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Daily Newsletter, Wednesday, 09/01/2004

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The Option Investor Newsletter                Wednesday 09-01-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: A Difficult Trading Environment
Futures Wrap: See Note
Index Trader Wrap: Pepper spray stings for about 30-minutes


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      09-01-2004           High     Low     Volume   Adv/Dcl
DJIA    10168.46 -  5.46 10208.27 10110.65 1.38 bln 1718/1080
NASDAQ   1850.41 + 12.31  1859.44  1833.33 1.41 mln 1772/1197
S&P 100   538.60 -  0.17   540.74   535.63   Totals 3490/2277
S&P 500  1105.91 +  1.67  1109.25  1099.11
SOX       374.16 +  3.14   379.62   369.07
RUS 2000  552.46 +  4.53   563.38   547.70
DJ TRANS 3106.53 +  1.07  3132.73  3085.08
VIX        14.91 -  0.38    15.39    14.72
VXO (VIX-O)14.98 +  0.00    15.62    14.57
VXN        22.65 -  0.27    23.16    22.10
Total Volume 2,790M
Total UpVol  1,818M
Total DnVol    882M
Total Adv  3490
Total Dcl  2277
52wk Highs  178
52wk Lows    49
TRIN       0.71
PUT/CALL   1.05
******************************************************************

A Difficult Trading Environment
Linda Piazza

Many market technicians determined at Tuesday's close that
Wednesday might be a difficult day to trade.  Little did they
know how difficult it would be.  Technical analysts had pointed
to the obvious battle between those with bullish and bearish
hopes, with the possibility that the battle would produce choppy
trading conditions Wednesday.  They didn't know that indecision
would be complicated first by a fat-finger rise in the Russell
2000 at the open and then by a dive in the markets caused by a
rumor of a multiple-casualty event in D.C.

By day's end, the Dow, TRAN, SPX, OEX, BIX, and SOX had produced
either doji or small-bodied candles indicative of indecision, in
any cases leaving long shadows above and below the candle body.
Advancers were stronger than decliners on both exchanges.

U.S. traders had reason to be more optimistic than they appeared
to be pre-market Wednesday morning.  With only four exceptions,
all global bourses either traded in the green or had closed in
the green during the overnight session.  During that overnight
session, some semi-related stocks had recovered and closed in
positive territory.  That rebound occurred despite an avalanche
of analysts trimming estimates and worry building up ahead of
Intel's mid-quarter update on Thursday.

U.S. futures did not display optimism, however, and instead
registered slightly negative values.  Prudential had lowered the
software sector to a neutral rating, perhaps contributing to the
weakness in the Nasdaq futures, few news sources focused on the
downgrade.  Crude futures had been trending up during the
overnight session due to a pipeline fire in Iraq and worries
about the expected inventories numbers, but remained well below
recent highs.  A hostage crisis involving schoolchildren and
their parents and teachers erupted in Russia, but although market
participants of course worried over the fate of the hostages,
U.S. markets had tended to ignore recent terrorists' activities
in Russia.

More likely causes for the slightly lower futures included
caution ahead of the day's economic releases, to begin with
August's ISM Manufacturing Index at 10:00.  Expectations for auto
sales figures also garnered pre-market attention in some media.
Commentators cited higher incentives, higher material and fuel
costs, and building inventories as causes for worry, with some
mentioning a possibility that car manufacturers could announce
cutbacks in production.

Whatever worry was given the most weight in the pre-market
environment, Wednesday's economic releases had been some of the
most closely anticipated of the week.  At 10:00, the August ISM
Manufacturing Index's headline number disappointed, at 59 against
the previous 62, with expectations at 60.00-60.5.  The prices
paid component was higher than expected, at 81.5, with
expectations for a flat 77 against a previous 77.  The new
orders, employment, and backlog of orders components all fell,
while inventories rose.  The prices-paid and employment
components were the most closely watched, with prices paid now
the highest in three months.  Employment dropped to 55.75 from
57.3, but remained above the benchmark 50.

Although most indices had dipped into the 10:00 numbers, they
rebounded sharply after their release.  The reaction to the
number appeared to be keyed to relief that components remained
above that benchmark 50 level and that the number wasn't worse
than it had been.  July's Construction Spending was also released
at 10:00, showing an increase of 0.4 percent, with the previous
number showing a decrease of 0.3 percent, and expectations for a
0.2-0.4 percent increase for July.  The number was tagged as in
line with expectations.

The rebounds in the indices catapulted the SPX toward another
test of its 200-sma, with the SPX climbing within three points of
that average.  The TRAN, a strong indicator index lately, opened
above 3100 and climbed to a high just above the August 26 high,
seemingly indicating another upside breakout.  The SOX charged
straight up toward 380 resistance.

By 10:30, many indices had reached their highs of the day,
however, with the RLX being a marked exception as it climbed into
the close.  The release of the Department of Energy and American
Petroleum Institute's crude, distillate and gasoline inventories
revealed a shocking decrease in crude inventories.  The DOE
reported a drop of 4.2 barrels for the week ended August 27, and
the API reported a drop of 8.1 million barrels.  Analysts had
expected an increase in crude inventories.  Distillate
inventories rose 1.3 million barrels according to the DOE and 2.2
million according to the API.  Gasoline inventories rose 900,000
barrels according to the DOE and 2.2 million barrels according to
the API.

With a hurricane about to rush up the Florida coast, perhaps
disrupting oil production, and concerns about the pipeline fire
in Iraq and recent terrorists' activities in Russia, crude
futures accelerated the climb that had begun during the overnight
market.  Crude futures spiked up almost to $44.00 in that first
push.  The TRAN, particularly sensitive to fuel costs, steadily
declined.  By 12:20, that index had erased all but a few cents of
the gains made since the previous day's close.  The TRAN
maintained its role as an indicator index, with many other
indices and sectors also declining off their highs, even the
financials and semiconductors.  The SPX's behavior was typical,
setting up a series of lower highs that indicated it might be
forming a bearish right triangle.

Annotated Five-Minute Chart of the SPX at 13:00:



During the next five-minute period, disaster appeared to hit.
Rumor of a mass casualty incident in Washington, D.C. sent the
SPX lower by more than four points in less than ten minutes.
Other indices plummeted.  The drop was broad-based as market
participants hit the sell button.

As the five-minute SPX chart indicated, indices had been set up
for a fall before the rumor surfaced, but that rumor perhaps
exaggerated the decline.  As more information became available,
and it became likely that the casualties were limited to watery
eyes caused by a pepper-spray prank by adolescents, markets
rebounded.

However, by then, new car sales figures had begun to hit the
airwaves, and they weren't good.  Higher gasoline prices had
impacted sales.  Daimler-Chrysler, Ford, and General Motors all
reported slipping sales, as did Honda, Nissan, and Mazda.  Ford's
sales declined 13 percent, and the company admitted that it would
reduce production by 7.8 percent in the fourth quarter, an
outcome that had been anticipated and feared.  General Motors'
sales fell 7 percent and DaimlerChrysler's, 6 percent.

Crude oil kept sliding higher, adding pressure, too.  From
Monday's low of $41.30, crude futures for October delivery had
gained more than $3.00 at the intraday high, although those
futures slipped off the day's $44.40 high to close at $44.00. One
headline remarked that crude had seen its biggest one-day
increase since June.

With Intel's anticipated mid-quarter update Thursday drawing so
much attention and with the SOX playing a leadership role in the
tech-related indices, beginning with an examination of the SOX's
daily chart appears to be a sound idea.

Annotated Daily Chart of the SOX:



The 20-sma continues to play an important role in the SOX's
behavior, as does the 50 percent retracement of the rally off the
October 2002 low, the purple horizontal line on the above chart.
The 30-dma descends toward that 50 percent retracement level, so
that the two might converge more closely by the time they're
tested.  A breakout above the 20-dma should probably be confirmed
by a break above that 50 percent retracement level and converging
30-dma.  An upside break through these levels brings the SOX back
inside that descending regression channel.

Some expect a buy-the-fact reaction after Intel's update or
perhaps even a short squeeze tomorrow, ahead of that update.
Those holding bearish profits might be reluctant to give them up
if Intel might something encouraging or even if the update is no
more troublesome than is expected.  Although many remember an
Intel-driven decline, market participants have had weeks to
remember that decline and position their accounts accordingly, so
the buy-the-fact reaction remains possible, if its likelihood
cannot yet be gauged.

A long position in the SOX remains problematic, however, because
of closely placed resistance.  That resistance might be found at
the August 23 swing high of 386.00, with a move above that level
confirming the higher low recently reached.  Resistance looms at
400, too.  The 50-dma at 412.81 might have dropped to join 408-
410 historical and Fibonacci resistance by the time it's tested,
and 420 is also known historical resistance.  A drop below the
August 13 low of 360.61 would create a lower low and confirm the
rollover beneath the 50 percent retracement of the rally.

Similarly, the Nasdaq appears poised for a break through a
horizontal resistance line or for a downturn beneath it.

Annotated Daily Chart of the Nasdaq:



The Nasdaq's most recent pullback could be a bull flag forming
beneath resistance.  If so, logic suggests that the Nasdaq will
maintain closes above that 30-dma.  An upside break of the bull
flag would be confirmed by a move and close above the May low.  A
drop below Tuesday's low, especially if confirmed by a close
beneath the 30-dma, would suggest a potential rollover beneath
that horizontal resistance.

A horizontal resistance line also plays a part in the Russell
2000's trading pattern, evident even after that early morning
fat-finger spike higher Wednesday.

Annotated Daily Chart of the Russell 2000:



This chart presents a few interesting developments.  Due to the
early morning spike, the Russell 2000 spanned the distance all
the way from the (green) 200-ema to the 200-sma, finding support
at one and resistance at the other.  Candle bodies continue to
form at or beneath the horizontal resistance and the 50-dma,
although the Russell 2000 edged above the 50-dma at the close.
In addition, as is obvious by Wednesday's trade, whether caused
by a fat-finger trade or not, the Russell 2000's pattern begins
to look more volatile again, widening from the tight range it
printed when first testing this level.  Sometimes that kind of
volatility precedes a breakout as one side or the other
momentarily gains an advantage.

Oscillators give opposite impressions of the likely direction of
that breakout, with stochastics completing a bearish kiss and
attempting a roll down out of territory indicating overbought
conditions while MACD attempts to move up through the signal
line.  Obviously, oscillators are as confused as traders by the
recent action.

The Russell 2000 had appeared to be setting up for a rollover
into a potential shoulder for an inverse H&S, reaching the
potential rollover level ahead of some other indices.  Now it's
lingered there so long that the rollover scenario can no longer
be given preference over an upside breakout one.  The possibility
that this recent consolidation has formed a blunted right
shoulder or that bulls intend to forgo the right shoulder
altogether cannot be ignored.  The recent consolidation pattern
remains roughly bounded by the 30-dma's support and the 50-dma's
resistance, so breakouts might be determined by moves above or
below those averages.

Wednesday's action points out the problems attendant upon such a
choice of boundaries, however.  An upside break could be expected
to find resistance at either the descending 100-sma or the 200-
sma.  Bullish traders should have profit-protecting plans in
place as those levels are tested, if they are.  A downside break
could be expected to find first support at the July low and then
near 520. Bearish traders should have profit-protecting plans in
place as those levels are tested, if they are.

Like the Russell 2000 and many other indices, the Dow appears
trapped between moving averages.

Annotated Daily Chart of the Dow:



The Dow's range, like that of many indices, has widened, with the
Dow mostly contained in a range from 10,110-10,210, but with a
dip down to the 200-ema, currently at 10,077.  As with other
indices, stochastics present a picture of possible weakness while
MACD presents a picture of possible strength.  Breakouts above
the recent range will soon encounter the 200-sma, and breakdowns
below the recent range will soon encounter 10,000.  Perhaps
Intel's guidance will break the Dow out of this range one
direction or the other, but expect choppy, non-directional
behavior until the Dow does break out of that range.

SPX traders might expect the same range-bound, non-directional
trading pattern until the SPX breaks out of its recent range, one
of the most clearly defined of the indices.

Annotated Daily Chart of the SPX:



A breakdown below the closely matched 200-ema and 30-sma would
suggest that the SPX was rolling down into a right shoulder for a
possible inverse H&S.  A breakout above the 200-sma would suggest
that the SPX was forgoing the right-shoulder formation and
breaking to the upside.

The SPX's clearly defined range, bounded by the converging 100
and 200-sma's on the top and the 30-sma and 200-ema on the
bottom, might serve as a guideline to those watching for
breakouts on other indices, too.  I would be careful trading an
upside breakout on any index, for example, if the SPX were just
then challenging its 200-sma and hadn't yet broken above it.

Breakouts remain suspect if crude continues climbing.  Recent
activity shows crude futures' prices retreating to the 50-dma on
Monday and bouncing from that average, an average that has
supported it through many touches except for one in late June.
Crude futures had also touched the early June high before
rebounding.  While crude futures could always round into a lower
high, they're so far behaving just as would be expected if they
were following an important MA higher, with each trough stopping
above the preceding peak.  As long as that pattern continues,
equities might remain under pressure.  Watch the 50-dma,
currently at $41.89, and the early June high at $41.24, as
violations of those levels could indicate that crude futures
would again retreat to the 100-dma as they did in late June.

As of Wednesday's close, most indices remained caught in ranges
that have produced and may continue to produce choppy trading
conditions.  Perhaps traders saw the possibility for inverse
H&S's to form across many indices, and decided to buy or leverage
in ahead of the drop into the right shoulder, keeping that right
shoulder from forming.  Bulls appear to want to send the indices
higher, believing they will go higher, without waiting for that
inverse H&S, which after all is a bullish formation if it
completes.  The dip-buyers have not had enough strength to
accomplish their goal, however, with the choppy trading
conditions a result of the almost equal strength between bulls
and bears.  Whether bulls will eventually win out remains unknown
at this point.  Unfortunately, while indices remain within ranges
known to produce choppy trading conditions, then choppy trading
conditions will probably continue.

Wednesday's decline in financials might be problematic to bullish
hopes, and bears watching.  Intel's update could propel the SOX,
Nasdaq, Dow and then, by extension, other indices out of their
recent ranges.  Crude costs could, too, an often-repeated but
still true fact.  So far, the TRAN, an indicator index for the
impact of crude costs on the economy, has held up fairly well
under crude's rise, but it's also having difficulty moving far
away from its 50-dma.  Today's car sales figures showed some of
the impact that higher crude costs have had on consumers, and
same-store sales figures released Wednesday after the close and
Thursday pre-market may also show some of that impact.

So far, that impact has not been evidence in same-store sales
(SSS) released after the close.  Hot Topic (HOTT) reported SSS
falling 8.7 percent, but said that overall sales had been strong,
up 8 percent.  American Eagle (AEOS) raised Q3 expectations to
$0.56-0.58, far ahead of the earlier $0.47 guidance, after
reporting SSS up 24 percent in August.  Men's Wearhouse (MW)
August SSS climbed 9 percent.

Trade carefully tomorrow ahead of Intel's after-the-close update.
Worries over Intel's mid-quarter update have been weighing on
techs across the globe this week.  Several firms, including
Morgan Stanley, lowered expectations for Intel ahead of the
update.  Japan's Industrial Output disappointed Tuesday, with
rising inventories and reduced production among high-tech
companies responsible for at least part of that disappointment,
so market watchers have reason to worry. Still, any
disappointment might already be built into the markets.

Thursday's economic releases begin with the usual 8:30 release of
jobless claims, but also include the Q2 Final Nonfarm
Productivity and Unit Labor Costs. Those numbers were last at 2.9
percent and 1.9 percent respectively.  Those numbers will be
followed at 10:00 with July's Factory Orders, with the previous
number showing a 0.7 percent increase.  The DJ/BTM Business
Barometer will also be released at 10:00.  Natural gas
inventories will be released at 10:30.


***************
FUTURES MARKETS
***************

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 WRAP
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Pepper spray stings for about 30-minutes

A "false alarm" created some intra-day gyrations where economic
reports received far less attention than weekly oil inventory
data that showed a larger draw on supplies than analysts had
expected, while a pepper spray incident near the International
Monetary Fund building in Washington D.C. created some intra-day
volatility for stocks.

Stocks looked poised to erupt in the first hour of trade after
the 10:00 AM EDT release of economic data had July construction
spending and the August ISM Index pretty much inline with
economists' forecast.

Economists' were on target today as even the difficult to
forecast August auto sales (5.2 million) and truck sales (8.2
million) were darned near identical to economists respective
forecast of 5.4 million and 8.2 million.

But just as the major indices approached their DAILY R2s in the
pivot matrix, the 10:30 AM EDT release of weekly oil, gasoline
and distillate inventories helped put a lid on early morning
bullish enthusiasm.

And it was a lid, not a sharp reversal that took place on the oil
data.

It wouldn't surprise me that the young boy who grabbed the girls
"pepper spray necklace" might be named "Jeff."  That's something
I as a kid would have done on a field trip back in my youth.

While the names of today's pepper spray incident have been
withheld, I'm going to say it was Charley that was yanking
Frances' chain, where an accidental discharge of pepper spray
near the International Monetary Fund in Washington D.C. created
some jitters and saw stocks make a sharp intra-day move lower,
get snapped back up when news reports became more factual.

While news out of Iraq is sketchy at times, so were the initial
reports out of Washington D.C.  Everyone was quick to assume the
worse.

U.S. Market Watch - 09/01/04 Close



The names Charley and Frances are used as Hurrican Charley, which
struck Florida just two weeks ago, and the rapidly approaching
Hurricane Frances may have had some impact on broader financials,
specifically the S&P Insurance Index ($IUX.X) 313.15 -1.05%
today.

Just prior to Hurricane Charley reach Florida the weekend of
August 14 and 15, the S&P Insurance Index ($IUX.X) has been under
some heavy selling pressure to the 300 level, where since that
time, the IUX.X had reclaimed both its trending higher 200-day
SMA (313.58) and still trending lower 50-day SMA (313.89), but
with Hurrican Frances on her way and some industry watchers
saying her wrath could be worse that Charley's, I'd have to think
some bulls were in the profit taking mode among insurers, perhaps
getting ready to reload for another long at lower levels.

Market Snapshot / Internals - 09/01/04 Close



We'll look at some intra-day 30-minute interval charts in a
minute, but if you were out playing golf and looked at some
intra-day charts, you'd think there was a major "bad tick" across
all the indices in today's trade just after 01:00 PM EDT.

Internals were healthy all session.  Excluding a brief 30-minute
interval just after 01:00 PM EDT, the TRIN spent the bulk of the
day below 1.0.

Hmmmm.... The number of new highs at the NYSE ended at 176.  This
might be ominous as the last time we saw this many new highs was
July 1 (174) and July 7 (180).  On July 1, the SPX opened at
roughly 1,140, and the opening tick was the high for the month.
With September being the most bearish month historically, bulls
might be a little careful after the NYSE 10-day NH/NL ratio has
rebounded from 30% (August 16) to 87%.  Make no mistake that
there's some bullish leadership among 1, 2 and 3-lettered stocks.

Now, NASDAQ's leadership indications are also much improved, but
still lagging the NYSE.  Much improved as in early-to-mid August,
the NASDAQ's 10-day NH/NL ratio did reverse up to 22%, but then
faded back to a recent low reading of 10.2% (August 17), but this
reversal back higher we're still in has the 10-day NH/NL ratio
making a higher high at current best 51.7%.

While just about every piece of fundamental analysis I read has
analysts bracing for a terrible Intel (INTC) mid-quarter update
and a not so healthy nonfarm payroll figure, the internals are
suspiciously strong.

Outside the major market Bullish % indications of course, which
we touch on in each morning's 09:00 intra-day updates.

I wanted to take a quick look at the October Crude Oil futures
(cl04v) contract with the QCharts' WEEKLY Pivots turned on.  Get
some "here's where we've been, here's where we are" perspective.

October Crude Oil futures (cl04v) - 30-min. Intervals



Last week, the major indices were stuck in a very tight range of
trade, and I thought the only thing that partially unclogged the
log jam was when the October futures contract broke below
Tuesday's low of $44.75, where that break at about 12:00 PM EDT,
brought a bid into equities, where on Wednesday, stocks rallied
to their close, then began their sideways trade the remainder of
the week.

So far this week, October futures extended losses, but have found
support at this contract's WEEKLY S1, where today's inventory
data finds oil rebounding from $42.00 to $44.00, where it would
appear, and logically so, that the WEEKLY Pivot finds some
selling.

OK.  While oil isn't the only game in town, I had previously
stated that we wanted to keep an eye on $44.75 (seemed to draw a
reaction from the equity markets), and I would think if oil moved
much above $44.75 or $45.00, its going to have some psychological
impact on stocks.

Remember that we're looking at 30-minute intervals, so the simple
moving averages we're looking at are NOT the daily moving
averages.

S&P Depository Receipts (AMEX:SPY) - 30-min. Intervals



I'm showing the S&P Depository Receipts (AMEX:SPY) with the
QChart's WEEKLY Pivot levels, which surprisingly enough, match my
levels in the Pivot Matrix this week.  While compressed, you can
see that the SPY reaction to the 10:00 AM release of July
construction spending and August ISM Index figures was rather
bullish, with the SPY jerking above its MOTHLY Pivot.

I note that the SPY 200-DAY SMA (from a daily interval bar chart)
would have this key longer-term SMA marking today's high, where
today's high just so happens to be correlative with the 10:30 AM
EDT release of weekly crude oil inventories.

See how the SPY "eased" into its WEEKLY Pivot.  It didn't have a
sharp and overly negative reaction to the oil data.  A
trader/investor might take on the mindset that this is because
oil hasn't reclaimed a significantly higher price level.  Say....
$44.75.

I'd also note some similarity between the Oil futures WEEKLY
Pivot and the SPY weekly pivot.

I also point to today's "pepper spray" incident.  I've never been
pepper sprayed, but I hear it burns for about 30-minutes if you
can flush it out with some water.

NASDAQ-100 Tracker (AMEX:QQQ) - 30-min. Intervals



Now, we've seen how the weakness in the SOX.X has been a drag on
the QQQ, and with that drag, the QQQ doesn't appear to have been
as positively impacted by oils decline as perhaps the SPY has.
Hey, the QQQ doesn't have any financials in it either.

The QQQ is also weaker in its WEEKLY Pivot.

When looking at the QQQ's 30-minute chart, one thing that stands
out is the QQQ trade action around its 200-pd SMA.  In mid-August
the QQQ rebounded to this 200-pd SMA, which served some
resistance, and not unlike some of the recent breaks of "old
downward trends" on the SPX and INDU daily charts, the break
above this 200-pd SMA has served support twice.  Once immediately
after the mid-August break above, and then again yesterday
(Tuesday).

As I try and project this upward trending 200-pd SMA, I can
almost see it coming right up to the QQQ's WEEKLY S1 into
tomorrow's close.  After the close, Intel (INTC) $21.43 +0.65%
will give its mid-quarter update.

A 30-minute interval chart of Intel (NASDAQ:INTC) would have its
200-pd SMA higher at $21.72.

Pivot Matrix -



The S&P Banks Index (BIX.X) 359.53 -0.75% and the Semiconductor
Index (SOX.X) 374.16 +0.84% traded places today.  Sometimes I get
the feeling that the BIX.X is standing atop a ladder, trying to
hold up a 360-pound center beam of a roof, and is staring at the
floor (the SOX.X) as if to say.... "hey, can I get a little help
here?"

I missed the marking of 3 levels of correlative resistance for
tomorrow in the SOX.X at the 383.60 level as I didn't mark the
MONTHLY Pivot.

The ONLY reason at this point that I could see a rally in the
SOX.X is simply due to a short-covering rally as bear's risk in
the sector remains highs.  As of tonight's close, Dorsey/Wright's
Semiconductor Bullish % (BPSEMI) remained in "bear confirmed"
status at 11.04%, meaning that for every 100 semiconductor-
related point and figure charts, just 11 would have a point and
figure buy signal still intact.  The recent low reading has been
6% in early August, and we'd have to go back to late September of
2001 to find this sector bullish % at 6%.

You can NOT make a direct tie between bullish % indications and
an index/sector price, but if I were to try, I'd have to think a
move above 385 in the SOX.X might find Dorsey's Semiconductor
Bullish % (BPSEMI) reversing up to the needed 12% to achieve
"bull alert" status.  If I really stretched my assessment of
upside risk, then perhaps MONTHLY R1 and current WEEKLY R2 might
find Dorsey's Semiconductor Bullish % (BPSEMI) achieving 34% and
"bull confirmed."

Jeff Bailey


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The Option Investor Newsletter                Wednesday 09-01-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Watch List: Another Handful of Bullish Candidates
Stop Loss Updates: BOL, MHK, TDS, ZBRA
Dropped Calls: AET
Dropped Puts: None
New Calls: None
New Puts: None

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

Another Handful of Bullish Candidates

___________________________________________________________________

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.
___________________________________________________________________


ITT Industries - ITT - close: 80.30 change: +1.20

WHAT TO WATCH: This looks like an entry point in ITT.  We've seen
a number of bullish breakouts recently and ITT's push through
round-number psychological resistance at $80.00 looks tempting.
The stock's 1.5% rally today also broke through technical
resistance at its simple 50 and 100-dma's.  Its P&F chart is
currently bearish but a move over $81 would reverse that into a
buy signal.  Consider targeting the $85.00 region.

Chart=


---

Valero Energy - VLO - close: 67.42 change: +1.39

WHAT TO WATCH: Almost the entire oil and oil services sector is
in rally/bounce mode this week.  VLO appears to have put in a
bottom near the $64.00 level and now shares are breaking out over
resistance near $66 and its simple 21-dma.  More aggressive bulls
can look for an entry over the 100-dma and the $68.00 level.
More conservative traders can watch for a move over $70.00.  The
MACD is in a new "buy" signal.  A move over $68.00 should reverse
its bearish P&F chart into a bullish one.

Chart=


---

Cardinal Health - CAH - close: 45.79 change: +0.59

WHAT TO WATCH: CAH continues to consolidate under resistance at
the $46.00 level but traders bought the dip the last two sessions
at its rising 10-dma.  The stock looks ready to breakout and this
could offer bulls a chance to catch CAH's attempt to "fill the
gap".  We would consider a trigger over $46.00 and a target in
the $49.50-50.00 range.

Chart=


---

KB Home - KBH - close: 70.52 change: +1.75

WHAT TO WATCH: A number of homebuilders have been breaking out
and we noticed that KBH has hit new two-month highs with today's
breakout over its 200-dma and the $70.00 mark.  Volume was pretty
decent consider the week and its short-term technicals look
bullish again.  There could be some resistance at the June high
near $72.00 but this looks like a bullish entry point for a run
toward $75.00.  The P&F chart is bullish with an $87 target.

Chart=



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

PHM $60.00 +1.05 - PHM is one of the leaders in the homebuilders
that has been hitting new highs.  PHM hit some profit taking a
few days ago but is now bouncing from the $58 level.

VIP $101.60 +3.50 - Well that didn't take long.  We just had VIP
on the watch list for a breakout over $100.00.  This looks like a
bullish entry point for a run to $110.

Covered Call Candidates:  The following stocks have decent trends
and look like potential covered call ideas.

XOM, NSC, FE, OXY, PCU, MET, MFC, G,


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

BOL - call play -
  We HAVE been TRIGGERED in BOL.  The stock broke out
  above resistance at $66.50 and hit our TRIGGER to go long.



MHK - call play -
  MHK added another 2 percent today and hit new relative highs.
  We're going to raise our stop loss from $73.00 to $74.95.


TDS - call play -
  We can't find any catalyst for the move but TDS suddenly surged
  more than 3 percent today.  Shares have broken through the top
  of its trading range.  Watch for a breakout over $80.00.  We're moving
  our stop loss from $74 to  $75.95.


ZBRA - call play -
  Heads up!  ZBRA turned in a strong day adding 2.29 percent to
  close over the $58.00 level.  Volume was decent.  Readers can
  prepare to exit as ZBRA near the $60.00 region.  We're moving our
  stop loss from $53.99 to $54.99.


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

Aetna - AET - close: 92.45 change: -0.20 stop: 89.95

We're growing less comfortable with the sideways consolidation in
shares of AET.  The stock remains in a tight trading range but
volume is rising and it smells like distribution.  Readers can
still watch for a bounce from $90.00 or a breakout over $95.00.
We're going to be cautious and close the play here.

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 =


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DROPPED PUTS
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None

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*********
NEW CALLS
*********

None


********
NEW PUTS
********

None


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