would set up 
Friday as a gravestone doji top to finish off the daily cycle 
upphase, but conditions that generally accompany such prints 
include high volume and long intraday range.  Neither of those 
conditions were present on Friday, with light volume and a narrow 
range/short upper candle shadow.  Of course, chart signals are 
rarely perfect, and the trendline break with today's long candle 
looks pretty convincing to me.  If it's valid, then we should see 
10200 go unchallenged on a daily closing basis, and better yet a 
move to 10080 confluence/trendline support.  The wildcard remains 
the light volume and ambiguous cycle setup in this timeframe, as 
the daily cycle appears to be ready to roll over but has yet to 
do so.  A failure to regain the 10160-10170 should be enough to 
see the rollover follow through, however, and a lower high from 
the next 30 minute cycle upphase will confirm the new daily cycle 
weakness.


Weekly Nasdaq Chart



The Nasdaq held the previous week's gains last week, confirming 
what appears to have been a bull wedge breakout with an implied 
target as high as 2075.  Today's decline reversed all of last 
week's advance, confirming the 1855-60 confluence resistance 
below the more significant 1890 and 1920 resistance levels.  The 
bounce from the lows 3 weeks ago has yet to reflect itself in the 
weekly cycle oscillators, which remain bearish, if somewhat less 
aggressively so.  1760 remains key downside support, while the 
descending-channel-that-might-be-a-bull-flag support declined to 
1750.


Daily Nasdaq Chart



The break on the daily chart is as rich with implications for the 
Nasdaq as it is for the Dow above.  The implied target on the bear 
wedge that broke today is at the year lows, with the 22 day EMA at 1839 
being tested by today's close at 1836.  A close below the 1825-30 
support level should be enough to generate sell signals on the daily 
cycle oscillators, setting up the Nasdaq for a test of support at the 
1810 and 1800 levels for starters.  Any lower high for the anticipated 
30 minute cycle upphase below the 1860 level will confirm the daily 
cycle weakness.


Weekly TNX Chart



At the beginning of last week I discussed the daily cycle upphase 
building within the ongoing weekly cycle downphase.  In the 
latter part of last week, we saw ten year note yields (TNX) fail 
at the 50 week EMA and give up the better part of their advance, 
closing the week in negative territory.  That decline in the TNX 
(advance in bonds) continued today, with the TNX falling 3.9 bps 
to close at 4.188%.  The most recent downphase in the weekly 
chart of the ten year.  If support between 4.1% and 4.15% fails, 
next support is at the 4.0%-4.02% level.  Overhead resistance 
above 4.3% is at 4.4%. 

It was reported that tomorrow U.S. Treasury auction of 4-week 
notes will be reduced from 24B to 22B.


Weekly chart of Crude oil



Oil extended last week's slide today, and on the weekly candle 
chart the most recent candle is based solely on today's move.  
The bearish ascending wedge noted for the past several weeks 
broke with authority last week, and the implied downside target 
is as low as 36.  However, there's significant support at 40-41 
and at 41.70, with today's spike low on the Nymex reaching 41.40.  
A break below 41 should kick off a much-welcome weekly cycle 
downphase.

The news associated with the decline, other than pure technicals, 
revolved around a number of items.  It was reported that Shiite 
cleric Muqtada al-Sadr told his followers in Iraq to cease their 
resistance against U.S. and Iraqi government forces following the 
end of the standoff in Najaf. 

As well, OPEC president Purnomo Yusgiantoro said that  plans for 
additional oil capacity expansions were on the horizon.  "...In 
response to expected demand growth in the near future, member 
countries have plans in place to further increase production 
capacity by around one million bpd toward the end of this year 
and into 2005.   In addition, plans for additional capacity 
expansions are available and could be enacted soon. However, this 
capacity would, typically, become available around 18 months 
after commencement of this process," Yusgiantoro said. 

Iraqi oil exports were running below last week's 2 million bpd 
1.4 million bpd today, thanks to pipeline damage caused by last 
week's acts of sabotage. The repair work is expected to take five 
days.  Fire fighters were working yesterday to put out a blaze in 
the South Rumaila oilfield caused by the pipeline breaks. 

Crude oil closed lower by .925 at 42.25 on the Nymex, a 2.14% 
decline, and, despite an upgrade from Lehman Brothers from 
neutral to positive today, both the OSX and OIH closed lower by 
1.3% at 107.68 and by 1.12% at 72.01 respectively.  Oil bulls 
pointed to the absence of a resolution in the YUKOS affair, 
continued strong global demand and, other than in Saudi Arabia, a 
relative dearth of excess supply capacity.  Airline stocks, 
lofted by the continued decline in crude oil prices, bucked the 
broader market today, with the Amex Airline Index (XAL) closing 
higher by .38% at 47.22.

It was a quiet news day.  The Commerce Department reported that 
US consumer spending climbed sharply in July, rising .8% and 
meeting expectations.  Personal Income, however, rose just .1% 
and missing estimates for a .2% increase.  The increase in 
personal income was the weakest reading since November 2002.  The 
personal savings rate declined from 1.3% to .6% as consumer 
spending rose faster than income.  The personal savings rate was 
the lowest since December 2002. After-tax income increased 0.1 
percent.   The closely-watched personal consumption expenditure 
price index, which the Fed prefers to the CPI, was unchanged, as 
was the core PCE index.   Some analysts were quoted as saying 
that this confirms that there is "no inflation", and that the 
robust increase in personal spending bodes well for Q3 growth.

Spending on durable goods increased 4.1%, and June's 5.9% decline 
in durable goods spending was revised upward to a 3.2% drop.  As 
the most disappointing component of today's reports was the 
personal income reading, all eyes will be focused on this 
week's employment report for August, scheduled for release on 
Friday.  

Forrester Research announced that it expects a 7% increase in 
information technology spending next year, based on a its Q3 CIO 
Confidence Poll survey of 195 information technology executives.  
will rise 7% next year, according to the firm's survey of 195 
executives. 

The markets were less concerned with the impact of Hurricane 
Hermine and the flight-path of Hurricane Frances than with the 
ongoing GOP convention in NYC.  Despite a limit-up day for cotton 
futures, volume was light overall not just for cotton futures but 
for the markets in general.  With security tight in New York for 
the Republican Convention, some analysts wisely connected the 
light volume with impediments for those trying to enter or even 
travel within Manhattan.   

For tomorrow, we are left with the uncertainty surrounding the 
fate of the intraday cycles and the ongoing but faltering daily 
cycle upphase.  A relatively orderly bounce attempt turned up the 
30 minute cycles, only to see the price collapse into the close.  
That dip got ahead of the 30 minute cycle oscillators, which 
stalled but did not reverse their upphase.  Any strength tomorrow 
will generate a bullish divergence on that key intraday cycle, 
and the short cycles are oversold as well.  This is a recipe for 
a strong intraday rebound, which will either close below today's 
highs or not.  A lower high will spell the end of the daily cycle 
upphase, while a higher high will re-confirm it.  If we see more 
selling tomorrow after today's very weak bounce attempt, then I 
will expect that selling to be quite strong and the daily cycle 
upphase should abort almost immediately.  I do not expect to see 
today's high broken on a closing basis given the trendline break 
today and the toppiness in the daily cycle oscillators.

Oil is a wildcard, as we saw lower oil prices coincide with lower 
equity prices.  While intermarket trends are anything but stable, 
the recent decline in the price of oil from its record highs has 
coincided with higher prices in equities.  With oil declining 
strongly today, it remains to be seen whether bullish pressure is 
building for equities or not.  Again, tomorrow's bounce (or the 
absence thereof) will tell us a great deal.  Given that the daily 
cycle is threatening to roll over from just below overbought 
territory, my expectation is for the next extended move to be to 
the downside, ideally following the intraday bounce discussed 
above.  Hopefully, volume will pick up and provide us more clues 
as to which way the ambiguity will be resolved.


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

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


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

CONVENTIONally low volume

Stocks traded broadly lower with traders seemingly nonexistent as 
neither the NYSE nor the NASDAQ was able to breach the one 
billion share mark as the "Wall Street elite" avoided showing up 
for work as the Republican National Convention begins in New 
York City under extremely heavy security.

U.S. Market Watch - 08/30/04 Close

 

While volumes were light, today's trade was largely defensive 
with bonds finding buyers, while stocks were basically shut out.

The Biotechnology Index (BTK.X) 491.09 -3.04% hit its session 
lows in early morning trade, and finished there by the close 
where sector news was largely negative.

MedImmune's (NASDAQ:MEDI) $23.76 -2.98% shares slipped back under 
their trending lower, but trying to round flat 200-day SMA 
($24.05) after the company terminated its Phase II testing of 
Vitaxin.  But it was Accredo Health's (NASDAQ:ACDO) $22.05
-20.68% fiscal 2005 earnings warning that triggered the bulk of 
the sector's declines after Accredo warned that earnings would 
suffer as Medicare reimbursements for United Therapeutics' 
(NASDAQ:UTHR) $29.85 -6.68% Remodulin drug, for treatment of a 
rare lung disease called pulmonary arterial hypertension, fell 
short of purchase costs.  

The news had biotech and major pharmaceuticals under selling 
pressure as inventors contemplated the implications that future 
Medicare reimbursement limitations might have on drug pricing 
leverage.

Despite some dollar weakness, the AMEX Gold Bugs Index ($HUI.X) 
as well as industrial metals stocks gave back early morning gains 
as crude oil traded lower on news that earlier reported supply 
disruptions from the southern pipelines in Iraq had not been 
disrupted, where according to the Agence Rance-Presse, production 
remained stable at approximately 1.5 million barrels per day.

Earlier in the morning, a senior Iraqi oil official said 
pipelines in southern Iraq had come to a complete halt after 
insurgent attacks.

Market Snapshot / Internals - 08/30/04 Close

 

Internals at the advance/decline were negative throughout the 
session and closed that way where those traders that did show up 
for today's session were obviously in a non-buying mood.  

Despite negative TRIN and VIX.X indications (above their DAILY 
Pivots and TRIN above 1.0) stocks held firm until lunchtime, then 
started slipping to the close.

The S&P Banks Index (BIX.X) 359.35 -0.18% edged higher to the 
02:00 mark, trading a session best 361.14, but finished at its 
lows of the session as modest gains were fully erased in the 
final 2 hours of trade.

S&P 500 Index (SPX.X) Chart - Daily Intervals

 

We're right back where we started last week's trade where the 
cart carrying last week's gains may well be bound between 
overlapping support (1,093) and resistance (1,107) in what most 
likely surmounts to the lightest weekly volume trade of the year.

This Friday we'll get a look at July nonfarm payrolls, where last 
month's release revealed a very disappointing and weak monthly 
payroll growth of just 32,000, where both May and June's figures 
were revised lower from previously higher reported levels.

Today's economic data had personal incomes rising just 0.1% in 
July, while consumers dipped into their savings as personal 
spending rose 0.8%.

The S&P Retail Index (RLX.X) 389.43 -0.74% found resistance at 
its conventional 61.1% retracement (393.10) on Thursday and 
Friday of last week, and while weaker today, holds above 
important near-term support and its rounding flat 200-day SMA 
(386.88) and 50% retracement (386.78), which I might eyeball as 
correlative to SPX.X 1,093.

It would have to be my thinking that the retailer moved up in 
advance of today's July personal spending figures.  For the 
retailers to break the 393 barrier, then I would have to think a 
stronger-than-forecasted nonfarm payroll number is needed, where 
that might help solidify thoughts that consumer spending can 
continue to show gains as more Americans go back to work.

A quick review of this year's nonfarm payroll figures would have 
the SPX hitting its high in early March as February nonfarm 
payrolls were being released and showing just 83,000 jobs added. 

It could be a difficult speech for President Bush on Friday, and 
a hard pill for equity bulls to swallow, if the economy hasn't 
produced at least 100,000 new jobs in August.

Should payrolls exceed 200,000 like that in May, then with oil 
prices abating, investor sentiment should be able to boost the 
SPX above the 1,107 level with ease.

Pivot Analysis Matrix -

 

I profiled a day trade long for the QQQ as the TRIN gapped higher 
to open at its WEEKLY R2 with an opening tick of 2.22, just shy 
of my WEEKLY R2 calculation, when the QQQ began edging off its 
morning lows of $34.02 and WEEKLY S1 at QQQ $33.10.  The best the 
QQQ could do was three tries at $34.23 and I could never get my 
target back to the WEEKLY Pivot of $34.35.

On a light volume session, I was quick to pull the plug for a 
fractional gain at $34.14 as the Semiconductor Index (SOX.X) 
broke to a session low at 376.00 this afternoon.  

Jeff Bailey


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The Option Investor Newsletter                   Monday 08-30-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: None  	
Dropped Calls: None    
Dropped Puts: None    
Watch List: KLAC, AMZN, NX, AMGN 


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None


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DROPPED CALLS
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None


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DROPPED PUTS
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None


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

KLA-Tencor - KLAC - close: 37.45 change: -0.75

WHAT TO WATCH: We recently had KLAC on the play list as a put.  
The SOX was looking weak last week and KLAC was consolidating 
under the top of its downward channel.  Then on Friday last week, 
after two upgrades, KLAC gapped above the top of its channel but 
did not stop us out.  We chose to close it voluntarily to keep 
our losses at a minimum. Now the semiconductor sector is looking 
pretty weak again and KLAC has rolled back under the $38.00 
level. We would watch KLAC for a drop under $37.00 maybe $36.50 
as a potential bearish entry point.

Chart=


---

Amazon.com - AMZN - close: 38.31 change: -1.59

WHAT TO WATCH: AMZN was a major drag on the INX Internet index 
today.  Shares of the online retailer slid for a 4% decline that 
has reversed last week's bullish breakout over $40.00.  The 
short-term technicals are already rolling over and its MACD is 
nearing a new "sell" signal.  This may be an aggressive traders 
entry point to buy puts and target a drop to August support at 
$35.00. 

Chart=


---

Quanex Corp - NX - close: 45.05 change: -1.00

WHAT TO WATCH: NX has caught our eye because shares are trading 
in a wide range between $40 and $49/$50.  Friday's rally launched 
it back above the $44 level and its 40, 50, 100 and 200-dma's. 
Now it's seeing some profit taking.  Look for a bounce from 
$44.00 and target a run to the top of the channel.

Chart=


---

Amgen - AMGN - close: 59.01 change: -0.67

WHAT TO WATCH: AMGN and the BTK biotech index have been big 
winners the last few weeks.  AMGN has run from $53 to $60 and the 
BTK has climbed from 446 to almost 510.  Now they both may be in 
jeopardy.  The BTK index has reversed its bullish breakout from 
Friday and produced a sharp 3% decline back through the 500 level 
and its simple 100 and 200-dma's.  The move also looks like a 
bearish engulfing candlestick pattern.  Look for a drop through 
the 490 level as possible confirmation of the bearish reversal.  
Meanwhile, AMGN, the BTK's biggest component, is actually holding 
up pretty well only down 1.1% today and holding above its simple 
200-dma.  We'd watch it for a drop through $58 as a possible 
short-term sell signal. 

Chart=



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

IMCL $51.97 -4.03 - IMCL had been slowly consolidating higher 
along its rising 200-dma until today.  Now two weeks of gains 
have melted away in a 7% drop.  Watch for a drop under $50.00 as 
a potential entry point for puts.

DNA $48.40 -1.50 - DNA, another biotech stock, may be in danger 
of reversing.  The failed rally near $50.00 and its 50 and 200-
dma's looks pretty ominous.
 

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would welcome you as a permanent subscriber.

The monthly subscription price is $49.95. The quarterly
price is $129.95 which is $20 off the monthly rate.

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subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at

www.OptionInvestor.com

and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


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