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Daily Newsletter, Wednesday, 09/08/2004

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The Option Investor Newsletter                Wednesday 09-08-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Meeting Expectations
Futures Wrap: See Note
Index Trader Wrap: Distribution or Consolidation


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      09-08-2004           High     Low     Volume   Adv/Dcl
DJIA    10313.36 - 29.43 10361.22 10305.18 1.54 bln 1083/1708
NASDAQ   1850.64 -  7.92  1870.04  1850.05 1.44 bln 1121/1893
S&P 100   543.12 -  1.88   546.27   543.12   Totals 2204/3601
S&P 500  1116.27 -  5.03  1123.05  1116.27
SOX       352.06 -  1.70   358.36   350.91
RUS 2000  557.79 -  5.14   565.79   557.64
DJ TRANS 3188.79 +  7.79  3203.20  3176.82
VIX        14.06 -  0.01    14.31    13.41
VXO (VIX-O)13.70 +  0.12    14.11    13.58
VXN        21.28 -  0.16    21.83    21.24
Total Volume 2,980M
Total UpVol  1,093M
Total DnVol  1,832M
Total Adv  2204
Total Dcl  3601
52wk Highs  120 
52wk Lows    54
TRIN       1.19
PUT/CALL   1.05
******************************************************************

Meeting Expectations
Linda Piazza

Global bourses waffled around in overnight trading.  U.S. futures
drifted higher and then lower, setting up the expectation that
our markets might show the same lack of direction.  

That's how it felt as the day progressed, but a study of intraday
charts showed a relentless sinking lower throughout the day. 
That was particularly true of the retail index, the RLX, and the
Dow Jones US Home Construction Index, the DJUSHB.  By the end of
the day, the DJUSHB had lost 1.69 percent; the RLX, 0.82; the
SOX, 0.48; the Dow, 0.28; the OEX, 0.34; the SPX, 0.45; and the
Nasdaq, 0.43.  The TRAN however, bucked the trend, climbing along
an ascending trendline all day and closing higher by 0.24
percent.  

The oil services and pharmaceutical sectors joined the TRAN among
the few gaining sectors, while the biotechs, banks and utilities
joined the losing sectors.  Although more closely matched earlier
in the day on the Nasdaq, decliners led advancers all day on the
NYSE and did on the Nasdaq, too, by the afternoon.

Most times, the term "meeting expectations" refers to earnings
expectations.  Wednesday, that term applied to expectations for
Alan Greenspan's testimony before the House Budget Committee at
10:30 EST in Washington.  Most economists expected that Greenspan
would testify that the economic recovery proceeds about as
anticipated and that the FOMC would continue its measured set of
rate increases.  Still, many awaited confirmation that Greenspan
still believed the soft patch in the economy to be transitory. 
They waited to hear what he would say about the impact of higher
crude costs and the new record budget deficit. Market watchers
expected Greenspan to address that deficit, saying that the
deficit outlook was worsening.

Although our markets appeared to waffle prior to Greenspan's
testimony, a couple of notable developments occurred just prior
to the release of his prepared comments.  The Russell 2000
climbed five cents above its 200-sma and the OEX stopped five
cents short of its 200-sma.  That was to be the high of the day
for those indices.

As expected, Greenspan confirmed his belief that the soft patch
had been transitory, blaming higher crude prices for that soft
patch and saying that the expansion had regained traction.
Although some financial ministers across the globe have lately
quantified the effect of rising crude costs on their economies,
Greenspan declined to do so, noting disagreement among economists
about the impact.  He stated that non-oil import prices had
decreased, lowering concerns about core consumer price inflation,
but said that the outlook for crude prices remained uncertain. 
Rising demand in China and India as well as other factors could
buoy crude prices.  

Perhaps not conforming to expectations, some credited his
comments with a temporary spike in oil prices.  Crude futures for
October delivery moved up to their $43.70 high of the day before
beginning the decline into the $42.25 low of the day.  That low
occurred on continued assurances from OPEC that the market is
saturated.  

Also meeting expectations, Greenspan mentioned the deficit
outlook, calling the federal budget outlook "troubling."  A CNBC
commentator likened Greenspan's outlook to two separate forecasts
and summed up by saying that Greenspan's outlook was "short-term
good: long-term bad."

While Greenspan's testimony met expectations, JetBlue (JBLU)
warned that Q3 earnings would miss expectations.  The airliner
pegged those missed expectations on higher jet fuel costs and the
impact of two hurricanes hitting their key market in Florida.

Rising fuel costs also impacted Delta Airlines (DAL).  That
company announced a transformation plan to avoid bankruptcy, but
the CEO warned that bankruptcy could still be an option unless
pilots accepted the company's proposed pay cut.  That
transformation plan included a closing of the hub at the
Dallas/Fort Worth airport, news that hit all Dallas television
stations early Wednesday morning due to the impact on the DFW
airport and the metroplex.  A redesign of the Atlanta hub will
allow the carrier to add flights and reduce congestion at that
airport.  DAL will cut 6,000-7,000 jobs and will also reduce the
number of different types of aircraft it flies to trim
maintenance costs.  The company will add to the fleet of its low-
cost carrier, Song.  

JetBlue closed 0.34 percent higher, but Delta lost a whopping
9.82 percent, making the TRAN's gain all that more surprising.

Annotated Daily Chart of the TRAN:

 

As the TRAN approached the June 30 closing high and the July 1
intraday high, daily oscillators failed to reach the highs of
that late-June/early-July period.  That sets up potential but not
confirmed bearish divergence.  The TRAN's daily candle was a
shooting star, a potential reversal signal, but the TRAN produced
nearly the same candle at nearly the same level on June 28 before
climbing a few days into that subsequent closing and then
intraday high.  While the comparison with that late-June and
early-July period might not be particularly comforting to bulls,
it also shows the danger in assuming that the TRAN will see
immediately follow-through on the TRAN's intraday decline from
its high of the day.

Recently, dipping crude prices have helped the TRAN, but this
index also benefits from actual or anticipated improvement in the
economy.  As Greenspan's speech was released, suggesting that the
economic recovery had regained some traction, the TRAN tested
3200 the first time, fell back before reaching it, and then rose
above it again in the afternoon before retreating into the close. 
Traders might watch this indicator index for signs that bullish
trades have been given the green light.  They should look for a
move above the July 1 intraday high of 3212.45 for a potential
upside breakout.  

Those traders should be prepared for potential whipsaws out of
the trade, however, as the TRAN can reverse as quickly as it can
drive forward.  Some charts suggest a drop below 3180 might see a
quick drop to 3170-3172, with the result of that drop then
determining what happens next.  Just as there's the potential for
an upside break, there's also the potential for a double-top
formation on the TRAN's chart, with such a formation having
bearish implications for the market.

JetBlue's warning wasn't the only one seen Wednesday.  Some
market watchers and commentators, including Jim Brown, have
expected earnings warnings to accelerate this week, and Wednesday
saw several.  Coca-Cola Enterprises (CCE) warned, as did McKesson
(MCK), Dean Foods (DF) and Avon Products (AVP).  CCE lowered its
earnings forecast for the year, and drug wholesaler MCK said that
earnings would miss estimates.  DF cut its earnings guidance for
the third quarter and full year, with Q3 earnings expectations
lowered to 44-46 cents against expectations of 54-57 cents a
share.  Volatile milk prices and more-intense-than-expected
competitive pressures hurt the company, as did higher fuel costs
and resin prices.  AVP warned analysts to trim expectations for
Q3 profit from U.S. businesses by as much as 10 percent.  CCE
closed lower by 5.39 percent; KO, 4.82; MCK, 15.24; DF, 18.13;
and AVP, 6.13.  This suggests some danger to the markets, as
warning companies likely will be punished severely.

At 2:00 EST, the Fed's Beige Book was released.  While some
characterized the report as contrasting with Greenspan's
testimony, others noted that it, too, met expectations by saying
that the economy was seeing a gradual recovery.  With the report
expected to help the FOMC make decisions about monetary policy on
September 21, market watchers gleaned the report for information. 
The result of anecdotal information collected from the twelve
Federal Reserve districts, the Beige Book showed mixed conditions
across districts and sectors.  The word "mixed" appeared
frequently in the report.  Household spending, retail sales and
home sales might have cooled, but manufacturing improved. 
Consumer loans may have decreased, but demand for commercial
loans increased.  Back-to-school sales might have been slow in
New York, but Kansas City saw stronger sales when compared to
those of the previous year.  Dallas and Kansas City might have
seen slower sales of SUVs and light trucks, but Atlanta and
Chicago saw those sales increase.  

Although the Dow Jones US Homebuilders, the DJUSHB, had been
headed lower all day, the BIX and BKX both steepened their
descents after the Beige Book was released, perhaps at least in
part due to the notation that demand for consumer loans had
softened.  Earlier that morning, the MBA Refinancing Index
information was released.  Last week's figures showed refinancing
decreasing 0.6 percent, but that activity increased week-over-
week in this week's report.  Investors appeared to focus instead
on the Fed's headline statement characterizing sales of new and
existing homes as cooling.  

At 3:00, July's Consumer Credit figures were available for
examination.  Forecasts had ranged widely from $5.0-7.5 billion,
with the prior number at $6.6 billion, but this number zoomed
past expectations, with the figure at $10.9 billion.

Another focus sector was the SOX, ahead of TXN's after-the-close
mid-quarter update.  The SOX moved lower, closing at 352.06 ahead
of that announcement.  The day's candle produced a potential
reversal signal, however.

Annotated Daily Chart of the SOX:

 

MACD produced a bearish cross from below signal, not an
encouraging development to SOX bulls, but one that can be erased
if TXN prompts a strong enough bounce during Thursday's trading. 
Lowering the low end of its earnings-per-share estimate and the
top end of its revenue estimate, the company blamed inflated
inventories among its customers.  Some commentators characterized
these adjustments as a paring back of expectations while others
focused on the reduction in TXN's effective tax rate that would
allow it to meet or perhaps raise profit expectations.  

As this report was prepared, TXN traded at $19.11, up from the
$18.83 close.  While it's dangerous to assume that after-hours
trading is indicative of during-market-hours trading, some feel
that the bad news is priced into the SOX. A move below
Wednesday's SOX low will undo the potential for a confirmation of
the potential reversal signal.  A move above 353-354 will be
needed to break through Wednesday's resistance, but the 20-dma
and the 50 percent retracement of the rally off the October 2002
low might be powerful resistance.  A trend change can't be
verified until the SOX clears those levels, so any bounce might
be treated with caution until then.

Another average and retracement level have shown importance with
the Nasdaq's trading pattern.

Annotated Daily Chart of the Nasdaq:

 

The Nasdaq has been finding resistance at both the 38.2 percent
retracement of the June-August decline and the 50-dma.  A move
above both might represent an upside breakout, but the Nasdaq
would then soon find resistance at the 1900-1905 level, where the
200-ema now converges.  If the Nasdaq pushes above the 50-dma and
keeps going, bullish traders in Nasdaq stocks should have profit-
protecting plans in mind as that 1900-1905 level is tested.

Before Wednesday's close, however, the Nasdaq had fallen beneath
an ascending trendline off the August 31 low.  Before the Nasdaq
can advance far, it needs to reclaim that trendline, currently
crossing at about 1856.  A decline would need to be confirmed
first by a fall beneath the September 7 low of 1847.48, with
support expected again near 1842 and then perhaps at the 30-dma. 
Bulls do not want to see a daily close beneath the 30-dma, but
then the Nasdaq approaches possible gap support from early
August, support already proven to hold in late August. The Nasdaq
trades within a congestion zone, and conclusions and trading
conditions always remain hazardous within such a zone.

The Russell 2000 has also moved into a congestion zone, both from
the last week's trading and from a period in mid-July.  

Annotated Daily Chart of the Russell 2000:

 

A break above the 200-sma and Wednesday's intraday high,
particularly on a closing basis, would represent a breakout for
the Russell 2000, with resistance soon expected on the test of
the upper trendline of its descending regression channel.  Bulls
eventually want to see a breakout above that channel.  

A breakdown is more difficult to pinpoint since the Russell 2000
has now spent some time building support, but the confluence of
the 200-ema, important in the Russell's trading pattern, and the
50-dma just below the important 350 level might mark one support
level that bulls want to see hold.  A break of that support would
likely find at least temporary support near the 30-dma and
historical support at 541.50-542, with a break of that level then
setting up a possible test of 533-534.

While we don't always think of the Dow as an indicator index, it
sometimes functions as one.  While its sister index, the TRAN,
was testing a major swing high, the Dow has been approaching the
top of its descending regression channel.  The top of that
channel lies at about 10,400, but bulls should feel nervous until
they get confirmation by a move above the late June highs,
several of them in a row, at 10,487.  

Since the trend since the first of the year has been for the Dow
to turn lower at each test of the top of the channel, the
assumption might be that the Dow will do so now, too.  Dow bears
betting on that action should not feel safe until a move below
the 200-sma, an average that has been prompting bounces since the
OEX moved back above it.  A decline beneath that MA might soon
find support near 10,200.

Annotated Daily Chart of the Dow:

 

The SPX did not approach the top of its channel as closely as did
the DOW, but its chart looks similar otherwise.  

Annotated Daily Chart of the SPX:

 

The SPX moved lower, toward a test of its 200-sma, with other
averages just below to support the SPX.  Those averages, as
important as they might be, will not have the same effect on
sentiment as will a Dow and/or SPX decline beneath their 200-
sma's.  Bulls hope to see a bounce and a test of the top of the
descending regression channel, with a move up through that
channel's top resistance trendline.  Tuesday's 1,124.08 high
could be expected to serve as resistance, with the top-of-the-
channel resistance soon following at about 1,133.  Those with
bullish positions should have profit-protecting plans in place
for a test of the top of the channel if the SPX should bounce.

If the SPX instead falls through its 200-sma, the 100-sma lies
just beneath, at 1,110.09, near historical support/resistance,
and the 30- and 50-sma's and 200-ema all look to be converging
between 1,095-1,100 to provide support that should be stronger.

The OEX may be one of the best indices to watch Thursday,
however, as it perhaps came the closest to testing the top of its
descending regression channel.  Like the Russell 2000, the OEX
has not managed to move above its 200-sma.  A break above that
average and then above the top of the channel, currently at about
548, might signal an upside break, although the OEX would soon
move into congestion beginning at about 549.50 and extending all
the way up to 556.  Some charts show potential upside likely to
be capped at just over 553 on a first test of that level.  

Annotated Daily Chart for the OEX:

 

The OEX had also broken below its ascending trendline off the
August 31 low by Wednesday's close, so would need to climb back
above that trendline before the intraday bearish sentiment
improved.  A confirmed H&S Wednesday set a downside target
between 541.50-542, at historical support/resistance and near the
location of the 100-dma at 541.74.  OEX 540.80 is also historical
S/R and the location of a longer-term ascending trendline off the
August 13 low, with a violation of that trendline setting up the
potential for a retest of the converging 50-dma and 200-sma.  

This is an exciting time for options traders, because it appears
that a directional move could get started, despite all the
various resistance and support levels grouped around the current
levels of the equity indices.  The Russell 2000 and OEX show a
potential for a break above their 200-sma's or for a rollover
beneath them.  The OEX and Dow show a potential for a break out
of the long-term descending regression channels on their daily
charts or for a rollover down through those channels again, with
the SPX also near a test of the top of its descending regression
channel. 

The TRAN is close to a breakout above a major swing high or for a
double-top formation with all the bearish ramifications of that
formation.  The BIX did break out above a major swing high, but
Wednesday produced an inside-day candle that so nearly retraced
Tuesday's gains that it's also a possible tweezer-top formation. 
That threatens to create a weekly double-top formation if the BIX
closes the week below the weekly closing high of 361.23 from late
this winter.

Continuing the potential for a directional move has been the
action on the VIX.  Lately, VIX moves into sub-14 levels have
indicated a market top nearing, although the VIX is not a
reliable market-timing tool.  That truism of late should make
bulls nervous enough to make plans to protect their positions,
but doesn't prove that bears should pile in with bearish
positions.  Those who believe it does should hark back to spring,
2003 when the VIX was then approaching and descending below 20,
the level that for several years had indicated market tops in the
making.  The VIX offers a warning, but if price behaves in
opposition to that warning, we shouldn't keep trying to play the
opposite direction.

If the spring of 2003 taught us anything, it should have taught
us to trade the trend.  Which trend, though?  The SOX's trend,
both short-term and intermediate-term, has been down.  Short-
term, many indices have been rising through those descending
regression channels, with short-term trends that are moving up.  
Since the first of the year, however, many of those indices have
been trading in descending regression channels, so that
intermediate trend is down.  This is true of the two S&P's and
the Dow, for example.

I've long learned to heed the wisdom of the past, so those
intermediate-term trends and the months-long implications of sub-
14 levels on the VIX make me nervous about long positions just
now.  They don't make me nervous enough to discount the
possibility of upside breakouts, however, but certainly nervous
enough to wait for the breakouts to occur to believe that they
will.  The TRAN is one of the indices I'll be watching for that
upside breakout, as it's the nearest to a breakout and the
fastest moving.  It's also temperamental, and a quick reversal
will have me reversing my judgment just as quickly, too.

Be careful about drawing too many conclusions about the TRAN's
action ahead of mid-morning, however.  Although the Department of
Energy and American Petroleum Institute normally releases crude,
distillate and gasoline inventories on Wednesday, that release
was delayed until Thursday due to the holiday-shortened week. 
Crude prices and the TRAN both typically react to those
inventories numbers.

Thursday's economic releases begin with the usual 8:30 release of
jobless claims.  Last week's initial claims amounted to 362
thousand, with Hurricane Charley blamed for the increase.  If
that thinking and timing remained intact with regard to Hurricane
Frances' impact, the expected increase would not occur in this
week's number, but I wouldn't be surprised if any increase
weren't pegged to the hurricane's impact anyway.  

Other economic numbers released at 8:30 will include August's
export and import prices, with export prices ex-ag. rising 0.6
percent in the prior month and import prices ex-oil rising 0.1
percent in the prior month.  At 10:00, July's wholesale
inventories will be released, with expectations of a 0.6-0.8
percent rise measured against the previous month's 1.1 percent
increase.  


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

Distribution or Consolidation
Jonathan Levinson

The markets traded for the most part within yesterday's ranges on
higher volume today, with the S&P 500 and Dow printing lower 
highs and lower lows while the Nasdaq-100 and QQQ printed 
nominally higher highs and higher lows.  Bonds rose strongly, 
recovering from earlier weakness as Chairman Greenspan testified 
before Congress.

The extreme lows in volatility noted yesterday produced the 
anticipated decline, with all major equity indices finishing the 
day in the red.  However, those declines were generally slight, 
and the VXO added only .88% to close at 13.70 for the day, still 
below the benchmark 14 level and at what has in recent years 
constituted an extremely low level.  With the NDX and QQQ staying 
above yesterday's lows and the Dow and SPX spiking only briefly 
below them, only to reverse quickly, the question remains whether 
the current range from last week is a distribution top, destined 
to collapse, or a consolidation near the highs, gathering shorts 
to squeeze and fresh buyers for the next leg up.


Daily Pivots (generated with a pivot algorithm and unverified):




Daily NDX candles



The NDX was rejected at the high of 1393 and at the low of 1374, 
closing near the bottom of its range.  This action left us with a 
daily doji star verging on a gravestone doji right on the rising 
support line connecting the lows for move from the August lows.  
The closing print looks more bearish than bullish to me because 
of its proximity to the low for the day.  Once again, however, 
the overall decline was minor and the sideways range in place 
since the beginning of last week remains, despite the daily cycle 
sell signals.  As I stressed in the intraday Market Monitor this 
morning, a weak daily cycle downphase should prove to be very 
bullish, as weak downphases (corrective) are generally followed 
by strong upphases (impulsive).  It's for this reason that I 
can't decide whether this action is distributive or 
consolodative.  While the daily cycle oscillators suggest 
shorting all bounces, those oscillators are no longer overbought, 
and the price isn't as toppy as it was just days ago.  On a 
trading basis, my inclination is to follow a break of the range 
on a daily closing basis, either below 1375 or above 1400.  As 
noted by many of us in the Market Monitor, the middle of this 
range has turned into a chop zone.


20 day 30 minute chart of the QQQ 



The NDX tracking stock, the QQQ, displays the same dilemma on the 
30 minute candles.  The daily cycle downphase reflects itself in 
this intraday timeframe with a pattern of lower price and 
oscillator highs, but there has been no steep, sharp plunge of 
the type suggested by these lower highs.  More particularly, the 
most recent 30 minute cycle downphase was only good for the minor 
13 cent decline in QQQ today.  That's generally corrective 
action, and it generally is followed by an impulsive upphase.  On 
the other hand, the pattern of lower oscillator highs cannot be 
ignored, and the rising trendline that has supported QQQ since 
last Tuesday's  low was tested twice today.  Any weakness at the 
open should start the breakdown below the line.


The intraday range discussed in the Market Monitor today still 
looks good to me-  while support is up to 34.25 on this chart and 
resistance 34.60, a break of those levels will be relevant only 
in terms of a test of range support and resistance, being 34.05-
34.10 and 34.80.  Last ditch support for the bulls is at last 
week's low, just north of 33.60.



Daily SPX candles



The SPX had an inside day, breaking neither yesterday's high nor 
low.  Rising support at 1113 was not tested, though the high of 
1123 came within spitting distance.  The inside day is another 
form of harami or pennant, and the coiled price action is usually 
followed by a strong breakout, building “cause” to borrow Tom 
O'Brien's expression.  While a pennant is generally a 
continuation pattern, which in this case would break to the 
upside, the toppiness in the daily cycle oscillators as well as 
the slight bearish divergence in the Macd histogram should give 
us pause.  It's difficult to bet in the direction of an 
overbought trending move, but for the past few sessions, that's 
exactly what this is.  I expect heavy resistance until at least 
1134, and recall this wide confluence zone hanging onto the price 
until 1144 at other points this year.  If this is going to be a 
bullish breakout, those levels will need to get crossed, and an 
upside break will imply a weekly bull flag breakout targeting the 
year highs for starters.  On the other hand, the daily timeframe 
is toppy, and a break below 1113 on a daily closing basis, 
confirmed with a move below 1106, will kick off a new daily cycle 
downphase.



20 day 30 minute chart of the SPY



It's easier to entertain bullish thoughts looking at the 30 
minute SPY chart.  While the action of the past week looks like a 
complex top or distribution zone, a casual glance at this chart 
shows an unchallenged price uptrend.  The pattern of lower 
oscillator highs is a bearish divergence, but like yesterday's 
low VXO close, none of the downside fireworks that such would 
normally portend occurred today.  If 111.6 doesn't get broken 
quickly, the next 30 minute cycle upphase should challenge or 
break the highs of the move printed on Friday.  A break below 
that line will target 110.90 for starters, but given the weakness 
of the 30 minute cycle downphase today and the strength of 
111.60, being fibonacci, trendline and confluence support, it 
looks likely that the line will hold, at least on the first try.  
A bounce from there to a lower high would look more promising 
from a bearish perspective.


Daily VXO chart



While the S&P-100 Volatility Index, the VXO, is derived from the 
implied volatility of OEX options, there's always been an 
impressive inverse relationship between it and the broader 
market, as demonstrated in yesterday's SPX-VXO comparison chart.  
Prints below 14 are extremely low given the action in recent 
years, and for that reason, it's reasonable to be looking for a 
rise in volatility/plunge in equity prices.  While we got a drop 
today, there was little upside in volatility, and the decline in 
the SPX and broader market was minor.

Just like the daily cycle oscillators for the NDX and SPX, the 
markets appear poised for a strong downmove.  However, there are 
chart patterns and price action to support a renewed move higher 
from here.  Unless you have a strong opinion as to what the 
immediate future holds, my suggestion is to let the market tell 
us where it wants to go next, by means of a range break.  The 
levels discussed above for SPY and QQQ appear as significant 
support and resistance levels to me, and if they're broken with a 
confirming surge in volume, we should have a good idea as to 
likely direction from there.


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The Option Investor Newsletter                Wednesday 09-08-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Watch List: Biotech to Education and more!
Stop Loss Updates: DGX, TDS, IRF, IVGN, SPW
Dropped Calls: None
Dropped Puts: None
New Calls: None
New Puts: MERQ

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

Biotech to Education 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.
___________________________________________________________________


ImClone Systems - IMCL - close: 50.77 change: -1.53

WHAT TO WATCH: We've been commenting that IMCL looks like a 
bearish candidate the last couple of sessions.  Today's 2.9 
percent drop brings it that much closer to breaking round-number, 
psychological support at the $50.00 mark.  More aggressive 
traders may want to consider positions now that it's hitting new 
three-week lows.  Its MACD is very close to producing a new 
"sell" signal and its P&F chart has produced a new "sell" signal.  

Chart=


---

Potash Corp - POT - close: 58.15 change: +1.04

WHAT TO WATCH: You guessed it.  We now have seller's remorse.  We 
played POT as a call in early August and eventually closed it.  
Now the stock has soared from $52 to $58 in the last three weeks.  
We love the relative strength and volume has been decent on the 
rallies but now POT looks overbought.  Watch for a dip back to 
its 10-dma near the $55.00 region.

Chart=


---

TASER Intl - TASR - close: 35.55 change: +2.99 

WHAT TO WATCH: The stock that shocks is back!  TASR has soared 
from $28 to almost $36 in just four sessions.  Today's 9 percent 
rally was fueled by very strong volume of more than 19 million 
shares.  TASR looks poised to run toward the $40.00 mark.  The 
bullish P&F chart points to a $54 target but it does show 
resistance near $38-$39. Always be careful when trading TASR it 
can be dangerous.

Chart=


---

Apollo Group - APOL - close: 82.07 change: -0.65

WHAT TO WATCH: After three days of trying to breakout over the 
$85.00 level APOL may be rolling over.  Today's gap higher and 
steady decline throughout the session may be the most damaging.  
The simple 50 and 200-dma did hold up as support today but we'd 
watch for more weakness.  Aggressive traders may want to consider 
puts now.  The rest of us can watch for a breakdown under $80.

Chart=



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

QLGC $28.74 +0.99 - We remain in awe of QLGC's relative strength 
in the face of a weak SOX.  The climb continues.

BLL $38.24 +0.64 - Looking for a relative strength stock?  Then 
BLL is your candidate.  Shares just broke to a new high over $38.

WFMI $82.42 +1.40 - We're impressed with WFMI's relative 
strength.  Shares have broken back above the $80.00 level and 
will soon be challenging the bottom of the gap and its 50 and 
100-dma's near the $83.00 level. 



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

DGX - call play -
  Traders need to be careful here.  DGX is testing 
  support at the 10-dma and the $85.00 region.  
  Double-check your stops.  Ours is $84.50.
 
 
TDS - call play - 
  Heads up!  Our aggressive call play in TDS could be
  in danger.  The stock has painted a bearish reversal
  pattern with the drop back under the $80.00 mark. 
 Conservative traders may want to exit now.
 
 
IRF - put play - 
  Good news!  IRF continues to sink and under perform
  the SOX index.
 

IVGN - put play -
  This play has been TRIGGERED!  IVGN broke down under
  the $50.00 level again and steadily slipped lower to eventually
  trade under the $49.00 level and hit our entry point at $48.95.
  The MACD is getting closer to a new "sell" signal.
 
SPW - put play - 
  We have been TRIGGERED!  Finally, after all the waiting 
  shares of SPW has finally broken support at the $36.00 mark
  and hit our entry point to buy puts at $35.75.  The move follows
  the press release last night that the company's controller and
  chief accounting officer had suddenly resigned.  The opening bid
  at $35.40 is actually our new entry point.  The high volume 
  breakdown looks pretty good but we can expect some sort of 
  bounce tomorrow.


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

None


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DROPPED PUTS
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None

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

Mercury Interactive - MERQ - cls: 33.07 chg: -1.55 stop: 35.01

Company Description:
Mercury Interactive Corporation, the global leader in business 
technology optimization (BTO), is committed to helping customers 
optimize the business value of information technology. Founded in 
1989, Mercury conducts business worldwide and is one of the 
fastest growing enterprise software companies today. Mercury 
provides software and services to govern the priorities, people 
and processes of IT; deliver and manage applications; and 
integrate IT strategy and execution. Customers worldwide rely on 
Mercury offerings to improve quality and performance of 
applications and manage IT costs, risks and compliance. Mercury 
BTO offerings are complemented by technologies and services from 
global business partners. (source: company press release)

Why We Like It:
We like MERQ as a put candidate because shares have been 
suffering under a trend of lower highs for three weeks now and 
it's starting to blossom into a full-fledge sell-off.  The 
company presented at a technology conference today and having the 
stock drop 4.4 percent on almost twice the average volume is not 
the sort of reaction you want to see after presenting.  Now we're 
not saying that MERQ's presentation is the reason for the decline 
but the presentation obviously failed to inspire any buyers.  The 
whole software sector has been suffering and tech stocks are 
likely to under perform the market during this traditionally weak 
period during September.  

MERQ's relative weakness certainly makes it attractive and its 
MACD indicator is very close to producing a new "sell" signal.  
The high-volume sell-off today is also another clue to 
potentially more weakness ahead.  The P&F chart agrees.  
Currently the P&F chart is bearish with a $17.00 target.   
Looking at the chart you'll see the gap down in July.  That was 
investor reaction to MERQ's earnings report where the company 
missed earnings and came in light on revenues. The company tried 
to soften the sting a few days later with a $400 million share 
buy back program but it doesn't appear to be helping the stock 
does it?

We are going to use a TRIGGER to open the play in MERQ.  We want 
to catch a breakdown under support at the $32.50 level.  So our 
trigger will be $32.49.  More aggressive traders can jump the gun 
and buy puts on a break below $32.75, which was the low back in 
early August.  Our initial target is $30.00 but we believe MERQ 
can trade lower.  


Suggested Options:
Short-term traders can use the October puts.  We like the 35s, 
32.50s.  Hopefully they'll add some October 30s soon.

BUY PUT OCT 35.00 RQB-VG OI=3392 current ask $2.90
BUY PUT OCT 32.50 RQB-VZ OI= 985 current ask $1.50

Annotated chart:

 

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked:      - 0.00
Earnings Date           07/21/04 (confirmed)
Average Daily Volume =       2.8 million 
Chart =


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

None


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