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Daily Newsletter, Wednesday, 09/29/2004

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The Option Investor Newsletter                Wednesday 09-29-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: The Better to See You With, My Dear 
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)
******************************************************************
      09-29-2004           High     Low     Volume   Adv/Dcl
DJIA    10136.24 + 58.84 10136.24 10050.56 1.72 bln 1590/1202
NASDAQ   1893.94 + 24.07  1894.06  1869.95 1.62 bln 1996/ 998
S&P 100   536.56 +  2.37   536.56   532.46   Totals 3586/2200
S&P 500  1114.80 +  4.74  1114.80  1107.36
SOX       380.62 +  6.93   383.26   373.69
RUS 2000  571.07 +  5.41   571.07   565.22
DJ TRANS 3239.59 + 31.01  3241.28  3204.36
VIX        13.21 -  0.62    14.14    13.20
VXO (VIX-O)12.81 -  0.42    13.81    12.55
VXN        20.67 -  0.69    21.51    20.57
Total Volume 3,357M
Total UpVol  2,268M
Total DnVol  1,042M
Total Adv  3586
Total Dcl  2200
52wk Highs  175 
52wk Lows    50
TRIN       0.66
PUT/CALL   0.85
******************************************************************

The Better to See You With, My Dear
Linda Piazza

Although a Fed president painted a rosy picture for the economy
Tuesday night and the GDP was revised slightly upward Wednesday
morning, some consider the specter of higher crude costs the wolf
that lurks in "transitory" clothing.  

Pre-market, investors brushed aside views of the final GDP and
performances of global bourses with barely a glance, all the
better to focus on the crude inventories numbers released at mid-
morning.  In addition, unconfirmed rumors circulated that the IMF
might trim its estimates on economic growth for the economy due
to higher crude costs.  Inventories surprised to the upside, but
the IMF did lower its 2005 outlook for global economies based on
rising crude costs.  At the end of the morning's economic
releases, market participants had no better view of the size of
that wolf than they did at the start, but that was going to
change.  The wolf himself was going to change it.

Crude moved lower.  Oil services, natural gas and utilities
stocks declined, joined by the home builders and gold and silver
miners.  The Dow Jones Transportation Index climbed 0.96 percent
higher to close just underneath 3240 resistance.  Techs soared,
with the disk drive index and SOX gaining 2.91 and 1.85 percent,
respectively, ahead of Micron's (MU) after-hours earnings
announcement.  Advancers were always ahead of decliners on the
Nasdaq, and ended up so on the NYSE.

At day's end, however, some already expressed skepticism of the
climb's sustainability.  

The daily chart of crude futures shows no change in the uptrend
yet.

Annotated Daily Chart of Crude Futures for November Delivery:

   

The Russell 2000 might have been a likely recipient of end-of-
quarter buying, pushing it above its 200-sma.

Annotated Daily Chart of the Russell 2000:

 

Those leery of the sustainability of the gains will want to see
the Russell 2000's upside break confirmed by a break above the
September high.

Armed with an upgrade by Amtech, many chip and chip-equipment
stocks also felt no fear of the wolf, whatever its size or impact
on global demand, and charged higher ahead of MU's after-hours
report.  

Annotated Daily Chart of the SOX:

 

The SOX's behavior continues to conform to a potential inverse
H&S.  This suggests that some believe that the worst is baked
into expectations for the semi's.  Someone is buying, producing
this pattern.  However, the outcome of H&S's and inverse H&S no
longer proves predictable.  These formations should be used to
guide traders as to bullish or bearish intentions and whether
those intentions are realized rather than entice traders into
plays ahead of at least a minimal confirmation of the pattern by
a rounding down into a right shoulder.  They're now frequently
rejected.

The combined resistance of the 30- and 50-dma's and the 50
percent retracement of the rally off the October 2002 low proved
too strong for the SOX Wednesday.  MU reported earnings of $0.14
per share on earned operating income of $125 million, net income
of $93.5 million, and net sales of $1.19 billion.  Earnings per
share were up from last year's loss, but below the expected $0.21
on sales of $1.23 billion.  The company blamed lower selling
prices for memory chips for the disappointment.  

MU's result could help propel the SOX either direction, but which
direction?  Whisper numbers had been for results as low as $0.09
per share on revenue of $1.15 billion, so tomorrow could as
easily see a buy-the-fact reaction as a sell-the-fact one.  MU
traded $0.04 lower during after-hours trade, but other most-
actives in after-hours trades included semi-related stocks TXN
and INTC, with both relatively unchanged.  

The SOX's chart reveals that a break above the 50-dma would
indicate an upside breakout in progress.  Watch for a test of 394
and then 400, with semi bulls needing a profit-protecting plan as
each of those levels is approached. Investors sometimes reject
these formations at the neckline.  A push above September's high
sets an upside target near the 200-sma.  

However, the combined resistance near the 50-dma looks strong and
rollover entries might be more likely either from there or from
the 400 level.  New bears taking entries from those levels want
to see the SOX quickly press through the 30-dma and below
Tuesday's low.  Look for a decline beneath Tuesday's low as a
sign of a downside breakout entry.  That could see 360 tested,
but semi bears need profit-protecting plans in place as 360 and
then the September low are tested.  A break below September's low
suggests a test of the 342-343 level. 

The SOX and the Disk Drive Index helped push the Nasdaq higher,
and both could impact it Thursday.

Annotated Daily Chart of the Nasdaq:

 

Current Nasdaq bulls should have profit-protecting plans in place
as the Nasdaq approaches the 100-sma and 200-ema's, as well as
historical horizontal resistance.  A break through the converging
resistance suggests a test of resistance also converging just
above 1950.  Profit-protecting plans should be in place if that
level is tested.  

With a weekly downtrend still in effect, sell-the-rallies appears
to be remain the best tactic.  Look for rollovers beneath 1900,
1925, or 1950 as possible new bearish entries.  Any bear should
have a profit-protecting plan in place as the 50-dma is
approached.  A break below the 50-dma sets a downside target near
1790, but I'd also have profit-protecting plans in place as
August's gap was tested.   

Annotated Daily Chart of the Dow: 

 

With a weekly downtrend still in place on the Dow, sell-the-
rallies also appears to be the best policy until that weekly
downtrend is broken.  The breakout above the converging 50-sma
and 200-em's suggests a test of 10,160-10,200, but bulls should
have profit-protecting plans in place now and then as the lower
edge of that band is approached, if it is.  Look for a potential
rollover entry near the 100-sma or a breakdown entry on a break
below 9950.  A break below 9,950 suggests a tumble down toward
9,800, where profit-protecting plans should be in place.  If the
Dow instead breaks to the upside through the 30- and 100-sma's,
have profit-protecting plans in place as the 200-sma and the top
of the channel are approached.

Annotated Daily Chart of the SPX:  

 

As with the other indices, a weekly downtrend remains in effect,
so a sell-the-rallies policy continues to be the best tactic
until a breakout above that descending regression channel.
Current SPX bulls should have profit-protecting plans as the 200-
sma is approached and then again as September's high and the top
of the descending regression channel are approached, if the SPX
makes it past the 200-sma.  Bears should look for rollover
entries below the 200-sma or the top of the channel, back down
through the 200-sma.  A rollover beneath the 200-sma suggests a
test of 1080-1085, where profit protection plans should be in
place and remain in place through a test of the bottom of the
regression channel. 

What were the forces driving the markets today?  Wednesday's
first economic release is always the Mortgage Banker's
Association numbers on the previous week's financing activities. 
The composite number increased 4.9 percent week over week, with
the purchase component increasing 2.7 percent and the refinance
component increasing 7.7 percent, to its highest level since the
middle of April.  The sharp climb in yields today hit the
homebuilders hard, however, driving the sector lower. 

Next arrived the 8:30 release of the Q2's final GDP, with a ho-
hum reaction to the upward revision to a 3.3 percent increase. 
The Bureau of Economic Analysis had previously estimated a 2.8
percent rise, with expectations being that the number would be
revised upward to 3.1 percent.  Some articles credited business
investment with the higher-than-expected revision.  Others also
mentioned a decrease in imports and increase in inventory
accumulation and exports.  Investments in residences increased
16.5 percent.  Personal consumption and the chain deflator, a
measure of pricing pressures, had last been at 1.6 and 3.2
percent, respectively.  Both remained unchanged.  Still, despite
the headline number, growth was termed the slowest in five
quarters.

Market watchers brushed aside those numbers, however, all the
better to focus on the crude inventories to be released near
10:30.  That number prompted a short-covering rally in equities
and a decline in crude futures.  The release showed a jump in
crude inventories by 3.4 million barrels according to the
Department of Energy and by 3.7 million according to the American
Petroleum Institute.  Although both the DOE and API showed drops
in distillate and gasoline inventories, those numbers remained
within expectations.  

Market watchers knew all they wanted to know about the wolf,
although they hesitated just long enough to hear one more piece
of information.  Indices hit resistance levels just ahead of the
International Monetary Fund's 11:00 EST update on its 2005 global
outlook.  Many had feared that the IMF would trim its forecast
due to rising crude prices, and that's exactly what happened. 
The IMF cited higher oil prices as the reason behind the lowered
forecast for global economic growth in 2005, with the new
forecast for a 4.3 percent growth.  That was lower than this
year's projected 5.0 percent increase.  

IMF Chief Economist Ragharam Rajan characterized those numbers as
healthy and agreed with our Fed's characterization of the soft
patch in the U.S. economy as transitory, reassuring investors. 
However, the IMF also noted that the global economic outlook
appeared less solid and risks to the forecast were to the
downside.  That wolf clothes himself well, but he may still be
threatening.  

At 10:30 the Fed's McTeer also addressed a banking conference in
Dallas, but little coverage was given to his address.  The
previous evening, Thomas Hoenig, the president of the Federal
Reserve Bank of Kansas City, addressed a business group, saying
encouraging things about the labor market, consumer spending,
inflation, and the limited effects of rising crude on the U.S.
economy.  He felt that any negative impacts were being offset by
accommodative monetary and fiscal policies.  As long oil prices
do not rise significantly, he believes that those negative
impacts would remain minimal.  When someone in the Q&A session
tried to pin down his forecast for oil prices, he declined to
give one. 

Nothing investors heard was strong enough to hold back gains
later variously attributed to short-covering, end-of-quarter
window-dressing, oversold bounces, and healthy gains.  The VIX
and VXO dropped again into levels not seen since September 17,
with the VXO, the old VIX, dropping below the September 21 level. 
The VXN, the Nasdaq 100 Volatility Index, did not decline to new
recent lows.  That lack of fear of the lurking wolf shown by the
VIX and VXN levels scares many market participants, including
this writer, but price action should remain the final arbiter.  

With volatility indices low, semi weakness being confirmed by
MU's report, numerous companies warning after hours, and an
intact weekly downtrend in place, sell-the-rallies remains the
preferred tactic, and that's the one this writer suggests.  Many
indices appear to be moving up into resistance that forms at
appropriate right-shoulder levels for H&S's on the daily charts,
with those right shoulders perhaps requiring another day or two
to begin flattening.  Remain skeptical of any upward moves in
equities while crude futures remain above the 50-dma and perhaps
even while above the 100-dma, also a frequent bounce point. 

Bearish entries near the top of descending regression channels,
near breakout levels, are scary.  Those chart characteristics
offer an easy way to determine if the thesis is wrong, however: a
move above the appropriate right-shoulder levels or above the
tops of the channels, as the case might be.  

While the Russell 2000's daily chart does not sport a H&S
formation at the top of the climb on the daily chart, 
it may still be important to study this week.  Watch the Russell
2000 and TRAN for first signs of breakouts or rollovers in the
making.  The Russell 2000 moved the closest to a breakout and the
TRAN tested new recent highs, so a Russell 2000 upside breakout,
should make bearish traders cautious, no matter what volatility
indices suggest.  They're not good market-timing tools. 

Any option position taken tomorrow may accrue special risk due to
the presidential debates to be held Thursday night, including the
risk of no movement while options prices leak lower.  Whether
indices are heading up for new breakouts or preparing for a
rollover, tomorrow could be a difficult-to-trade set-up day for a
later directional play.  Know the risk you accept when entering
ahead of the first debate, and be willing to be wrong and jump
out again if proven wrong.   

Thursday's economic releases begin with the usual 8:30 release of
jobless claims, with August's personal income and personal
spending also to be reported during that time period.  Trade
carefully in front of the 10:00 release of Chicago's PMI, last
reported at 57.3, and the August Help-Wanted Index.


***************
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_092904_1.asp



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The Option Investor Newsletter                Wednesday 09-29-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Watch List: Entry Points or Window Dressing?
Stop Loss Updates: BIIB, LLY, LXK
Dropped Calls: None
Dropped Puts: None
New Calls: None
New Puts: FLIR

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

Entry Points or Window Dressing?

___________________________________________________________________

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.
___________________________________________________________________


Lehman Brothers - LEH - close: 80.19 change: +1.57

WHAT TO WATCH: The XBD broker-dealer index turned in a decent 
performance today with a 1.47 percent rally.  More importantly it 
was a follow through on yesterday's bounce from the XBD's simple 
50-dma.  Bulls will note that LEH out performed the XBD today 
with a 1.99 percent gain.  Technical traders will also note the 
bullish engulfing candlestick pattern for Wednesday's session.  
The breakout and close over the $80.00 mark is also a bullish 
signal as is the bounce from its simple 20 and 200-dma's at this 
morning's low.  So why aren't we adding LEH to the play list?  
For one this could be end of the quarter window dressing and LEH 
is up almost several weeks in a row.  Secondly, LEH is still 
battling with P&F resistance near $80.  Watch for some follow 
through.  Momentum traders may want to consider longs over $80.50 
and target $85.00.

Chart=


---

Whole Foods Market Inc - WFMI - close: 85.15 change: +0.75

WHAT TO WATCH: Here's another one we strongly considered adding 
to the play list tonight as a call candidate.  Shares have filled 
the gap down from July and traders are buying the dip to its 
simple 20-dma.  Its RSI and stochastic oscillators are turning 
bullish again although its RSI is still a little overbought.  We 
like the close over the $85.00 level and its P&F chart is bullish 
with a triple-digit target.  This could be an entry point for a 
run toward $90.00.  What do we not like?  We don't like the MACD 
which is actually in a sell signal after WFMI's six-week run up 
from the August lows.  

Chart=


---

Kmart Holdings - KMRT - close: 88.06 change: +2.21

WHAT TO WATCH: Once again we're being tempted by strength in 
KMRT.  Traders are buying the dip to its 20-dma and now shares 
are back above very minor resistance at $87.50 and nearing its 
highs near $90.00.  Short-term oscillators like the RSI and 
stochastics have ticked higher again.  Plus, KMRT's relative 
strength and bullish P&F chart make it attractive.  What do we 
not like?  Again the MACD is in a sell signal and we suspect that 
KMRT could be seeing buying interest due to window dressing.  
Still we might give into the temptation to go long if KMRT can 
close above $90.00.  

Chart=


---

Quanex Corp - NX - close: 50.88 change: +0.73

WHAT TO WATCH: Iron, steel and any stock related to metal has 
been seeing a lot of buying interest lately.  We've had our eye 
on NX as a possible put play because shares were near the top of 
its very wide trading range. Now with what could be end of 
quarter window dressing by funds NX has broken through the top of 
its trading range and round-number, psychological resistance at 
$50.00.  Momentum traders may want to consider this a bullish 
candidate and just use a tight stop to minimize risk.  The 
bullish P&F chart points to 68.00.

Chart=



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

BDK $76.55 +1.30 - BDK has broken through the top of its recent 
trading range and resistance at $75.00.  This could be an entry 
point.

HD $39.38 +0.55 - HD has broken through the top of a bull-flag 
pattern as well as resistance near $39.00.

FITB $49.60 +0.59 - Look for a breakout in FITB soon.  The stock 
is consolidating sideways in a neutral pennant pattern with 
higher lows and lower highs.  The move could go either direction.



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

BIIB - put play -
  Traders need to be careful here.  BIIB has continued its
  bounce from $59.00 and is now bouncing from this morning's
  dip toward $60.00.  We are not suggesting new positions.
 
 
LLY - put play -
  We are expecting a small bounce in LLY tomorrow but
  the $63.00 level should hold as very short-term resistance.
 
 
LXK - put play -
  Be careful here.  LXK has rebounded back above the $82
  mark and if it closes above $84.50 we may decide to close it.


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

None


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

None


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Financial global presence and the convenience of one group for
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success.

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

None


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

FLIR Systems - FLIR - close: 59.35 chg: -2.99 stop: 62.51

Company Description:
FLIR Systems, Inc. is a world leader in the design, manufacture 
and marketing of thermal imaging and stabilized camera systems 
for a wide variety of thermography and imaging applications 
including condition monitoring, research and development, 
manufacturing process control, airborne observation and 
broadcast, search and rescue, drug interdiction, surveillance and 
reconnaissance, navigation safety, border and maritime patrol, 
environmental monitoring and ground-based security.
(source: company press release)

Why We Like It:
This is purely a technical breakdown/relative weakness play.  
Fundamentals seem to be pretty good for FLIR as the company has 
been beating earnings estimates at least lately.  Although some 
may consider it rich with a P/E near 37.  We like the high volume 
breakdown through support at the simple 50-dma and round-number 
support at $60.00.  Volume was almost double the norm on today's 
decline, which is significant considering the markets were mostly 
positive today (and yesterday).  Technical oscillators are all 
bearish and its P&F chart points to a $45 target.  We are going 
to set an initial target at $55.00 but we're not ruling out a 
drop towards $50.

Suggested Options:
Short-term traders can choose Octobers, November and January
puts.  Right now our preference would be the Novembers but the
January's look pretty good here too.  

BUY PUT NOV 65 FFQ-WM OI= 10 current ask $7.10
BUY PUT NOV 60 FFQ-WL OI=136 current ask $3.90
BUY PUT NOV 55 FFQ-WK OI= 60 current ask $1.80

Annotated chart:

 

Picked on September 29 at $59.35
Change since picked:      - 0.00
Earnings Date           07/22/04 (confirmed)
Average Daily Volume =       577 thousand
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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subscribe at any time but your subscription will not
start until your free trial is over.

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card server or you may simply send an email to

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