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Daily Newsletter, Monday, 09/13/2004

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The Option Investor Newsletter                   Monday 09-13-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Higher Highs
Futures Wrap: See Note
Index Trader Wrap: See note


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
 
*******************************************************************

Higher Highs
Jonathan Levinson

The markets marched higher today on solid volume, breaking 
Friday's highs and setting new highs as the volatility indices 
scoped multiyear lows.  The indices peaked at lunch and began a 
slow rollover that picked up speed until the final half hour of 
the cash session, from which time the indices began a sharp 
bounce to correct the better part of the afternoon weakness.

The strength today extended what had become a trending move 
across the intraday cycles and continued the upside whipsaw in 
the daily cycles that we followed last week.  The lack of 
pullback was sufficient to generate the first stochastic buy 
signals on the weekly timeframe, the first such signal since 
before the summer.


Weekly Dow Chart


The Dow closed flat for the day, up 1.69 at 10314, failing at a 
high of 10348.  The move higher started this week's candle just 
below the upper descending resistance line of the bull flag in 
play from the January highs.  A move above the 10350-10400 zone 
on a weekly closing basis would set up a move to 10500 
resistance, but the bull flag breakout would imply a move to the 
year highs and beyond.  Confirming this bullish picture is a 
slightly higher stochastic and Macd histogram low as highlighted 
above, forming a bullish oscillator divergence.  A rollover below 
the 10300 level would start a retracement of the gains over the 
past month, but on this weekly timeframe, the trend is in the 
process of reversing to the upside.


Daily Dow Chart


The higher open on the Dow kept the day's candle right on the 
steeply rising daily trendline, but all of the day's gains had 
blown off in a doji spike by time of the cash close, setting up a 
bearish gravestone doji formation.  A break below today's low of 
10292 would bring us closer to a bearish Macd cross to confirm 
the rollover in the 10-day stochastic.  Next support is at 10260, 
followed by 10190-10200.  The daily cycle oscillators combine 
with today's upper doji shadow to paint a picture of an imminent 
daily cycle downphase, but it will take a close below 10260 to 
break last week's range and put a bearish tint on the 
consolidation.  The weekly cycle buy signal discussed above 
suggests that a daily cycle downphase from here should find 
support at a higher low- how high or how low that daily cycle 
bottom proves to be will tell us a great deal about the fate of 
the bullish weekly formation that bulls have been eyeing all 
year.


Weekly Nasdaq Chart


The Nasdaq outperformed the Dow again today, closing higher by 
16.1 points at 1910.4.  The high was at 1919.21, but bulls were 
happy to have closed above the 1890 confluence line.  As on the 
Dow, the lack of pullback for the past month was enough to 
generate the first weekly cycle buy signals.  Confluence, 
Fibonacci and trendline resistance line up at the 1940 level, 
above which bulls will be looking to the 2000 and 2025-30 levels.  
As with the Dow, a break above the descending upper flag 
resistance line has very bullish implications, suggesting that 
the decline this year was merely corrective following 2003's 
impulsive rally.  While the decline this year looks longer than a 
bull flag would ideally be, the upper resistance line is 
nevertheless set up as a key watershed between bull and bear 
territory.


Daily Nasdaq Chart


The daily Nasdaq looks considerably more bullish than the daily 
Dow, with an unfilled upside breakaway gap printed by today's 
open.  On this chart, there's rising resistance in the 1930 area 
but if the bulls manage another advance tomorrow, the 10-day 
stochastic should complete its upside whipsaw with a new buy 
signal.  That would be a very bullish development, but as noted 
last week in the Market Monitor, bulls need to continue their 
advance.  The upside whipsaw in the 10-day stochastic stopped 
what had been daily cycle downphase, but until the previous 
oscillator high is either matched or exceeded, there remains the 
risk of a bearish divergence against the higher price high.  A 
rollover in price from here would suggest a strong daily cycled 
downphase to follow, with the implication that the daily cycle 
upphase from the August low has been a corrective bear flag.  
1870-80 is key downside support, following which the lower rising 
trendline and the 1835 levels will be in play.


Weekly TNX Chart


Treasury  bonds rose today, with the ten year note yield (TNX) 
declining 2.9 basis points to close at 4.151% for a .69% move on 
the day.  On the weekly chart above, this week's candle 
(comprised solely of today's data) remained within the lower end 
of last week's range, and appropriately, there were no particular 
sharp or impressive moves in either direction.  Rising weekly 
support at 4.1% remains unbroken, with the lower spike 2 weeks 
ago repelled with authority from the lower line, bouncing higher 
in a doji hammer.  The weekly cycle oscillators are turning up, 
with the 10-week stochastic printing a buy signal today.  This 
suggests that the lower wedge support line is likely to hold on 
this run, and that higher yields / weaker bonds are on deck, at 
least in this weekly timeframe.  A break below 4% would suggest a 
bear wedge breakdown targeting the 3.1% support level, while a 
bounce from the line will have resistance at 4.4%, 4.88% and 
ultimately 5% at the top of the wedge.


Weekly chart of Crude oil



Crude oil rose strongly today, adding 2.45% or 1.05 to close the 
day session at 43.85 on the Nymex.  The weekly chart of front-
month crude futures shows a bearish stochastic divergence, and 
the sharp break from the bear wedge apex 4 weeks ago suggests 
more weakness to come.  However, the bearish divergence is of 
limited reliability because the weekly stochastic has been 
trending in overbought for months.  I would be more impressed 
with a break below the rising channel support confirmed with a 
move below 41 confluence.

The media attributed today's strong rise to the threat posed by 
Hurricane Ivan, whose flight path has edged westward and now 
threatens the Gulf of Mexico.  Hurricane Ivan, which remains the 
strongest of this year's series of hurricanes and is still 
measuring force-5, threatens not only damage to key 
infrastructure in the Gulf, but also the threat of downtime due 
to evacuations and delays.  Reuters reported that energy 
companies have already moved more than 3,000 workers off rigs in 
the area as a precaution.

Compounding this turn of events was uncertainty due to the 
plethora of stories to cover last Thursday's explosions in North 
Korea.  The story was reported after the fact as being one 
explosion with a "mushroom cloud" that left a crater and a 
mushroom cloud more than 3 kilometers wide.  The uncertainty was 
nearly total, with National Security Adviser Condoleezza Rice 
saying, "We don't think ... that it was a nuclear event. But 
we're looking at it and we'll get further analysis.  There are 
... all kinds of assessments that are going on. Maybe it was a 
fire, some kind of forest fire."  The uncertainty resolved 
somewhat today, with North Korean Foreign Minister Paek Nam-sun 
saying that that the explosions were deliberately set as part of 
the construction of a hydroelectric dam project.  North korea has 
invited foreign envoys to visit the scene and see for themselves, 
but it remains a mystery why no statements were made 4 days 
earlier to explain a matter of global concern.

The Commerce Department reported that revenues in three major US 
service industries accounting for approximately 15% of the US GDP 
increased by 5.4% from Q1 to Q2 2004, reaching $598.1B.  The data 
is the conclusion of a new quarterly survey covering following 
sectors: professional, scientific and technical services;  
information services; and administrative, support and waste 
management services.

At 2PM it was announced that the US federal budget deficit 
declined to 41.1B in August, down from the 76.6B last August. The 
cumulative deficit for FY 2004 is 436.9B with one month to go.  
At this time in 2003, that figure was 401B.  The 41.1B deficit 
exceeded the 40B level projected by the Congressional Budget 
Office. 

U.S Airways (UAIR) is seeking protection from its creditors for 
the second time in the past 10 years, filing a Chapter 11 
proceeding over the weekend.  The filing comes following the 
airline's failed attempt to obtain cost concessions from labor 
unions, some of which Reuters reported to be key shareholders of 
the company as well.  The company has assets of approximately 
8.8B and liabilities of 8.7B, though those assets include some 
2.5B of goodwill.  Another 1.45B of its assets is cash and cash-
equivalents.  Later in the afternoon, the Association of Flight 
Attendants-CWA (the union represent UAIR flight attendants) 
claimed that it never received the full details of the company's 
latest contract proposal, and that there were important delays in 
its receiving information from the company.  UAIR closed lower by 
29.45% at 1.03.

For tomorrow, bulls will hoping for a shallow or sideways 
correction to relieve the overbought intraday cycles, and 
particularly the 30 minute cycles which were in a downphase at 
the cash close.  The daily cycle is still up for grabs on the 
Nasdaq and Dow, both of which suggesting that the easy part of 
the recent rise has been seen.  On the other hand, the weekly 
cycle, which obviously lags its shorter-term counterparts, is 
only now printing buy signals.  That's a bullish sign for longer 
term traders, and sets up a bullish expectation for higher highs 
and higher lows for the daily cycle.  My own feeling is that a 
daily cycle correction, most likely to a higher low, is the next 
major move on the daily horizon.  If I'm wrong and the daily 
cycle begins trending in overbought from here, we will be much 
more likely to see a retest of the year highs within the context 
of a weekly bull flag breakout led by the Dow.  For that reason, 
the trendlines on the weekly chart highlighted above are the key 
upside levels to watch in the event of further strength this
 week.


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

Index wrap will be updated soon:
http://members.OptionInvestor.com/Itrader/marketwrap/iw_091304_1.ASP



 

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The Option Investor Newsletter                   Monday 09-13-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: AHC, SPW 	
Dropped Calls: None 
Dropped Puts: IRF
Watch List: Oil to Communications and more!


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

AHC - call play -
  We're growing more and more concerned with AHC's lack
  of participation in the oil sector's gains.  Stay on the alert
  or exit now and seek bullish plays elsewhere in the sector.
 
 
SPW - put play -
  SPW was just one of several stocks that defied gravity today
  and rallied higher.  Shares added 4.9 percent when they should
  have been dropping.  Barron's came out over the weekend with
  a very negative story on SPW's accounting and a gloomy 
  forecast.  If we get stopped out at $36.01 we'll keep an eye 
  on SPW and play it again.  



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

None


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DROPPED PUTS
************

Intl Rectifier - IRF - close: 35.43 chg: +0.59 stop: 35.01

Stocks, especially tech stocks, continued to rally on Monday with 
the SOX semiconductor index leading the way higher.  Of course a 
number of traders and market pundits believe the sharp rebound in 
the SOX is mostly short covering.  Whatever is fueling the move 
in chip stocks it was enough to send IRF above the $35.00 level 
and stop us out.  

Picked on September 5th at $32.18 
Change since picked:       + 3.25
Earnings Date            07/29/04 (confirmed)
Average Daily Volume =        1.3 million 
Chart =



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

Occidental Petroleum - OXY - close: 53.48 change: +0.88

WHAT TO WATCH: Oil stocks continued to climb today as hurricane 
Ivan threatens 25% of the U.S. oil production facilities in the 
Gulf of Mexico.   This sent crude oil higher by more than 2% to 
$43.36 a barrel.  OXY responded by continuing to bounce from the 
$52.00 level and its rising simple 10-dma.  This looks like a 
bullish entry point but we'd use a relatively tight stop.  The 
P&F chart is extremely bullish with a $96 target.

Chart=


---

Cabot Microelectronics - CCMP - close: 37.18 change: +1.55

WHAT TO WATCH: CCMP is affected by moves in the chemical industry 
and the semiconductor industry.  Thus it has been less volatile 
than many of its clients in the semiconductor sector.  However, 
we see the same three-day rally as we do in the SOX just to a 
lesser extent.  More importantly today's 4.3% gain was a breakout 
above resistance to new 4 1/2 month highs on very big volume.  
Unfortunately, CCMP still has overhead resistance at its simple 
and exponential 200-dma's.  Watch for some follow through. 

Chart=


---

Vimpel Communications - VIP - close: 108.76 change: +4.51

WHAT TO WATCH: VIP is stretching its rally into the fifth 
consecutive week.  The stock almost made today a new closing high 
but missed it by 4 cents.  Shares look overbought here and VIP is 
facing resistance at the $110 level.  We'd prefer to watch for a 
dip back toward $100 and consider buying a bounce.  Momentum 
traders can watch for a breakout over $110 to new all-time highs 
and use a relative tight stop - just keep in mind this would be a 
very aggressive high risk play.  Waiting for the dip would be 
safer.

Chart=


---

Valero Energy - VLO - close: 71.07 change: +2.38

WHAT TO WATCH: This looks like a very tempting entry point for 
bullish positions in VLO.  This oil refiner has broken through 
technical resistance at its 40, 50 and 100-dma's in the last few 
sessions and today sent it above the $70.00 mark.  VLO has also 
broken its short-term trendline of lower highs from mid-July.  
The P&F chart shows the same bottoming pattern and a bullish 
price target of $77.00.

Chart=



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

EBAY $92.10 +2.03 - EBAY is back to its winning ways with a 
breakout over resistance at the $90.00 level on above average 
volume.

FFIV $29.10 +1.45 - Networking stock FFIV has broken through its 
simple 200-dma as it too enjoys a strong three-day rally.

ATH $85.17 +0.66 - ATH has broken through the $85.00 level but 
shares are failing at the simple 100-dma overhead.


*******************
FREE TRIAL READERS
*******************

If you like the results you have been receiving we
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.

We would like to have you as a subscriber. You may
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


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

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


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