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Daily Newsletter, Monday, 10/04/2004

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The Option Investor Newsletter                   Monday 10-04-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Flagpole Rally II 
Futures Wrap: See Note
Index Trader Wrap: Homebuilders weak ahead of Pulte warning


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

Flagpole Rally II
Jonathan Levinson

It was a very quiet, almost cadaverous market for traders 
watching the cash markets during regular trading hours, as the 
real action occurred in the premarket.  After the initial gap up, 
there little tradeable action and a narrow range ensued.

Despite the lack of range, volume was strong with breadth 
positive, advancing volume more than doubling declining volume on 
the NYSE and almost doubling it on the Nasdaq.  The volatility 
indices were similarly divided, with the NDX volatility index 
(QQV) rising even as the NDX advanced, while the OEX volatility 
index (VXO) declined.


Daily Dow Chart



The daily candle print for the Dow combined with the strong NYSE 
volume would qualify as a gravestone doji, a classic reversal 
print.  However, there are two inconsistencies:  a gravestone 
doji should be red instead of green, meaning that the day would 
ideally have finished negative.  I've found this to be of only 
minor importance, as the key is that the Dow finished well within 
the bottom of its range, having been decisively rejected at the 
upper end.  More importantly, however, there wasn't the panicked 
"DOH! Geee" reversal that markets the obvious doji tops.  This 
pattern is based on the idea of the herd stampeding in one 
direction, and then stampeding equally urgently the other way.  
Today's endless, minute range that drifted lower wasn't the stuff 
of which classic reversals are made.  Of course, it could have 
been a controlled distribution top-  it's just not obviously so.  
The key will be whether we break today's low of 10191 on a 
closing basis tomorrow.  A strong break below the upper 
descending resistance line tomorrow will close the door on bulls.  
A weak, sideways decline or a bounce will set up more pain for 
bears.


Daily S&P 500 Chart


The same candlestick issue is evident here for the SPX, and bears 
will be looking for a close below 1131.5.  Note that the daily 
cycle oscillators are on early buy signals from a higher low for 
SPX.  Because of the higher price high, there's the potential for 
a steep bearish divergence if the upphase fails early, as in this 
week.  However, until it does, the SPX is still in an upphase, 
and the benefit of the doubt should go to bulls above the line at 
1131.


Daily Nasdaq Chart


The Nasdaq would have printed a gravestone doji/shooting star, 
closing 2 points above its low for the day.  It opened on its 
second consecutive breakaway gap up in as many sessions, with gap 
support at 1942 if today's low at 1950 fails.  Of the 3 indices, 
the Nasdaq is on the weakest daily cycle upphase, and a close 
below the 1940 level should be enough to stall the current bounce 
attempt.  Once again, it's bullish until it isn't, but bulls will 
want to keep their stops close to protect current profits.


Weekly TNX Chart


Treasury bonds kicked off the week on a soft note as ten year 
note yields (TNX) rose above 4.2% intraday before settling back 
below the line.  Buying in bonds reversed the gains as the TNX 
closed in light negative territory, still at the upper end of 
Friday's range.  Traders following the TNX closely should refer 
to this weekend's Futures Wrap, in which I reviewed the daily TNX 
chart.  The weekly chart posted above shows last week's bullish 
reversal in the TNX, rising on a bullish hammer from below the 4% 
line to engulf the previous two weeks' declines.  Bond 
bears/yield bulls will want to see the TNX clear the 22 and 50 
week EMAs overhead on the way to a retest of the 4.4% resistance 
level.  Note that this week's TNX candle is based solely on 
today's session.  For the day, the TNX declined 1.8 bps to 
4.173%, a .43% loss for the day.


Weekly chart of Philadelphia Housing Index ($XAL)


Homebuilders got clocked on the weakness in bonds and continued 
lower even after bonds returned to positive territory, declining 
3.2% to close at 397.59 in a notable divergence from the broader 
market.  The weakest components of the index included BZH, MDC 
and PHM, all of which lost more than 4% for the day.  TIN and BCC 
were the lone advancers among the 21 stocks that comprise the 
index.


Weekly chart of Crude oil


Oil was among the topics discussed at this weekend's G7 meeting, 
with the Group of Seven calling for an expansion in supply from 
oil producers.  Representatives of the G7 countries, Britain, 
Canada, France, Germany, Italy, Japan and the United States, 
stated that current high oil prices pose a risk to global 
economic growth.  Both higher production and an increase in 
efficiency from consumer nations were cited in the G7's 
communiqué.  OPEC's smallest producers, Qatar, said however that 
OPEC has done all it can to relieve rising prices, but added that 
it will continue to do so.  OPEC's top producer, Saudi Arabia, 
announced that it was increasing production from 9.5 mbpd to 11 
mbpd in response to prices above 50 per barrel.

Reuters reported that Nigerian rebels withdrew their threat to 
target oil operations in the delta region and signed a peace 
agreement on Friday.  Oil companies were considering returning 
workers to Nigeria's delta today as it appeared that the deal 
would stick.  Nigeria produces approximately 2.3 mbpd.

David Malpass of Bears Stearns was out this morning with bullish 
comments for the US economy, projecting growth in Q3 above 4% and 
a possible "blowout" in Q4 to the 6% level.  He cited rate hikes 
as being bullish for the economy, based on their evidencing the 
Fed's lack of concern for deflation and the degree to which 
current rates are currently low.  He believes that global 
economic expansion is offsetting the drag caused by the oil 
rally, and cited certain expiring tax provisions that allow the 
expensing of capital equipment purchased prior to year-end.  He 
expects a spike in spending from businesses seeking to exploit 
these provisions.

In much the same vein, Fed Governor Bernanke was talking down the 
impact of oil prices today: "It's the difference between rising 
prices and high prices. The economy can accommodate prices at the 
current level."  Nevertheless, he added that he hopes that oil 
prices will fall gradually.

Philly Fed President Santomero weighed in as well in a speech to 
the National Association of Business Economics (NABE), stating 
that he expects to see growth in the 3.5%-4% range through 2005 
supported by a steady rise in consumer and business investment 
spending.  In his opinion, growth at this level would be optimal, 
sufficient to stimulate gains in employment without causing a 
spike in price inflation.  He believes that at its current 1.75%, 
the overnight lending rate is "below neutral."  As he put it, "I 
don't think we are yet at neutral.  We will have to evaluate how 
the economy evolves from here to try to figure out how to 
proceed, but my suggestion to you is that we still have a way to 
go."

Governor Bies addressed the NABE in the afternoon, reiterating 
the view that the US economy is coming out of its recent "soft 
spot" and her opinion that growth would accelerate in the current 
quarter.  She added that she sees very weak inflation: "The core 
PCE has been one-tenth of one percent for the past three months 
and that is a good signal that we are down from where we were," 
she said.  Note that the "core" PCE strips out the so-called 
"volatile" food and energy components.

The IMF's managing director Rodrigo de Rato and World Bank 
president James Wolfenson reported a general lack of consensus on 
critical issues from this year's World Bank-IMF annual meeting.  
Strongest progress was made on the issue of debt-relief for the 
world's poorest nations, though a specific plan was not agreed 
upon.  Rato spoke up in favor of better surveillance to provide 
early warning of potential financial crises. 

More exciting were comments from Li Ruogu, assistant governor of 
the People's Bank of China, who delivered what was characterized 
as a rebuke to Congress, suggesting that it is not China's 
currency, but rather the low US savings rate behind current 
global imbalances.  Mr. Li suggested that US foreign direct 
investments in China generate profits not for China, but for the 
US, and concluded that changing the exchange rate would 
effectively "destroy the goose that can give you golden eggs".  
He said that China remains committed to supply-and-demand based 
exchange rates, but would not state a timeframe, stating that in 
China's 8000 year history, a decade isn't a long time.  He added 
that the US has done nothing in 20 years despite its commitment 
to reduce arms sales to Taiwan.


It was a quiet day for economic data, with August Factory Orders 
as the lone report for the day.  The Commerce Department reported 
that new orders at US factories declined 0.1% after rising a 
revised 1.7% in July.  Economists were expecting a rise of 0.1% 
in August.  The data revealed the bulk of the weakness to be in 
civilian aircraft orders, which declined 42.9% following July's 
103.5% increase.  Excluding transportation, Factory Orders rose 
1.3%, and y-o-y grown remains strong at +12.5%.  The market 
cheered the data immediately following its release at 10AM.


In corporate news, VTSS reduced Q4 estimates from 0-1 cent per 
share to -2 cents per share, citing weakness in the storage 
market.   VTSS closed lower by 5.92% at 2.70.

WAG announced that same-store sales rose 6.3% in September, with 
total sales rising 13.2% from September 2003.  NUS, a direct 
seller of personal care and nutrition products, reduced its 
forecast for Q3 earnings to 27-28 cents per share, compared with 
the First Call consensus of 34 cents.  The company cited weaker 
than expected revenue in China and Japan, and higher than 
expected expenses in these territories.  NUS declined 32.32% to 
close at 16.46.

Merrill Lynch was bearish on tech this morning, citing earnings 
revisions that were -14% in September compared with +5% in 
August.  This decline was more than double its standard 
deviation, and spurred Merrill's Steven Milunovich to project 
negative revisions to continue in 2005.  He expects technology 
stocks to underperform in such an environment.

SEBL was up more than 14.04% on news of an extension to its 
strategic alliance with MSFT whereby SEBL will optimize its 
Siebel Business Analytics for use with a number of MSFT's 
products.  The stock closed up 1.15 at 9.34.

The Disk Drive Index (DDX) rose 3.23% on gains from HTCH, which 
guided higher to 15-20 cents per share for fiscal Q4, up from its 
July guidance of breakeven to 10 cents per share, citing strong 
shipments.  HTCH closed higher by 16.28% at 4.57.  MXO was 
another big winner, adding 6.17% to close at 5.68.  WDC got a 
boost, rising 2.74% to close at 9.37 on news of a new 2.5" hard 
drive that is currently shipping briskly in a market that is 
expect to grow from 53M units in 2004 to 77M in 2007 according to 
Gartner Group. 

Tomorrow is scheduled to be another light news day, with ISM 
services for September at 10AM, est. +.1%.  The key issue for 
traders will be whether the indices can hold onto their gains 
following the dismal drift lower from this morning's strong open.  
While the daily cycles are pointed north, the higher price highs 
leave these cycles vulnerable to a divergent reversal, 
particularly on the Nasdaq. 


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

Homebuilders weak ahead of Pulte warning

The Dow Jones Home Construction Index (DJUSHB) 631.51 -5.31% 
moved opposite of broader market gains, and traders may have 
smelled out this evening's earnings warning from index component 
Pulte Homes (NYSE:PHM) $56.33 -8.59%, which accounted for the 
bulk of the DJUSHB's intra-day declines.

In Monday's extended session, shares of Pulte Homes (PHM) fell an 
additional 6.7% from Monday's close, to $52.55, after the company 
cited weaker sales and unit volume in its Las Vegas markets for 
lowering of quarterly and full-year earnings guidance.

Pulte said it now expects third quarter earnings from continuing 
operations to be in the range of $1.95 to $2.05 per share 
compared to previously issued guidance of $2.00 to $2.10 per 
share.  For the full year, the company expects earnings from 
continuing operations to be in the range of $7.40 to $7.70 per 
fully-diluted share versus prior guidance of $7.80 to $8.00 per 
share.

While Las Vegas' market, which Pulte had raised prices by as much 
as 50% in some communities did slow sales volumes for the company 
in that region, Pulte said preliminary signups for its third-
quarter ended September 30 had increased 11% over the same period 
last year.

Pulte's President and CEO Richard J. Dugas Jr. addressed the Las 
Vegas market by saying, "Consumer acceptance of these increases 
at certain price levels has apparently reached a ceiling, 
suggesting that prices have become higher than what the market 
will support.  Pulte has already implemented actions to lower 
local market pricing to better align the Company's operations 
with current market conditions."

Dow Jones Home Construction Index (DJUSHB) - Daily Intervals

 

Pulte may have found a price sensitivity level in Las Vegas after 
raising prices nearly 50% in some developments in and around Las 
Vegas.  I was floored that demand for housing was so strong to 
even think such an increase possible.  As they say, "What goes on 
in Vegas, stays in Vegas."  

Las Vegas' housing market is obviously hot, and price increases 
found in that region are an exception to the national average.  
Look for new entry points in the homebuilders back near the lower 
end of upward regression.  If still holding some longs in the 
group, write some near-term covered calls.

Market Snapshot / Internals - 10/04/04 Close

 

New highs expanded on the NYSE and we haven't seen new highs 
breach the 400 number on the big board since early March.  The 
NYSE Composite ($NYA.X) 6,677.75 +0.21% did trade into the 6,686-
6,735 "zone of resistance" today after its bullish breakout on 
from September 21 at 6,611.  NASDAQ's NH/NL ratios show some 
resumption of bullish leadership as NASDAQ Composite (COMPX) 
1,952.40 +0.52% tested its 200-day SMA (1,964.50) today.

NYSE Composite ($NYA.X) - Daily Intervals

 

After the NYSE Comp. closed above the 6,611 level on September 
21, the NYSE quickly reversed to re-test its rising 200-day SMA 
(6,511) and conventional 50% retracement.  End of quarter window 
dressing as well as strength from retailers, transports, 
cyclicals and energy sectors have the NYSE trading what I feel is 
going to be a formidable area of resistance.

In this weekend's Index Trader Wrap, fellow analyst Leigh Stevens 
looked at NASDAQ Composite resistance to be present at 1,985, and 
with the NYSE Composite being stronger, on internals and PRICE 
measures, I'd tied NYA.X 6,735 and COMPX 1,985 as rather 
correlative levels of resistance.

Pivot Analysis Matrix - 

 

I removed the TRIN from the WEEKLY Pivot and placed the VIX.X in 
its place per trader/investor request.  Since TRIN "resets" 
itself each day, I can't argue that it would be of greater help 
to traders to have a VIX.X observation in the WEEKLY Pivot.

The S&P 500 Index (SPX.X) 1,135.17 +0.32% didn't quite get a 
trade at WEEKLY R1 as I thought it might today or tomorrow, where 
after an impressive end of quarter rally, I was looking for 
institutional bulls to perhaps limit their buying at WEEKLY R1 
early this week, with the SPX easing back toward MONTHLY Pivot of 
1,115 and October's "Max Pain" (1,115) by October expiration.

Additional October "Max Pain" levels are DIA $101 ($1 
increments), OEX 540 (5-point increments), QQQ $35 ($1 
increments) and SOX.X 380 (5-point increments).

S&P 500 Index (SPX.X) - Daily Intervals

 

Not unlike the rebound in the NSYE Composite ($NYA.X) from its 
200-day SMA, the SPX.X has rebounded from its 50-day SMA, where 
today's trade brings a break ABOVE MONTHLY R1 (1,131) and our 
"cheater's" downward trend.  This week's WEEKLY R1 is close to 
conventional 80.9% retracement, where I would look for further 
gains above the WEEKLY R1 to find sellers firm at MONTHLY R2 
(MONTHLY levels marked on above chart), where first sign of 
weakness, or abatement of recent gains to come with the SPX 
slipping back below the WEEKLY R1 (1,141.66), but more 
importantly 1,140 and today's high.

In Monday's Market Monitor, I posted an SPX.X chart at 02:51:05 
with WEEKLY and MONTHLY Pivot levels, which I feel gives traders 
a better view of the "strength above WEEKLY R1" with resistance 
firm at MONTHLY R2, where we would then look for some October 
expiration weakness back below 1,140.

Jeff Bailey


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The Option Investor Newsletter                   Monday 10-04-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: None 	
Dropped Calls: None 
Dropped Puts: KSS
New call plays: KMRT, GIVN
Watch List: BSTE, IDXX, CELG, PH 


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STOP-LOSS UPDATES
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None


*************
DROPPED CALLS
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None


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

Kohl's - KSS - close: 50.00 change: +1.25 stop: 50.26     

Ah - the mystery of the unexplained gap higher.  We can't find 
any specific news on KSS that would account for the gap higher or 
its above average volume.  As a matter of fact the retailers 
should have traded lower given Wal-mart's comments that its 
September same-store sales came in at the low end of its prior 
estimates.  But no, the markets are not logical.  Instead the RLX 
retail index jumped to a new all-time high on the expectation 
that consumers will feel more confidence and spend more freely in 
the fourth quarter.  Of course this isn't necessarily a new 
assumption and doesn't really explain the pop higher for KSS.  
Which, by the way, completely gave back its midday gains creating 
a failed-rally pattern.  We have been stopped out at $50.26.

Picked on September 16 at $49.48
Change since picked:      + 0.52
Earnings Date           08/12/04 (confirmed)
Average Daily Volume =       3.1 million 
Chart =


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

Kmart Holdings - KMRT - close: 90.53 chg: +2.47 stop: 84.99

Company Description:
Kmart Holding Corporation and its subsidiaries (together, 
"Kmart") is a mass merchandising company that offers customers 
quality products through a portfolio of exclusive brands that 
include Thalia Sodi, Jaclyn Smith, Joe Boxer, Kathy Ireland, 
Martha Stewart Everyday, Route 66 and Sesame Street.
(source: company press release)

Why We Like It:
We've been watching KMRT for the last month looking for the right 
entry point.  Today's breakout over $90.00 looks like our green 
light.  The good news for bulls here is that the RLX retail index 
is showing lots of strength with a new all-time high today 
despite news from Wal-Mart that same-store sales for September 
came in at the low end of estimates.  Technicals on KMRT are 
bullish and its P&F chart points to a $116 target.  We're going 
to use today's breakout over round-number, psychological 
resistance at $90.00 as an entry point to target a run towards 
$100.  We'll use an initial stop at $84.99 but more conservative 
traders can use the 21-dma near $85.90 as a good spot for a stop 
loss.

Suggested Options:
We are going to suggest the November calls.  Our favorites are 
the 85s, 90s, 95s and 100s.

BUY CALL NOV 85 KTQ-KQ OI=140 current ask $8.50
BUY CALL NOV 90 KTQ-KR OI=374 current ask $5.50
BUY CALL NOV 95 KTQ-KS OI=880 current ask $3.20
BUY CALL NOV 100 KTQ-KT OI=407 current ask $1.65

Annotated Chart:

 

Picked on October 04 at $90.53
Change since picked:    + 0.00
Earnings Date         08/16/04 (confirmed)
Average Daily Volume =     2.7 million 
Chart =


--

Given Imaging - GIVN - close: 41.26 change: +2.28 stop: 37.00

Company Description:
Given Imaging is redefining gastrointestinal diagnosis by 
developing, producing and marketing innovative, patient-friendly 
products for detecting gastrointestinal disorders. The company is 
developing a complete line of PillCam video capsules for 
detecting disorders throughout the gastrointestinal tract. The 
company's technology platform is the Given® Diagnostic System, 
featuring the PillCam(TM) video capsule, a disposable, miniature 
video camera contained in a capsule which is ingested by the 
patient. The PillCam(TM)SB video capsule is the only naturally-
ingested method for direct visualization of the entire small 
intestine. It is currently marketed in the United States and in 
more than 60 other countries and has benefited more than 122,000 
patients worldwide. (source: company press release)

Why We Like It:
GIVN was a big winner for investors though most of 2003 and the 
first part of 2004.  Then the stock went into a six-month long 
hibernation.  Traders may notice that the consolidation narrowed 
significantly in September as GIVN churned under resistance at 
the $40.00 level.  Today shares broke out to new all-time highs 
over resistance on more than five times its average volume.  
Technicals are positive and its MACD just produced a new buy 
signal on the move.  Technical traders can also note that GIVN's 
P&F chart is bullish with a $59 price target.  We are going to 
target a move to $47.50-50.00 but only if GIVN can make it there 
before its earnings report near the end of October.  We will not 
hold over the report even if we think it will be positive.

Suggested Options:
We are going to suggest the November options.  Our favorites
are the 40s and 45s.

BUY CALL NOV 40 QPG-KH OI=2636 current ask $3.30
BUY CALL NOV 45 QPG-KI OI=1472 current ask $1.15

Annotated chart:

 

Picked on October 04 at $41.26
Change since picked:    + 0.00
Earnings Date         10/27/04 (unconfirmed)
Average Daily Volume =     247 thousand
Chart =



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Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for
success.

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

Biosite Inc - BSTE - close: 51.11 change: +1.26

WHAT TO WATCH: Biotech stock BSTE is hitting new one-year highs 
with a high-volume breakout over resistance at $50.00-51.00.  Its 
technicals are turning bullish and its MACD just produced a new 
buy signal.  Looking at the weekly chart suggests BSTE might be 
able to run towards long-term resistance in the $56-57 range.  
The P&F chart is more bullish with a $64 target.

Chart=


---

IDEXX Labs - IDXX - close: 52.51 change: +1.28

WHAT TO WATCH: After almost two months of consolidating sidewways 
IDXX is on the move again and it's moving higher.  Shares have 
broken out through the top of its trading range at $51.00 and its 
exponential 200-dma near $52.50.  The current four-day rally has 
also been gaining momentum with rising volume.  Watch overhead 
resistance at $55 and its simple 200-dma.

Chart=


---

Celgene Corp - CELG - close: 61.45 change: +2.57

WHAT TO WATCH: This looks like an entry point to open bullish 
positions in CELG.  The stock is breaking out over major 
resistance near $60.00 to hit new four-year highs.  Today's 4.3 
percent rally was fueled by very strong volume and its MACD just 
crossed into bullish territory.  The stock is set to split 2-for-
1 on October 25th and could account for some of CELG's upward 
momentum.  The P&F chart is very bullish with an $89 target.

Chart=


---

Parker Hannifin - PH - close: 61.12 change: +1.53

WHAT TO WATCH: This looks like an entry point to buy calls on PH.  
The stock is breaking out over major resistance near $60-61 to 
hit new all-time highs.  Volume has been pretty strong on the 
four-day rally, which helped push PH through its multi-month 
trend of lower highs.  The P&F chart shows a fresh quadruple-top 
breakout buy signal with a $76 target.

Chart=



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

ERTS $44.83 -1.61 - This looks like an entry point to consider 
bearish positions on ERTS.  Or traders could look for a new 
relative low under $44.50-44.00.  Such a move would break the 
neckline of its descending H&S pattern.

CI $72.01 +1.41 - CI is seeing some follow through on Friday's 
breakout over the $70.00 mark.  Watch the 200-week moving 
average.

FO $75.33 +0.53 - FO is breaking out over resistance at the 
$75.00 mark.
 

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DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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