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Daily Newsletter, Wednesday, 09/22/2004

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The Option Investor Newsletter                Wednesday 09-22-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: The Good the Bad and the Low Carb Diet  
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)
******************************************************************
      09-22-2004           High     Low     Volume   Adv/Dcl
DJIA    10109.18 -135.75 10244.05 10097.37 1.68 bln  759/2058
NASDAQ   1885.71 - 35.47  1910.23  1884.85 1.58 bln  755/2232
S&P 100   536.84 -  7.90   544.74   536.20   Totals 1514/4290
S&P 500  1113.56 - 15.74  1129.30  1112.67
SOX       391.74 - 12.01   403.75   391.08
RUS 2000  565.89 - 11.03   576.92   565.53
DJ TRANS 3194.66 - 76.56  3270.33  3191.45
VIX        14.74 +  1.80    15.30    13.95
VXO (VIX-O)14.63 +  1.77    14.96    13.80
VXN        21.06 +  0.76    21.19    20.66
Total Volume 3,264M
Total UpVol    615M
Total DnVol  2,649M
Total Adv  4290
Total Dcl  1514
52wk Highs  189 
52wk Lows    60
TRIN       1.81
PUT/CALL   1.10
******************************************************************

The Good the Bad and the Low Carb Diet
Jane Fox

The Low Carb Diet 

I tell you at some point the Low Carb diet will be blamed for the high 
price of oil. The latest to use this diet as a scagegoat is the makers 
of Twinkies and Wonder Bread Interstate Bakeries (IBC) when they filed 
for Chapter 11 bankruptcy reorganization. Although many factors were 
sited for the company’s woes including declining sales, a high fixed-
cost structure, excess industry capacity, rising employee benefits 
costs, higher costs for ingredients and energy, they had to jump on the 
bandwagon and include the low-carb diet. I have always contented that 
anyone who ate Twinkies or Krispy Kreme doughnuts didn't worry about 
dieting and didn't cut back on these luxuries because of a diet. But 
anything that flows your boat. IBC ended the day at 2.05

This is one bearish chart.

 

The Bad

Morgan Stanley (MWD) had positioned itself for a rise in interest rates 
that did not pan out because of the unexpectedly low unemployment data 
(or so they say) and due to this bond miscalculation, earnings came in 
at 0.76/share instead of the expected 0.95/share, a huge miss, and 
quarterly earnings dropped by 34%. MWD has also agreed to settle 
several disputes with the NYSE to the tune of $19 million. MWD ended 
the day at 48.72 down -3.66.

After an eight-month investigation by its main regulator that found 
evidence of earnings manipulation, the SEC has opened an informal 
inquiry into Fannie Mae's (FNM) accounting practices. The Office of 
Federal Housing Enterprise Oversight launched its probe of FNM after 
widespread problems surfaced last year and today presented its report 
to the company's board detailing accounting deficiencies and violations 
of generally accepted accounting principles. The OFHEO stated FNM has 
"maintained a culture that emphasized stable earnings at the expense of 
accurate financial disclosures." FNM closed the day at 70.69 down -
4.96. 

The Good 

Today FedEx (FDX) reported strong gains in shipment volume across 
almost all its levels of business and a fiscal first quarter profit 
that more than doubled. 

Although FDX's average load of 5.5 million packages/day was up 6.4% 
from a year earlier, the company noted air shipments in the U.S. 
continue to be hurt by the shift toward cheaper ground deliveries. This 
phenomenon seems to be restricted to the US however, because deliveries 
outside the U.S. climbed 13%, including a 52% surge in export shipments 
from China. FDX ended the day at 85.21 down -3.48. Looks like they 
wanted to sell today and no matter how pretty the books looked you got 
sold. 

30-year mortgage rates eased to their lowest level since early April 
spurring a rise in mortgage refinancings last week and new applications 
for U.S. home loans. The Mortgage Bankers Association said its 
seasonally adjusted market index, a measure of mortgage activity, rose 
for the week ending Sept 17 by 1.8 percent to 690.7 from the previous 
week's 678.2. 

The Department of Energy reported commercial crude inventories fell 9.1 
million barrels to the lowest level in seven months, caused by the 
disruption of imports when Hurricane Ivan hit the East coast. The 
greater than expected drop for the week ended Sept. 17, left commercial 
crude inventories well below the lower end of the average range for 
this time of year. Once the ships are able to dock again, there should 
be a substantial increase in imports next week that will build up 
inventories.

On to the charts.

The last time I did a market wrap I was quite bearish except for the 
NYA. Well things have definitely changed since then. But before we get 
to the charts I would like to say that I am going to use a more 
conventional MACD setting (12, 26, 9), which coincides with the other 
OI analysts. 

Annotated Weekly Chart of the SPX:

 

Here is a weekly chart of the SPX and as you can see it is up against 
that red downward trendline, which seems to be well-fit trendline. You 
can also see SPX is trading above the 50 and 200EMA. Support should 
come in at the August 12 low where you also find the 200EMA. 

Annotated Daily Chart of the SPX:

 

Here is the same time frame but on the daily chart and you see how 
important that red downward trendline has become as resistance. Now for 
support I have talked a lot about the swing high made on August 2nd as 
an important level for the bulls to break from below (which they did) 
and it is now an important level for the bulls to defend from above. I 
have marked the August 2nd swing high with a blue arrow. This arrow 
also coincides with the 50 EMA at 1109 confirming it as support. I also 
see an ominous MACD cross but those can be negated easily enough with a 
push upward and a positive MACD divergence that cannot be ignored. 

Annotated Weekly Chart of the DOW:

 

Here is the weekly DOW and the same well fit red downward trendline in 
place. The DOW is also trading above 50 and 200EMA. 

Annotated Daily Chart of the DOW:

 

The daily DOW chart has already traded past the August 2nd swing high 
and below the 50 and 200 EMAs on the daily chart so the DOW is more 
bearish than the SPX. Also the positive MACD divergence is not quite as 
prevalent in this market.


Annotated Weekly Chart of the Nasdaq:

 

The weekly chart of the NAZ shows that it didn't even make it all the 
way to the red downward trendline and is trading right at the 50 and 
200EMAs. This market is still the most bearish of the three above 
charts. 

Annotated Daily Chart of the Nasdaq:

 

The daily chart of the NAZ shows that it has not printed above the 
200EMA but is above the 50EMA and also right at the August 2nd swing 
high. Support and resistance is very clear in this market and may help 
to determine where the rest of the market may go. If the NAZ closes 
below the 50EMA take a look at the other markets to see if they are 
closing below their support levels also for bearish confirmation. If 
you see all three closing below support a revisit of August 12th lows 
is possible. On the other hand if you see the NAZ close above the 
200EMA look to see if the SPX and DOW have broken above their red 
downward trendlines for a confirmation of bullishness. 

Annotated Weekly Chart of the Russell 2000:

 

Here we have the same red downward trendline but note where the 50 and 
200EMAs are. 

Annotated Daily Chart of the Russell 2000:

 


This chart looks more like the SPX than the DOW or NAZ. Support is 
where the blue arrow and the 200EMA converge. It also has a positive 
MACD divergence. MACD has not yet crossed. 

Annotated Weekly Chart of the NYA:

 

This is the most bullish of all charts because the red downward 
trendline has been broken but NYA was stopped at the June swing high 
(blue line) making a double top, which is bearish if confirmed. That 
confirmation is a trade below the double bottom formed at August 12th. 
As a matter of fact we have a double bottom and a double top giving us 
very clear support and resistance. If so inclined, one could trade this 
range and have a very clear idea of where to put stops. 

Annotated Daily Chart of the NYA:

 

On the daily chart NYA should find support at the red downward trendline 
that converges with the 50EMA.

Tomorrows Economic Reports and Earnings

Thursday's economic releases will begin with the usual weekly 8:30EDT 
release of initial claims.  Last week's number was a lighter-than-
expected 333 thousand claims, with this week's expectations at 335,000-
338,000.  Of course, we could expect some disruption due to Hurricane 
Ivan's swath through the U.S. and a much-lower-than-expected claims 
number might be discounted resulting in little market reaction. For the 
week ending September 18th the consensus is +8K.

At 10:00EDT, the Conference Board releases the Leading Indicators 
number; one whose title would seem to make it an attention-grabber, but 
the truth is that many components are already known before this number 
is released. Consensus is +0.2%

Also at 10:00EDT is the Chicago Fed National Activity Index and the 
DJ/BTM Business Barometer along with the Fed's Gramlich speaking on 
monetary supply.  Gramlich detoured from recent Fedspeak in his talk 
last week on oil supply, so stay tuned on what he has to say about 
monetary supply, too.  Natural gas inventories follow about thirty 
minutes later.  Perhaps drawing more attention will be the FOMC Minutes 
from the August 10th meeting, to be released at 2:00.

HAL, CAG and WSTL will hold investor or shareholder meetings, while 
many of Wednesday's conferences continue, with WR Hambrecht joining in 
with a Display Technology Conference. 

Among the companies reporting tomorrow are AGE, RAD, SCS, CMGI and 
RAZF.  

Remember trade your plan and plan your trade. 


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_092204_1.asp



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The Option Investor Newsletter                Wednesday 09-22-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Watch List: A few more bearish candidates
Stop Loss Updates: PD, AHC, FAST
Dropped Calls: None
Dropped Puts: APOL, KRI
New Calls: None
New Puts: BIIB, LLY, SEPR

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

A few more bearish 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.
___________________________________________________________________


Respironics Inc - RESP - close: 50.38 change: -1.36

WHAT TO WATCH: We came THIS close to adding RESP to the play list 
tonight as a put with a trigger under $50.00.  The stock has 
clearly topped and now shares have fallen under its simple and 
exponential 200-dma's toward major support at the $50 mark.  
Technical oscillators are bearish and its P&F chart has broken 
through support and points to a $45.00 target.  Odds are if RESP 
doesn't get away from us we may add it tomorrow night.  Wait for 
the breakdown under support.

Chart=


---

American Intl Group - AIG - close: 69.92 change: -1.02

WHAT TO WATCH: The IUX insurance index is looking weak with a 
fresh MACD sell signal.  Leading it lower is Dow-component AIG.  
Not only has AIG broken down through technical support at its 
simple 200-dma and round-number support at $70.00 but the company 
recently received a Wells notice from the SEC, indicating future 
civil action.  This could be a nimble trader's bearish entry 
point for a drop back toward $66.

Chart=


---

ImClone Systems - IMCL - close: 54.91 change: -1.16

WHAT TO WATCH: Are you feeling brave?  The usually volatile IMCL 
is starting to hesitate under resistance at $57.00 and its simple 
and exponential 200-dma's.  With the drug and biotech indices 
looking weak and overbought, respectively, IMCL could easily fall 
back toward support in the $49.50-50.00 level.  Short-term 
oscillators like the RSI and stochastics are already rolling 
over.

Chart=


---

Henry Schein - HSIC - close: 61.10 change: -1.25

WHAT TO WATCH: HSIC may be down 2 percent today but the stock is 
up off its lows.  Traders bought the dip to support at $60.00 
this morning and shares rebounded on very strong volume.  Now the 
question is will the rebound and support at $60.00 hold up if the 
major market indices continue to falter.  Technical oscillators 
are mixed but its MACD is in a sell signal.  The P&F chart looks 
pretty ugly with a triple-bottom breakdown sell signal and a $54 
price target.  We would consider bearish positions if HSIC traded 
under $60.00.

Chart=



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

PD - call play -
  Phelps Dodge has broken out over resistance at $86.00.
  This is good news especially considering the market's weakness
   today.  Be prepared to exit if PD runs near the $90 level. 
 
 
AHC - call play -
  If you didn't take our suggest last night to exit and close this
  play for a profit consider doing it now.  We have a hard exit at
  $89.00 but the stock has surpassed our initial target.
 
 
FAST - put play -
  Be careful here!  FAST has triggered us at $56.95 as it traded
  below support at the $57.00 level and its simple 100-dma on an
  intraday basis.  Unfortunately, it managed to bounce back before
  the closing bell.  We would suggest waiting for a new low under
  $56.80 before considering new plays.


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

None


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

Apollo Group - APOL - close: 73.14 change: +1.14 stop: 74.10     

It looks like we set our stop loss to tight last night.  
Yesterday APOL exceeded our original profit target of $73.50 and 
hit $72.00 on heavy volume.  We suggested readers exit in the 
MarketMonitor Tuesday afternoon and last night.  Today we have to 
close the play because APOL produced an oversold bounce and hit 
our new stop at $74.10.  More aggressive players may want to 
leave the play open as the action in Wednesday's trading still 
looks bearish.  

Picked on September 14 at $78.88
Change since picked:      - 5.74
Earnings Date           10/05/04 (unconfirmed)
Average Daily Volume =       3.3 million 
Chart =


---

Knight-Ridder - KRI - close: 65.31 change: +0.94 stop: 65.51

Ugh!  We can't find any reason for KRI's sudden strength.  
Yesterday it's rival the NYT cut its profit forecast and that 
should have hit shares of KRI as well.  Today the entire market 
turned lower and KRI bucked the trend to breakout over resistance 
at $65 and its simple 50-dma on massive volume.  Yet we can't 
find a reason for the rally.  Thankfully we used a relatively 
tight stop loss at $65.51 to reduce our risk.

Picked on September 15 at $63.85
Change since picked:      + 2.46
Earnings Date           07/22/04 (confirmed)
Average Daily Volume =       491 thousand
Chart =



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

None


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

Biogen Idec - BIIB - close: 59.57 change: -1.95 stop: 62.51

Company Description:
Biogen Idec creates new standards of care in oncology and 
immunology. As a global leader in the development, manufacturing, 
and commercialization of novel therapies, Biogen Idec transforms 
scientific discoveries into advances in human healthcare.
(source: company press release)

Why We Like It:
We like BIIB because after months of churning mostly sideways the 
stock is breaking down under key support with today's market 
sell-off.  Not only has BIIB been stuck in a relative trading 
range the last few months but shares have posted a new lower high 
last week.  Now its MACD indicator has created a new "sell" 
signal with today's three-percent drop through round-number 
support at $60.  This is somewhat aggressive because we're 
fighting a bullish pattern on the P&F chart.  However, this is 
only a short-term play to catch a quick drop back toward support 
at $55.00.  

Suggested Options:
This is a short-term play so we're going to suggest the October
puts but Novembers are available.

BUY PUT OCT 60 IHD-VL OI=5364 current ask $2.05
BUY PUT OCT 55 IHD-VK OI=6903 current ask $0.55

Annotated chart:

 

Picked on September 22 at $00.00
Change since picked:      - 0.00
Earnings Date           07/28/04 (confirmed)
Average Daily Volume =       3.0 million 
Chart =


---

Eli Lilly & Co - LLY - close: 63.92 change: -1.24 stop: 67.01

Company Description:
Lilly, a leading innovation-driven corporation, is developing a 
growing portfolio of first-in-class and best-in-class 
pharmaceutical products by applying the latest research from its 
own worldwide laboratories and from collaborations with eminent 
scientific organizations. Headquartered in Indianapolis, Ind., 
Lilly provides answers -- through medicines and information -- 
for some of the world's most urgent medical needs
(source: company press release)

Why We Like It:
It's always a little dangerous to play drug/biotech stocks 
because one never knows when the company will announce some new 
drug/trial/approval or the failure of a drug/trial/approval.  
However, we feel a little bit more confident with LLY's recent 
weakness and the new breakdown in the DRG drug index.  The sell-
off in the markets helped push the DRG index through support and 
LLY followed suit.  Not only has LLY recently reversed a 50 
percent retracement of its June to August decline but the stock's 
MACD indicator has produced a new "sell" signal.  The P&F chart 
is bearish with a $44.00 target.  We feel the close under $64.00 
and its simple 40 and 50-dma offers a decent entry point to 
capitalize on a drop back toward $60.00 (maybe lower).  If you 
look at LLY's weekly chart you'll see that the June-August 
decline broke through its long-term rising channel.  The bounce 
was just an oversold rebound that kissed the bottom of its broken 
channel and then turned lower.  

Suggested Options:
We like the October and November puts.  Our favorites are the
65s and 60s.

BUY PUT OCT 65 LLY-VM OI=29445 current ask $2.25
BUY PUT OCT 60 LLY-VL OI=50147 current ask $0.90

BUY PUT NOV 65 LLY-WM OI= 159 current ask $3.80
BUY PUT NOV 60 LLY-WL OI= 713 current ask $2.05

Annotated chart:

 

Picked on September 22 at $63.92
Change since picked:      - 0.00
Earnings Date           07/22/04 (confirmed)
Average Daily Volume =       3.1 million 
Chart =


---

Sepracor Inc - SEPR - close: 48.94 chg: -1.31 stop: 52.01

Company Description:
Sepracor Inc. is a research-based pharmaceutical company 
dedicated to treating and preventing human disease through the 
discovery, development and commercialization of innovative 
pharmaceutical products that are directed toward serving unmet 
medical needs. Sepracor's drug development program has yielded an 
extensive portfolio of pharmaceutical compound candidates with a 
focus on respiratory and central nervous system disorders. 
Sepracor's corporate headquarters are located in Marlborough, 
Massachusetts. (source: company press release)

Why We Like It:
This is another bearish-breakdown trading range play.  SEPR has 
been stuck in a trading range since it gapped higher back in 
March.  With easily defined resistance near $53-54 and support at 
$42.00-42.50 investors can play the dips and bounces.  Right now 
the market weakness and the drop in the DRG drug index has sent 
SEPR through support in the $49-50 region after peaking at $53 
near overhead resistance.  Its technicals and MACD are flashing a 
sell signal but we are going against the grain with a bullish P&F 
chart.  We'll start the play with a stop loss at $52.01 and a 
$42.50 target.

Suggested Options:
We like the October and November puts.  Our favorites are the 50s
47.50s and 45s.

BUY PUT OCT 50.00 ERU-VJ OI=7948 current ask $2.25
BUY PUT OCT 47.50 ERU-VW OI=2146 current ask $1.05
BUY PUT OCT 45.00 ERU-VI OI=4818 current ask $0.45

BUY PUT NOV 50.00 ERU-WJ OI= 106 current ask $3.60
BUY PUT NOV 47.50 ERU-WW OI=  35 current ask $2.25
BUY PUT NOV 45.00 ERU-WI OI= 445 current ask $1.35

Annotated chart:

 

Picked on September 22 at $48.94
Change since picked:      - 0.00
Earnings Date           07/13/04 (confirmed)
Average Daily Volume =       1.8 million 
Chart =




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would welcome you as a permanent subscriber.

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price is $129.95 which is $20 off the monthly rate.

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information over the phone.

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

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