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Daily Newsletter, Monday, 09/27/2004

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The Option Investor Newsletter                   Monday 09-27-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Lower Highs, Lower Lows
Futures Wrap: See Note
Index Trader Wrap: Bearish leadership resumes at NASDAQ 


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      09-27-2004           High     Low     Volume   Adv/Dcl
DJIA     9988.54 - 58.70 10046.65  9985.37 1.54 bln  902/1918
NASDAQ   1859.88 - 19.60  1871.94  1858.88 1.31 bln  833/2177
S&P 100   531.02 -  3.35   534.37   530.84   Totals 1735/4095
S&P 500  1103.52 -  6.59  1110.11  1103.24
SOX       376.96 -  5.59   383.47   375.67
RUS 2000  558.36 -  7.61   565.97   558.36
DJ TRANS 3177.35 - 24.76  3201.29  3166.94
VIX        14.62 +  0.34    15.06    14.55
VXO (VIX-O)14.30 +  0.16    14.76    14.07
VXN        21.92 +  0.82    22.34    21.73
Total Volume 2,864M
Total UpVol    637M
Total DnVol  2,203M
Total Adv  1735
Total Dcl  4095
52wk Highs  107 
52wk Lows    95
TRIN       1.68
PUT/CALL   0.99 
*******************************************************************

Lower Highs, Lower Lows
Jonathan Levinson

The indices gapped lower today and failed at or just below 
Friday's lows.  A narrow range emerged following the gap open, 
but an afternoon breakdown drove the indices below the intraday 
range to finish at the lows.

Breadth was negative and volume was light, with declining volume 
exceeding advancing volume 2.98:1 on the NYSE and 3.92:1 on the 
Nasdaq.  Volatility rose, with the OEX Volatility Index (VXO) 
adding 6.72% to close at 14.30 and the QQQ Volatility Index (QQV) 
+6.16% to close at 19.99.


Daily Dow Chart


The daily chart of the Dow shows today's break below 10000 
completing Friday's bearish consolidation at the lows.  Price is 
walking down the lower daily Bollinger band in what is so far a 
strong daily cycle downphase.  9950-60 is next support, below 
which bears will be targeting the August lows. 


Daily S&P 500 Chart


The SPX is in the earlier stages of its daily cycle downphase, 
still working on support from 1096-1102.  Below this level, the 
downphase will strengthen, with next support in the low 1080s.  
1112-1115 is new resistance.


Daily Nasdaq Chart


The Nasdaq is showing a bearish unfilled breakaway gap this 
morning, with the daily cycle downphase just getting started.  
Support below is at 1850-55, below which 1825-30 comes into view.  
Note the pattern of lower highs and lower lows from the daily 
cycle over the past 6 months.


It was a light day for economic news, with New Home Sales as the 
only major release.  The Commerce Department reported that new 
home sales in the US rose 9.4% to an annual rate of 1.184M homes 
(seasonally adjusted).  This was the largest jump in 4 years, 
with 404,000 new homes up for sale, which represents an inventory 
of 4.4 months at August's sales rate and the highest level in 25 
years.  The median price of a new home fell from $214,400 to 
$208,900, still a 9.7% year-on-year increase but the lowest 
median price in 8 months.

Standard & Poor's announced its estimate for Q3 SPX operating 
earnings at $16.42, which represents a 13.9% increase from Q3 
2003.  It's estimate for Q4 is for a 15.5% rise over 2004's 
levels.



Weekly TNX Chart


Ten year treasury bonds pulled back briefly on the New Home Sales 
news, but the decline proved to be a mere pause in the morning's 
gains.  Ten year note yields (TNX) continued lower through 4% and 
failed on a bounce attempt back to that level to close lower by 
3.4 bps at 3.997%.  The weekly chart of TNX shows descending 
trendline support in play at current levels, while the rising 
support line connecting the lows of the past 18 months is just 
below in the 3.85% area.  A break below that lower line would 
suggest a bear wedge breakout targeting 3.55% on the way to a 
downside objective of 3.05%.


Weekly chart of Crude oil


Investor awoke to crude oil trading north of $49 per barrel 
today, with crude futures reaching a new record high of 49.75 on 
the Nymex this morning.  This time it was concerns over Nigeria, 
the number five OPEC producer, where rebels pushing for political 
reforms said that they would seek to extend the current uprising 
to the countries entire southern delta oil region.  Royal 
Dutch/Shell closed down their 30,000 bpd output as a precaution.  
Nigeria had already been forced to cut back from its peak 
capacity of 2.55 mbpd due to aging facilities, and the current 
disruptions compound existing factors in Nigeria in a climate of 
global supply concerns and strong demand.

The weekly chart of Nymex crude, whose most recent green candle 
is comprised only of today's data, points an unequivocally 
bullish picture.  Current support is at 48, followed by 46.50.  
For the day, Nymex crude close higher by 80 cents or 1.64% at 
49.675, a new record close.

Nigeria wasn't the only fly in the ointment.  Insurgent forces in 
Iraq attacked the oil ministry building Saturday, causing no 
injuries and minor damage.  Iraq's export levels remain at 
relative highs for the year despite the various attacks on 
production facilities.  OPEC continues to produce oil at 25 year 
high levels, but traders and analysts cite an absence of excess 
capacity with which to cushion external shocks such as the recent 
Nigerian developments.  Again referring to the weekly chart, this 
year's rally has merely steepened an already bullish trend, and 
I'm personally not persuaded by arguments attributing the rally 
in oil to terrorism or other such purely external factors. 

In a report to its private clients released today, Morgan Stanley 
stated that it believes "crude oil could reach $61 before a 
meaningful sell-off occurs.  The Amex Airline Index ($XAL) fell 
4.01% or 1.72 to close at 41.18, with AMR losing 6.69% to close 
at 6.97, a new 52-week low.


Weekly chart of Amex Airline Index ($XAL)




In other news, UBS reported that its Index of Investor Optimism, 
maintained in collaboration with Gallup, declined to a 4-month 
low of 74 in September from 77 in August.  56% of investors 
polled believe that now is a good time to invest in the financial 
markets, down from 60% in August, though expected average rates 
of return rose from 9.3% in August to 10.1% in the current 
report.

In corporate news, FNM was announced its agreement with its 
regulator, the Office of Federal Housing Enterprise Oversight, to 
create a 30% capital surplus within 270 days and review its 
internal accounting controls.  FNM's minimum capital requirement 
is 2.5% of assets plus 0.45% of off-balance-sheet/derivative 
obligations, which Reuters reported to be equal to approximately 
$31B based on most recent data.  The company agreed to submit to 
the OFHEO with 45 days details of strategies to meet these new 
commitments and their impact on the company.

This comes in the wake of Wednesday's OFHEO charges that FNM has 
been employing improper "cookie jar" accounting methods to smooth 
earnings and, on at least one occasion, deferred its reporting of 
expenses, possibly to reach bonus compensation targets for 
management.  The SEC announced that it is conducting an inquiry 
into these findings.  Morgan Stanley had downgraded FNM earlier 
in the morning to equal weight from overweight, citing 
uncertainty from the ongoing OFHEO examination and "a wide range 
of possible outcomes", and Prudential followed with its own 
downgrade to "neutral" following the announcement.  Later in the 
day, it was announced that a subcommittee of the House Committee 
on Financial Services will hold a hearing titled "The OFHEO 
Report: Allegations of Accounting and Management Failure at 
Fannie Mae" will be convened on Oct. 6 at 10AM EST. 
Notwithstanding all of the foregoing, FNM's ticker showed some 
much needed green following last week's washout, closing higher 
by 1.51% at 66.50.

Hurricane Jeanne moved out of Florida today, leaving at least 4 
people in the State and approximately 5.2M people without power.  
Reuters reported that the storm dropped up to 10 inches of rain, 
and a close friend of mine in Florida told me that crews had yet 
to clean up much of the debris left by Ivan.  Sewage and drainage 
systems were waterlogged before Jeanne swept through, and 
flooding remains a serious concern.  Current damage estimates are 
between $4B and $8B.  The President declared a major disaster for 
the state, rendering it eligible for federal aid.  

While the Orlando/Orange County Convention and Visitors Bureau 
said that its tourism areas were unaffected, operational and open 
for business, investors sold shares in DIS, which closed 1.19% 
lower for the day at 23.18.  EMRG announced that it is 
redirecting customer service operations from its Sebastian FL 
location to its Fort Worth, TX branch.  Tampa Electric, a 
division of TE, announced that its infrastructure has sustained 
extensive damage in eastern FL, and that 228,000 of its customers 
are without power.  Insurer ANAT announced that the combination 
of Charley, Frances and Ivan will cost its subsidiaries $22M in 
pre-tax earnings, with total gross losses estimated at $37.2M, 
part of which will be recovered from the Florida Hurricane 
Catastrophe Fund and part from its reinsurance agreements.  
Insurer EMCI estimated its losses at $6.9M, which will translate 
to an earnings hit of $4.5M.  Both EMCI and ANAT had not yet 
tallied the damage resulting from Hurricane Jeanne.  BLS reported 
that 30,000 of its customers in Georgia have experienced service 
interruptions due to Hurricane Jeanne.

In other news, TOM got smoked for 21.79% or 2.87 to close at 
10.30 on news of a federal grand jury subpoena from the US 
Attorney, examining the commission rates paid by its US 
subsidiary  to its non-US subsidiary since 1990.  Pharmaceutical 
company NSTK rose 69.90% or 5.41 to close at 13.15 on news of a 
contract with Merck to develop a nasal spray treatment for 
obesity.

Tomorrow's lone economic report is Consumer Confidence for 
September to be released at 10AM, estimated at 99.5 and down from 
August's 98.2.  With oil mere pennies away from the $50 mark and 
getting a lot of attention, with the volatility indices beginning 
to rise but still in the range of multiyear lows, with S&P 
announcing optimistic expectations for Q3 earnings, my current 
bias is aligned with the daily cycle oscillators on the indices.  
With the previous daily cycle upphase failing from its third 
lower high in the past 6 months, the trend on this timeframe 
remains to the downside.  The current daily cycle downphase
suggests a strategy of shorting overbought bounces on the 30 
minute or 60 minute cycles with stops just above resistance.  
Until it reverses, this cycle should continue to deliver a 
pattern of lower highs and lower lows on these intraday 
timeframes.


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

Bearish leadership resumes at NASDAQ

Higher oil prices brought by supply disruptions from recent 
hurricane activity near the Gulf of Mexico as well as Nigerian 
militants of an armed Islamic extremist group vowing to step up 
it rebellion against that country's government sent November 
Crude Oil futures (cl04x) higher to trade the $50.00 level late 
Monday, where the fallout of this weekend's destruction from 
Hurricane Jeanne weighed stocks lower.

U.S. Market Watch - 09/27/04

 

The Dow Industrials (INDU) closed back below the 10,000 level 
despite a mid-session attempt to bring things back to unchanged.  
Sellers seemed determined to have the Dow close back below 10,000 
and peg the major indices lower to their close as the NYSE Short 
Term Trade Index (TRIN) 1.62 rose to the close depicting strong 
sell side volume in the final hour of trade.

Market Snapshot / Internals - 09/27/04 Close

 

Internals were weak from the opening bell where recent session's 
action along with today's has the NASDAQ's 10-day NH/NL ratio 
reversing back lower to 65.3%, its first signal that bearish 
leadership is reversing since this indicator signal a more 
meaningful resumption of bullish leadership at 24% on August 23.

NASDAQ Composite 52-week High/Low 10-day Avg. Chart - 2% box 

 

Today's 78 new lows at the very broad NASDAQ Composite (COMPX) is 
the highest number of new lows dating back to August 16th's 119, 
suggesting some renewed softening at the bottom, while 46 new 
highs is anemic.

It has been our observation that the NASDAQ leads weakness and it 
would currently take a NYSE 10-day NH/NL ratio of 84% for that 
very broad market to show some sign that bullish leadership 
softens.

NASDAQ Composite Index ($COMPX) - Weekly Intervals

 

The NASDAQ Comp. (COMPX) gapped below its rising 21-day SMA 
(1,879), which served support into Friday's close and unless oil 
prices reverse their gush higher, the NASDAQ Composite (COMPX) 
looks vulnerable to its longer-term upward trend at 1,800, with 
the 50-day SMA (1,854) a near-term level of SMA support.

For pivot analysis traders, you'll want to know that NASDAQ 
Composite's WEEKLY Pivot is 1,895.49.  On Wednesday of last week, 
the day after the FOMC announced its decision on interest rates, 
the COMPX moved below its WEEKLY S1 of 1,895 and found selling on 
each attempted bounce at that level.  

Weekly Pivot Levels for the NASDAQ Comp. are 1,850, 1,865, Pivot 
at 1,895.50, 1,911 and 1,941.

Pivot Matrix -

 

The S&P 100 Index (OEX.X) 531.02 -0.62% traded and closed below 
its MONTHLY Pivot for the first time today.  Market cap 
heavyweight and Dow component Citigroup (NYSE:C) $43.61 -1.22% 
(fourth-largest market cap weighting) has been on the defensive 
and trades well back from its recent bounce highs of $47.50 after 
Japan's financial regulators ordered the company to close its 
Japanese private banking offices after uncovering a series of 
problems, including a failure to prevent suspected money 
laundering.

General Electric (NYSE:GE) $33.12 -0.86% (largest market cap 
weighting) slipped back below its 21-day SMA ($33.46) on Friday, 
but managed to hold above its 50-day SMA ($32.96) by today's 
close, while Exxon Mobil (NYSE:XOM) $47.96 +0.27% has surpassed 
Microsoft (NASDAQ:MSFT) $27.23 -0.21% (third-largest market cap 
weighting) once again to hold the second-largest market cap 
weighted stock in the OEX.

Jeff Bailey


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The Option Investor Newsletter                   Monday 09-27-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: MMM 	
Dropped Calls: None 
Dropped Puts: None
Watch List: Clothing to Washing Machines and more 


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

MMM - put play -
  Exit Alert - MMM has now broken under the $78.00
  mark and is trading on its trendline of higher lows 
  dating back to March.  Our initial target is $77.50
  (just 19 cents away).  We are suggesting that short
  term traders prepare to exit.  More aggressive traders
  can hold on and aim for our secondary target near $75.


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

None


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DROPPED PUTS
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None


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

Timberland Co - TBL - close: 55.87 change: -2.25

WHAT TO WATCH: Heads up!  This looks like a bearish entry point 
on TBL.  Thursday and Friday saw shares of TBL rally towards 
resistance at the $58.50-59.00 region bolstered by its simple 
200-dma overhead.  TBL failed at the 200-dma on Friday and now 
Monday's decline looks like the last leg of a three-day bearish 
reversal.  We would watch for a drop under round-number support 
at $55.00 and consider targeting a drop towards $50.00 but watch 
out for tested-top-of-the-February-gap support at $52.50.  The 
P&F chart is bearish and points to a $39 target.

Chart=


---

Sina Corp - SINA - close: 24.00 change: -1.53 

WHAT TO WATCH: Internet stocks have come under some profit taking 
lately and the bounce in SINA from $20 to $27 is fading.  The 
stock has broken round-number support at $25.00 and its technical 
oscillators are turning bearish.  Aggressive traders may want to 
consider this a candidate for a drop back towards $20.00.  Keep 
in mind that its P&F chart is still bullish and a drop to $20 
would not invalidate the bullish signal. 

Chart=


---

Amazon.com - AMZN - close: 39.93 change: -1.01

WHAT TO WATCH: This could be an entry point for bearish plays in 
AMZN.  The stock has failed at the $44.00 level last week, which 
just happened to coincide with its simple 100 and exponential 
200-dma's.  Now AMZN is breaking down under round-number 
support/resistance at the $40.00 mark. Its technical oscillators 
are bearish and its MACD is very close to a new sell signal.  Its 
P&F chart is already bearish with a $15 target.   Aggressive 
traders may want to jump on this now but watch for support at 
$37.50 and $35.00.

Chart=


---

Whirlpool - WHR - close: 60.43 change: -1.01

WHAT TO WATCH: Last week's breakout from its trading range has 
failed and WHR is back to testing support at the psychological 
$60.00 mark.  Technical oscillators are bearish and its MACD is 
extremely close to producing a new sell signal.  The P&F chart is 
already bearish with a $53 target.  We would watch for a drop 
under $60.00 and use a breakdown as an entry point to buy puts.

Chart=



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

EBAY $88.73 -0.49 - EBAY failed at the $90.00 level again today.  
Aggressive traders may want to consider shorts here with a tight 
stop.

NBIX $46.44 -1.65 - We highlighted NBIX on the watch list a 
couple of days ago.  The stock is now breaking down under support 
at $48.00.  

HSIC $61.01 +0.09 - The bounces keep failing for HSIC.  We're 
getting closer to adding this as a put play with a trigger under 
$60.00.

RESP $50.53 -0.03 - We're still watching for a breakdown under 
$50.00.
 

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


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