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Daily Newsletter, Thursday, 10/07/2004

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The Option Investor Newsletter                Thursday 10-07-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Drug Interaction Warning
Futures Wrap: See Note
Index Wrap: Consumers pay down credit.  That's good isn't it?
Market Sentiment: Is this the beginning?


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      10-07-2004           High     Low     Volume   Adv/Dcl
DJIA    10125.40 -114.50 10240.95 10124.52 1.84 bln  869/2325
NASDAQ   1948.52 - 22.50  1970.26  1948.03 1.74 bln  961/2133
S&P 100   542.28 -  5.61   547.89   542.19   Totals 1830/4458
S&P 500  1130.65 - 11.40  1142.05  1130.46 
W5000   11047.92 - 41.88 11164.15 11045.44
SOX       403.36 -  2.80   410.53   402.78
RUS 2000  582.60 - 10.06   592.66   582.37
DJ TRANS 3341.87 - 46.90  3389.20  3340.94
VIX        14.50 +  1.22    14.66    13.32
VXO (VIX-O)14.56 +  1.56    14.59    13.37
VXN        20.59 +  0.82    20.75    19.65 
Total Volume 3,863M
Total UpVol  1,182M
Total DnVol  2,643M
Total Adv  2145
Total Dcl  5012
52wk Highs  398
52wk Lows    97
TRIN       1.14
NAZTRIN    0.61
PUT/CALL   0.86
************************************************************

Drug Interaction Warning
by Jim Brown

Warning, certain drug stocks may not be tolerated well 
by bulls. Serious negative reactions may occur. Limit
consumption to only those drug stocks that have reached
well know support levels. This could have been the label
for today's market as the drug induced stupor kept buyers
in bed for the day.

Dow Chart

 

Nasdaq Chart

 
SPX Chart

 

The excuse gaining maximum credibility today for the
drop in the markets was an attack on drug stocks. An
article in the New England Journal of Medicine called
into question the entire COX-2 class of arthritis drugs.
The article suggested that despite any negative evidence
to the contrary all drugs in that class are bad. The
article came under fire from multiple directions for
the generic conclusions and disregard for the facts. 
Still the three drug stocks in the Dow, PFE, MRK and
JNJ all dropped substantially and were responsible for
more than half the morning drop in the Dow. 

Accounting for the other half was disappointing 
economics, simple profit taking from the last weeks 
gains and fear of GE earnings tomorrow morning. The
economics started with the Monster Employment Index at
151. This was +6 points over the August level at 145 and
appeared to be normal seasonal hiring and not specifically
a continued increase in the trend. In August we saw a
+11 point spike and this month's seasonal gain was only
half of that spike. Despite the slowing rate of growth
the +6 points was significant. When coupled with the
strong employment components in several other reports
recently this suggests tomorrow's Jobs report could be
strong.

Jobless Claims fell back into the range we had seen
prior to the hurricanes at 335,000. The prior weeks
claims were adjusted higher to 372,000 and were seen
to be a direct result of the hurricanes. Continuing 
claims have continued to decline but the pace is slowing
and could suggest we have reached a level where hiring
and turnover have reached a point of equilibrium. 

The Manufacturers Alliance survey dropped to 75 for
the third quarter after three quarters of record highs.
Nothing moves higher forever and a drop or pause in
production was expected eventually. Even at 75 this 
is a strong indication of current growth. Shipments
remained high at 93 and New Orders only backed off
-1 point to 92. The weakness came from a drop in Back
Orders to 86 from 93 indicating manufacturers are
closing the gap. The Inventory component also shot
upward to 69 from 61 and the investment index fell 
to 69 from 75. Companies running at greater than 85%
capacity fell to 28% from 45%. Overall this report
showed continued expansion but a reduction in the
speed of that expansion. 

Oil continues exert pressure on consumers and that
pressure came in the form of a drop in Consumer Credit
by -$2.4 billion when an increase of +$5.9 billion was
expected. This was the largest drop in Consumer Credit
since Q4-1990 and is a clear indication consumers are
being hurt by high energy prices and are concerned 
about the future. We have been seeing a drop in sales
at various retail stores and numbers out today 
confirmed the drop in credit may continue. 

The headline Retail Sales number rose only +2.4% for
September and it was the second weakest gain for the
year. While weather and high gas prices combined to
knock about -1.0% from the total the calendar impact 
of Labor Day added +0.5%. Thompson First Call said 
that taking Wal-Mart out of the equation dropped the
headline number to only +1.9% growth. This compares
to +6.1% for 2003 and illustrates how the tax rebate
helped inflate the economy. In September discounters
saw +3.0% growth but department stores lost -0.8%,
apparel -0.4% and specialty stores lost -0.4%. Drug
stores gained +4.1% due to the rising cost of drugs
and the high floor traffic resulting in impulse sales.
Tight job markets, falling wages, higher benefit costs,
employers pushing more benefit expenses onto employees
and rising energy prices are all depressing retail 
sales. None of these factors are expected to improve
in the near future. 

Tomorrow we will get the September Jobs Report and 
the outlook is rosy, maybe too rosy. Expectations are 
calling for a +160,000 increase in jobs but that is
not the real attention getter. October is when the
Jobs numbers for the year are revised based on the
corrections to the monthly estimates as more info
becomes available. Based on a leaked internal memo
now making the rounds, source unknown, the street is
expecting another +288,000 jobs in the form of an
upward revision to prior numbers. Obviously if this
revision occurs and the September numbers are strong
the Democrats will lose a few more debate points for
Friday night. They can't complain that the revision
was moved to October for political purposes because
that date change happened in 2001 to better reflect
current conditions. The revisions prior to 2001 had
been made in February since 1991.

This expected jump in jobs by nearly 500,000 jobs has
been raising eyebrows and stock prices on the street
for the last week. This suggests that the market may
have gotten ahead of itself on the rumor and a sell
the news event could be in our future should the
expectations not come to pass. This could have been
a factor in our afternoon sell off on Thursday.

The morning sell off was initiated by the attack on
Pfizer in the New England Journal of Medicine. The
investment community is fresh off the massive Merck
drop from last week and funds were trying to decide
what to do with their MRK money now burning a hole
in their pocket. Pfizer had been looking like a
beneficiary from the VIOXX disaster and had seen a
six day gain on the news. Because the article took
a swipe at the COX-2 drugs in general there was a
knee jerk reaction to drug stocks in general. There
is no basis in the attack but investors dumped -84
million shares of Pfizer anyway. 

Personally I think this is a superb buying opportunity
on Pfizer. After the initial morning dip it rebounded
right back to its multiyear support level at $30. 
Pfizer was on TV on nearly every news channel claiming
numerous studies, one as large as 1.4 million patients
had not shown any indications of cardiac events. In
one specific blind study the subjects taking Celebrex
long term actually had fewer cardiac incidents than
those taking the placebo. Celebrex is the oldest COX-2
drug and as such has had many more studies done and
according to the FDA there is no incidence of cardiac
events. Several studies currently underway using 
Celebrex have been running longer than the 18 month
threshold where VIOXX failed and at dosages 2-4 times
the recommended dose with no indications of complications.
Over 31 million patients have taken Celebrex since it
was introduced in 1998.

Celebrex was on track to do nearly $3 billion in sales
in 2004. This is a big drug but only a drop in the
bucket to the $53 billion in revenue Pfizer will 
see this year. VIOXX was on track to hit $2.5 billion
in sales before being removed from the market. According
to surveys done this week 58% of those VIOXX patients
are switching to Celebrex. 38% to some other form of
treatment including Bextra, another Pfizer drug, and 
the rest going back to Ibuprofen or a similar over 
the counter drug. The survey found that pharmacies 
were scrambling to find enough Celebrex to fill the 
demand and pharmacy suppliers were paying premium 
prices to acquire large stocks of the drug. Rumors 
have customers trying to stockpile large quantities 
of the drug just to make sure they have it on hand 
if a shortage develops. With the jump in demand from 
58% of VIOXX users converting prescriptions, Celebrex
is on track to hit $5 billion in sales at little or 
no extra cost to Pfizer. If their drug trials currently
underway prove to prevent Alzheimer's and colorectal
cancer then $10 billion would be an easy target. I
believe this is a buying opportunity for Pfizer but
do your own research. I am an occasional Celebrex
user and for me it is a wonder drug and based on the
consumer hoarding reports I am not alone in that belief. 

The real reason we sold off today was not COX-2 drugs
$53 oil or weak economics. We sold off because we were
due and in those occasions the headline reasons are
just sound bites for reporters looking for an excuse.
If they wanted a reason there were plenty. Chipmakers
are still warning and earnings estimates for the quarter
are still falling. Taiwan Semiconductor, the worlds
largest chipmaker, said sales fell for the first time
in seven months and they warned they could continue 
to drop as demand falters. They expect oil prices to
filter through the global economy and depress demand
and earnings in 2005. The current S&P Q3 earnings are 
projected to be +12.5-13.5% with 4Q estimates now
below +15%. This alone is plenty of reason to take
cautious profits from the very strong rally. 

Oil hit $53 today and closed at an all time high of
$52.67 on continued supply concerns. Production from
the Gulf of Mexico is still down -1.4 billion barrels
per day from Ivan damage and will not be back online
for weeks. Nigeria is still a concern after a strike
put some production on hold. Home heating oil supplies
fell yesterday and demand is increasing as homeowners
try to beat the rush to fill tanks ahead of any coming
shortage. When given the choice of paying high prices
for gas and heating oil or not being able to buy it at
all, the high price option is quickly chosen with some
other retail purchase taking a back seat. 

Investors are no longer pouring funds into the markets
according to TrimTabs.com. In the week ended Wednesday
stock funds saw outflows of -$170 million compared to 
inflows of +$600 million in the prior week. These
numbers pale in comparison to the multi billion inflows
from early in September. Fear of October may be impacting
investor sentiment and seeing the markets back at multi
month highs may seem like a good place to be cautious. 

Another reason for the market weakness may be the 
growing election risk. Kerry has pulled ahead in some
polls and this produces even more risk for drug companies.
The CIA report today that Saddam had not produced weapons
of mass destruction for more than a decade was a serious
blow to the Bush campaign and Kerry wasted no time in
turning the news into a media event. Tomorrow night's
debate will turn into another Bush bashing event in
hopes of trying to leverage Kerry's current lead into
a winning margin. With only 26 days left in the campaign
the mud slinging will intensify for both sides. With the
broader surveys showing a dead heat we could see more 
caution appear in the markets. Given the heights we 
have seen this week it was only natural for some 
profits be taken off the table before the Jobs 
report and the debate.

The Dow took a serious hit for -114 points but 40+ 
points were due to the three drug stocks in the Dow.
Also dragging the Dow lower was a substantial drop in
MMM, UTX, HON, CAT and BA in front of the GE earnings
before the open tomorrow. Fears that the conglomerate
could express weakness in any of their individual 
areas drove investors to take profits. Each of those
stocks represent a subset of some GE business and 
risk is high. GE never misses earnings numbers but 
they do talk down future projections. Jeffery Immelt
said recently that growth in 2005 could be in the high
single digits. Previously he had projected double
digit growth in various divisions so it will be very
interesting to see what appears as official guidance
tomorrow. GE earnings are a proxy for the overall
economy and while no negative guidance is expected
caution was warranted.   

The Dow dropped from its opening level of 10240 to
close at the low of the day at 10125. Nearly 50 of
those points lost came in the last 30 min of trading
when investors bailed from those five Dow stocks
mentioned above. Even with the -114 point drop today
we are still trading above last Friday's support level
of 10050 and resting on the 50dma. While today's drop
was dramatic it was not material and only classifies
as simple cautionary profit taking along with a drug
induced headache. 

The Nasdaq held at support most of the day and it was
not until that closing sell cycle that 1955 broke and
it accelerated deeper into negative territory. However,
even at the 1948 close it only pulled back to yesterday's
lows. The Wednesday end of day buy program was erased
and we are right back in the range for the week. Again,
it was simply cautionary profit taking. The SOX barely
even budged after a couple of chip warnings and the 
comments out of Taiwan Semi. For the week the SOX has
been trading between 400-410 and it closed in range at
403 with only a -2.84 drop for the day. If the Nasdaq
selling was more widespread or on more substantial 
fears the SOX would have confirmed. Instead the SOX
appears to be confirming a lack of selling pressure
in techs. 

When determining real market performance it sometimes
helps to look at the Wilshire-5000. As the broadest
measure of the market it is not impacted by weighting
of several high profile stocks and as such gives a
clearer picture of overall market sentiment. The
Wilshire dipped only a tame -41 points today and
suggests the negativity was due to Dow imbalances
only. 

Wilshire Chart

 

The worst performer today was the Russell with a -10
point drop. The Russell had been on fire since Sept 
28th and rallied more than +30 points as end of quarter
contributions pushed it to within 7 points of resistance
at 600. October is small cap month and funds typically
pour the majority of their cash into the small caps in
hope they will turn into big caps in the coming year.
It is also the time when those funds that specialize
in small caps tend to take profits in those winners
who no longer fit the small cap growth model. 
Essentially those that became big caps are kicked out
in favor of the little guys with big prospects. This
pruning process tends to make the Russell volatile as
the higher cap stocks which are more heavily weighted
are sold. We saw some of that volatility today with
the -10 point drop breaking initial support and taking
back one third of the recent gains. 

For Friday I have mixed emotions. I know, you should
not trade on emotions but you know what I mean. The
SPX has pulled back to 1130 and strong support and a
likely place for a relief rally to occur should Jobs
be strongly positive and GE not spoil the party. I
personally have a bullish bias for tomorrow but it
all depends on the morning events. I believe the 
pullback today simply gave us some breathing room 
for both sides and took the pressure off the bulls.
Wednesday's close was just too close to very strong 
and very critical resistance. Trying to get a running
uphill start while on the side of a steep hill is a 
challenge. The pullback provided a resting point in
neutral territory to wait for events to clear. I am
not worried about Friday regardless of which direction
prevails. Next week's direction is more critical with
October one third over and the election only three 
weeks away. The Friday debate will be cussed and 
discussed in mini-debates by hundreds of on air 
reporters and countless surveys will be tabulated. 
Institutional investors will have to wade through the
political morass and decide if the prevailing candidate
can be elected and how it will impact their portfolio.
With October known as portfolio restructuring month 
we could see this activity suddenly reach a fevered 
pitch. Let's just hope it is positive for the markets. 

Enter Passively, Exit Aggressively. 

Jim Brown
Editor


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


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********************
INDEX TRADER SUMMARY
********************

Consumers pay down credit.  That's good isn't it?

One of the better arguments, of which I don't think you'll ever 
get agreement on, is if it is a positive, or a negative that 
consumer credit rises or falls in any particular month.

Americans are often criticized for carrying too much debt, 
especially on those little thin plastic things called credit 
cards.

I still remember my grandfather telling me (at the ripe age of 
about 8 years old), "Jeff, other than your house, if you can't 
afford to pay cash for what you want to buy, you probably can't 
afford it."  

I think that was the lecture he gave me after I asked him if I 
could borrow 20-cents for a candy bar at the drug store.  

It was a bearish day on Wall Street, where stocks extended losses 
in the last hour of trade after the Fed said consumer, non-
mortgage credit fell by $2.4 billion to $2.038 trillion in 
August, which was a shocker to economists' forecast of a $5.5 
billion increase.

The decline was led by a $3.4 billion drop in revolving credit 
(credit card debt) which fell by a sharp $3.3 billion, the 
largest monthly decline since April's $5.0 billion.  Meanwhile, 
nonrevolving credit (student loans, auto, etc.) rose a fractional 
$900 million.

Hmmmm.... for those of us who have been monitoring Treasury 
yields, we can probably make the tie that consumers refinanced 
some mortgages in August as the benchmark 10-year yield ($TNX.X) 
slipped back from its May-June highs of 4.8%.  After all, in 
March (see April's $5.0 billion decline in consumer credit), the 
benchmark 10-year Treasury yield ($TNX.X) was just starting to 
rise from roughly 3.8% (refinance that mortgage) where in April, 
a prudent consumer probably paid down some of those revolving 
credit card balances that carry upwards of 9% to 18% annual 
rates.

The negative of paying down those revolving credit balances?  You 
got it!  Consumer's could have spent the money and helped fuel 
economic growth!

The good news?  Consumer should now have some "available credit" 
to run up in the months ahead.  Roughly $3.4 billion according to 
the Fed.

You see, there will never be agreement on this topic.

Aha!  So that puts some focus on tomorrow's nonfarm payroll 
figures (nice transition here) and average hourly earnings, which 
economists are forecasting to rise 0.2% from August's 0.3% gain.

We'll get all these fun figures before the opening bell.  The 
headline number is the September nonfarm, where economists' look 
for the economy to have added 150,000 new jobs, after adding 
144,000 in August.  August's figures, as well as prior months 
figures can be revised, and there have been some good points made 
that revisions will be higher.

The average workweek is expected to decline to 33.7 hours from 
August's 33.8, where since the beginning of the year, the average 
workweek has been bound between 33.6 hours and 33.8.

CNBC's Kudlow & Cramer had James Cramer looking for an upside 
surprise with the thought that the energy industry had stepped up 
hiring in the energy-rich states of Texas and California.  

During and after hurricanes pummeled parts of Florida, some 
economists' thought hiring from the construction and utility 
sectors could see a hefty increase as demand for labor to clean 
up hurricane-related damage takes place.

We may have seen some of that today, when weekly jobless claims 
fell to 335,000, which was below economists' forecast of 355,000.

I'll try and dig through tomorrow morning's nonfarm payroll 
figures and see if there are any special notes as to "why" the 
numbers came out as they did.

Market Snapshot / Internals - 10/07/04 Close

 

From 12:00 to 03:00, we need a magnifying glass to look for any 
change, but in the final 45-minutes of trade, buyers vanished and 
the major indices finished at their lows of the session.

Sell side volume doesn't look particularly heavy, as TRIN was 
little budged.  Meanwhile the VIX.X popped above its WEEKLY Pivot 
for the first time this week to close at a session high.  
Sniff..... A little option action into next week's expiration?

By the close, it was the Nov. 1,175 calls that turn up as the 
most active at 10,838 contracts and open interest of 13,820, 
where the average h/l/c price was $4.50 and last trade of $4.10.  
Looks like a premium seller to me, where the bet is that the SPX 
isn't going to trade much above 1,175 by next month's expiration.  

The Oct. 1,100 put (9,747 : 49,470) and Oct. 1,125 calls (8,252 : 
19,546) were 2nd and 3rd-most active.  Both of these contracts 
were up more than 125% from yesterday's close.  

U.S. Market Watch - 10/07/04 Close

 

Today's "top story" was the question of whether or not its the 
COX-2 inhibitor of many pain relievers that may cause a higher 
risk of heart attack in some patients, or is it Merck's Vioxx?  I 
read some articles today that date back several months regarding 
COX-2 inhibitors, and I cannot come up with any conclusive 
evidence that COX-2 is at the root of concern.  However, the 
uncertainty is present, as Merck's Vioxx has been studied longer 
than any of the other COX-2 inhibitor drugs (as far as I could 
tell), and that is what raises some doubt/speculation on just 
what scientists know for sure about extended use.

Bottom line right now, as I see it, is that nobody really knows 
for certain, and if they do, they aren't talking about the 
ABSOLUTE known negatives of COX-2 inhibitors.

While Genentech (NYSE:DNA) $47.55 -5.37% was weak after 
yesterday's quarterly earnings report, I have to think the 
broader weakness in the group may stem from a growing debate on 
just what the Food and Drug Administration should be doing, or 
should have been doing when it approved Merck's Vioxx.

The FDA has been chastised for taking too long to approve some 
drugs that could potentially save lives, where the FDA seems to 
drag its feet in the approval, or expediting process.  However, 
the recent news about Vioxx now has investors, and the general 
public, wondering what else is out there that we may not know is 
potentially more harmful to us than what we're trying to cure, or 
treat.

For biotechnology, one concern could be that the approval process 
takes longer, thus more costly to develop a drug that could 
eventually win approval.  

For me, biotech is a difficult "buy" right now, and as one 
institutional analyst that follows the drug/biotech group said 
today, even a large drug maker like Merck (MRK) and recent price 
action shows some of the risks of investing in drug/biotech.

A couple of days ago, some analysts were cautiously bullish on 
Merck (MRK) as the company had a hefty cash position and a nice 
4% dividend yield.  Now we're seeing some lawsuits being filed 
against the company and that 4% dividend yield is now 4.9% as the 
stock has fallen an additional 6% from its September gap down 
close of $33.00.

BIG test for BIG tech?  The SOX.X and NWX.X showed some relative 
strength today, but the MSH.X, while fractionally green during 
parts of today's session, remains below its 200-day SMA.  

Keep an eye on these buggers.  The NASDAQ's 10-day NH/NL ratio 
was able to reverse back up into a column of X, and suggests some 
intermediate-term bullish leadership is still holding tough.  
Since January, we've been used to seeing the NASDAQ's 10-day 
NH/NL ratio turn south and keep heading south when it moves 
lower.  

Still, I remember taking a few exams in high school, which I 
spent about 30-minutes studying for, and when I looked at the 
first question on the BIG test, I wasn't overly confident of my 
eventual score as that first question was a tuffy.  Of the 35 
MSH.X components, Intel (INTC) $21.24 +0.52%, Oracle (ORCL) 
$12.29 +0.42% and Motorola (MOT) $18.80 +0.26% managed to have 
the bullish answer.  Electronic Arts (ERTS) $45.62 -2.81%, 
Juniper Networks (JNPR) $25.20 -2.66% and EMC Corp. (EMC) $12.35 
-2.6% got it wrong in today's session.

The Morgan Stanley Health Provider Index (RXH.X) was the only 
sector to finish green, with Manor Care (HCR) $31.41 +5.36% and 
LifePoint Hospitals (LPNT) $31.50 +3.82% doing most of a bull's 
work, on negative breadth of 9 to 4.  Community Health (CHY) 
$27.93 was unchanged.

Pivot Matrix - 

 

The Dow Industrials (INDU) sits right on its WEEKLY Pivot and 
trying to curl higher 50-day SMA, but close back below its 
MONTHLY Pivot, where a continued slide could have other indices 
gravitating back toward their MONTHLY Pivots.

In what could be a volatile session tomorrow, the INDU sits smack 
dab between DAILY S2 and DAILY R2, as well as correlative WEEKLY 
S1 and WEEKLY R1.  Keep in mind the DIA "Max Pain" Theory of $101 
($1 increments) if you're looking to trade, or hold October 
expirations.

OEX "Max Pain" is 540 (5-point increments), SPX is 1,120 (5-point 
increments), NDX is 1,400 (25-point increments), QQQ is $35 ($1 
increments), and the SOX.X is 380 (5-point increments).  

We make note of the "Max Pain" levels, and would want to know 
where they are, especially if we see unusual VIX.X action.

Jeff Bailey


****************
MARKET SENTIMENT
****************

Is this the beginning?
- J. Brown

Could this be the beginning of a new leg lower in the market's 
current trading pattern?  Bulls had hoped the pattern was broken 
earlier this week when the S&P 500 index broke above its 
descending trendline of lower highs.  Yet since Monday's rally 
the SPX has churned mostly sideways between 1130 and 1140.  The 
NASDAQ's strength and new two and half month highs were also 
encouraging but again the index has spent the week churning 
sideways mostly under its simple 200-dma.   The Industrials fared 
even worse with an early high on Monday and another lower top 
Wednesday-Thursday.  

Given the sentiment and fear indicators like the ARMS index and 
the VIX/VXO it's not a surprise to see stocks turning lower.  The 
VIX/VXO has been screaming that the markets are at a short-term 
top for days and the ARMS index or TRIN has seen its short-term 
moving averages hit bearish reversal levels in the last couple of 
sessions.  

Of course if you're an episodic or news-driven trader then 
today's weakness has more to do with drugs, oil and jobs than 
technical indicators.  Experienced traders try and take a 
balanced approach and absorb it all.  

The drug sector has surely been a drag on stocks.  Merck's 
dramatic news last week to pull their Vioxx drug off the shelves 
hit the group hard.  Earlier this week news that Chiron would not 
deliver any flu vaccines was another surprise.  Now new reports 
are out today suggesting that Pfizer's Celebrex, the rival to 
Vioxx, may also raise the risks for heart attacks.  While PFE 
should have the studies to prove their product is safe the stock 
sank anyway on the initial news and pulled the drug sector lower 
again.  

Rising oil prices certainly don't help investor confidence.  
Crude oil has hit its third record high in a row over $50 a 
barrel.  Today oil futures crossed $53 before settling at $52.67.  
The oil story has been beat to death even though it's still a 
factor so I won't go into detail on why it's bad for our economic 
health.

Investors are also focused on tomorrow's jobs report.  Wall 
Street estimates for the non-farm payrolls number is 140K to 
150K.  The problem is that September's number could be skewed 
downward by the recent rash of hurricanes.  Four hurricanes in 
six weeks can take its toll on the economy.  Therefore there will 
be a lot of eyes watching to see if the July and August numbers 
are revised upward to support a rising trend of job growth.  If 
the job number is above 150K then the Bush camp is going to use 
it as fuel.  If the number is under 140K then it will be gun 
powder for the Kerry camp.

Meanwhile the Q3 earnings season has begun.  Dow-component Alcoa 
(AA) has already announced and Dow-component General Electric 
(GE) reports tomorrow.  Wall Street is looking for 38 cents a 
share from GE and analysts are eager to hear positive comments 
about GE's forecast for 2005.  

-----------------------------------------------------------------

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9230
Current     : 10125

Moving Averages:
(Simple)

 10-dma: 10128
 50-dma: 10124 
200-dma: 10298



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  990
Current     : 1130

Moving Averages:
(Simple)

 10-dma: 1122
 50-dma: 1106
200-dma: 1119



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1301
Current     : 1455

Moving Averages:
(Simple)

 10-dma: 1430
 50-dma: 1388
200-dma: 1441



-----------------------------------------------------------------

CBOE Market Volatility Index (VIX) = 14.50 +1.22
CBOE Mkt Volatility old VIX  (VXO) = 14.56 +1.56
Nasdaq Volatility Index (VXN)      = 20.59 +0.82


-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume

Total          0.86        804,871       694,062
Equity Only    0.75        624,556       467,848
OEX            0.77         48,226        37,137
QQQ            1.70         54,479        92,781


-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          66.3    + 0     Bear Correction
NASDAQ-100    47.0    + 0     Bull Alert      
Dow Indust.   56.6    - 3.3   Bear Correction
S&P 500       65.2    + 0.8   Bear Correction
S&P 100       62.0    - 1     Bear Correction


Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend


-----------------------------------------------------------------

 5-dma: 0.69
10-dma: 0.93
21-dma: 0.95
55-dma: 1.11


Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.


-----------------------------------------------------------------

Market Internals

            -NYSE-   -NASDAQ-
Advancers     680       895
Decliners    2112      2101

New Highs     100        52
New Lows       22        33

Up Volume    470M      697M
Down Vol.   1367M     1023M

Total Vol.  1849M     1733M
M = millions


-----------------------------------------------------------------

Commitments Of Traders Report: 09/28/04

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

The most recent data doesn't show a lot of movement.  Commercial
traders upped their short positions a bit so they remain net
bearish.  Small traders didn't do much maneuvering and remain
net bullish.

Commercials   Long      Short      Net     % Of OI
09/07/04      415,952   426,342   (10,390)   (1.2%)
09/14/04      442,049   469,982   (27,933)   (3.0%)
09/21/04      404,746   425,560   (20,814)   (2.5%)
09/28/04      404,773   434,441   (29,668)   (3.5%)

Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   23,977  - 12/09/03

Small Traders Long      Short      Net     % of OI
09/07/04      157,732   130,817    26,915     9.3%
09/14/04      167,310   126,513    40,797    13.9%
09/21/04      134,943   108,036    26,907    11.1%
09/28/04      135,317   107,173    28,144    11.6%

Most bearish reading of the year:  (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02


E-MINI S&P 500

The e-minis always see a lot of action and this time we see
the commercial traders upping both their longs and shorts in
almost equal percentage moves so "smart" money remains bearish.
Small traders also upped their longs and shorts and remain
strongly net bullish.

Commercials   Long      Short      Net     % Of OI 
09/07/04      371,111   600,593   (229,482)  (23.6%)
09/14/04      377,643   586,139   (208,496)  (21.6%)
09/21/04      213,014   397,844   (184,830)  (30.2%)
09/28/04      226,020   420,714   (194,694)  (30.1%)

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:  133,299   - 09/02/03

Small Traders Long      Short      Net     % of OI
09/07/04      286,194     80,075   206,119    56.2%
09/14/04      289,155     81,314   207,841    56.1%
09/21/04      256,315     60,275   196,040    61.9%
09/28/04      262,501     68,255   194,246    58.7%

Most bearish reading of the year: (77,385)  - 09/02/03
Most bullish reading of the year: 449,310   - 06/10/03


NASDAQ-100

The NDX futures aren't seeing much action from the commercials.
They did up their short positions a bit after the previous 
periods significant drop.  Yet professional traders remain
net bullish on the NDX.  In contrast the small trader remains
heavily net bearish but not to the extreme they were a week
ago.  

Commercials   Long      Short      Net     % of OI 
09/07/04       51,814     44,179     7,635    7.9%
09/14/04       64,282     59,808     4,474    3.6%
09/21/04       54,530     30,827    23,703   27.7%
09/28/04       55,045     32,319    22,726   26.0%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  25,160   - 06/01/04

Small Traders  Long     Short      Net     % of OI
09/07/04       16,817    12,561     4,256    14.5%
09/14/04       36,372    28,584     7,788    12.0%
09/21/04        7,417    25,821   (18,404)  (55.3%)
09/28/04       10,078    22,917   (12,839)  (38.9%)

Most bearish reading of the year: (20,270) - 06/01/04
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

Interesting... commercial traders didn't make many adjustments
but small traders did.  We're seeing small traders hedge their
bets as their longs and shorts grow closer together.  This 
has significantly reduced their bearish outlook on the Dow.

Commercials   Long      Short      Net     % of OI
09/07/04       29,128    24,011    5,117       9.6%
09/14/04       41,951    34,486    7,465       9.7%
09/21/04       30,816    27,200    3,616       6.2%
09/28/04       29,714    26,877    2,837       5.0%
 
Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
09/07/04        5,041     8,656   (3,615)   (26.4%)
09/14/04        8,121    14,425   (6,304)   (27.9%)
09/21/04        4,467     6,748   (2,281)   (20.3%)
09/28/04        5,143     5,988   (  845)   ( 7.6%)

Most bearish reading of the year: (12,106) -  3/09/04
Most bullish reading of the year:   8,523  -  8/26/03


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The Option Investor Newsletter                 Thursday 10-07-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: MHK
Dropped Puts: None
Call Play Updates: CMI, GDW, GIVN, IR, KMRT, LMT, OSIP, PH
New Calls Plays: None
Put Play Updates: LLY, FLIR, SEPR
New Put Plays: IVGN, WHR


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

Mohawk Industries - MHK - cls: 76.98 chg: -2.30 stop: 77.99

Yuck!  MHK has reversed from Friday's bullish breakout over 
$80.00 to today's bearish breakdown under support at $78.00.  We 
couldn't find any specific news for today's decline but we 
suspect it is sympathy pains from the 3.9 percent drop in the 
housing sector.  MHK looks ready to retest the $75.00 level as 
support.  Needless to say we have been stopped out at $77.99.

Picked on October 03 at $80.35
Change since picked:    - 3.37
Earnings Date         10/21/04 (confirmed)
Average Daily Volume =     355 thousand
Chart =



PUTS:
*****

None


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********************
PLAY UPDATES - CALLS
********************

Cummins Inc - CMI - close: 73.87 change: -1.20 stop: 69.99     

Shares of CMI did not escape the market-wide sell-off on Thursday 
but they didn't do too bad.  The stock slipped about 1.6 percent 
on volume that was less than half the average, which means it was 
probably a lack of buyers more than an over abundance of sellers.  
Keep an eye on the stock.  Shares could find support at $72 and 
$70 but we'd obviously prefer to see CMI bounce from $72.  No 
change in our stop loss.  

Picked on September 19 at $70.99
Change since picked:      + 2.88
Earnings Date           07/23/04 (confirmed)
Average Daily Volume =       724 thousand
Chart =


---

Golden West Financial - GDW - cls: 113.49 chg: +0.04 stop: 109.95*new*

GDW is holding up pretty well.  On a day that most of the market 
turned lower GDW still managed to close in the green.  A reader 
emailed in this morning when GDW was over $114 and asked if we 
still planned to exit near our suggested target in the $116 
region.  Right now given the current market environment our 
answer would be yes.  If GDW reaches $115.50 or above we'd 
probably exit.  Keep an eye on the $111 level.  If GDW breaks 
$111 we're going to turn defensive.  We are raising our stop loss 
to $109.95.

Picked on September 30 at $110.95
Change since picked:       + 2.54
Earnings Date            07/20/04 (confirmed)
Average Daily Volume =        512 thousand
Chart =


---

Given Imaging - GIVN - close: 42.04 change: -0.36 stop: 37.00

There's not much happening in shares of GIVN the last couple of 
days.  Then again that may be a good thing.  The stock dipped 
earlier in the session (Thursday) but pared its gains by the 
close for a 36-cent loss.  Overall the action over the last two 
sessions has been sideways so we're not complaining, especially 
today.  If the stock dips consider buying a bounce from $40.00.

Picked on October 04 at $41.26
Change since picked:    + 0.78
Earnings Date         10/27/04 (unconfirmed)
Average Daily Volume =     247 thousand
Chart =


---

Ingersoll-Rand - IR - close: 69.75 change: -0.44 stop: 67.49

Uh-oh!  This looks like trouble.  IR has not been able to hold on 
to yesterday's bullish breakout over the $70.00 mark.  Granted 
today's 44-cent drop is relatively minor to the declines in the 
Dow Industrials it remains a warning sign.  Readers can watch for 
a potential bounce from $68.00 but currently we would not suggest 
new positions until IR traded back above $70 and then again may 
be wait for IR to trade over $70.50. 

Picked on October 06 at $70.19
Change since picked:    - 0.44
Earnings Date         10/21/04 (confirmed)
Average Daily Volume =     1.2 million 
Chart =


---

Kmart Holdings - KMRT - close: 87.75 chg: +0.53 stop: 84.99

Our aggressive call play in KMRT is holding up.  Well, it may not 
be up but it's maintaining its trend of higher lows.  The 
lackluster same-store sales data from the retail sector today was 
not very encouraging.  We would not consider new bullish 
positions until KMRT traded back above the $90.00 mark.  

Picked on October 04 at $90.53
Change since picked:    - 2.78
Earnings Date         08/16/04 (confirmed)
Average Daily Volume =     2.7 million 
Chart =


---

Lockheed Martin - LMT - close: 56.26 change: -0.05 stop: 53.50

Defense stocks were not able to dodge Thursday's market sell-off 
and LMT followed the DFI defense index lower.  Fortunately, LMT 
was dragging its feet as shares slipped just 5 cents or 0.08 
percent compared to the DFI's 1.25 percent decline.  As long as 
LMT trades above $55.50 we're going to feel okay with bullish 
positions.  If shares crack the simple 10-dma we're going to get 
cautious.  

Picked on October 01 at $56.01
Change since picked:    + 0.25
Earnings Date         07/27/04 (confirmed)
Average Daily Volume =     1.7 million 
Chart =


---

OSI Pharma - OSIP - close: 62.00 change: -1.62 stop: 59.99

Hmmmm... what to do now?  The BTK biotech index dropped 3.5 
percent as investors did some profit taking in biotech giant 
Genentech (DNA) after the company announced earnings recently.  
The DRG drug index fell another 2.7 percent after PFE lead the 
group lower over concerns that Celebrex may also raise the risks 
of heart disease.  OSIP has been weathering much of the storm 
with only minor sideways chop.  That was until today.  Thursday 
OSIP slipped 2.5 percent to test very minor support at $62.00.  
We suspect that OSIP could retest the $60.00 region as support.  
Therefore we would not suggest any new positions until we see 
OSIP dip toward $60 and begin to bounce.  Watch those stops.  
Ours is immediately under $60.00.

Picked on October 03 at $63.45
Change since picked:    - 1.45
Earnings Date         08/10/04 (confirmed)
Average Daily Volume =     1.6 million 
Chart =


---

Parker Hannifin - PH - close: 62.00 chg: -0.78 stop: 59.49

PH is a recent addition to the play list and shares soared to new 
highs at $63.90 today before finally succumbing to the market's 
downward slide.  Volume today was very big and that's a concern 
because it looks like distribution.  If this is a short-term top 
then PH should dip back toward the $60.00 level.  We suggest 
patience.  Readers can wait on the sidelines and look for PH to 
dip to $60 and then consider buying a bounce.

Picked on October 06 at $62.78
Change since picked:    - 0.78
Earnings Date         10/19/04 (confirmed)
Average Daily Volume =     719 thousand
Chart =


**************
NEW CALL PLAYS
**************

None


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*******************
PLAY UPDATES - PUTS
*******************

Eli Lilly & Co - LLY - close: 59.56 chg: -1.91 stop: 62.51     

Look out below!  LLY slid another 3.1 percent and under 
performing the DRG drug index's 2.7 percent decline.  Drug stocks 
took it on the chin again today after new reports surfaced that 
PFE's Celebrex drug may also increase risks of heart disease - 
the same risks that forced MRK to pull its Vioxx drug off the 
market.  The news about Celebrex may or may not be true and PFE 
appears to have the studies to prove that Celebrex is safe.  
Whatever the case LLY joined the drug stock sell-off and fell 
through and closed under round-number, psychological support at 
$60.00 on heavy volume.  This is the second time we've had an 
opportunity to take profits at our initial profit target of 
$60.00.  We are suggesting readers do the same again today.  
However, we're going to keep the play open and target a move to 
$58.00-56.50.  

Picked on September 22 at $63.92
Change since picked:      - 4.36
Earnings Date           07/22/04 (confirmed)
Average Daily Volume =       3.1 million 
Chart =


---

FLIR Systems - FLIR - close: 58.16 chg: -1.26 stop: 62.51

FLIR isn't the fastest moving stock but the downtrend is still 
intact.  The stock spent the last few sessions trying to bounce 
back above the $60 level but failed.  Today's 2.12 percent drop 
looks like a new entry point.  Our one concern is the simple 100-
dma just under $57.  Our short-term target remains $55.

Picked on September 29 at $59.35
Change since picked:      - 1.19
Earnings Date           10/20/04 (confirmed)
Average Daily Volume =       577 thousand
Chart =


---

Sepracor Inc - SEPR - close: 47.35 chg: -0.98 stop: 52.01

We would have liked to have seen a bigger and more negative 
reaction in shares of SEPR as the drug and biotech indices march 
lower today.  Yet we won't complain about the 2 percent drop in 
shares of SEPR.  The stock is back under the cloud of moving 
averages and is now testing minor support at $47.00.  Our target 
remains the simple and exponential 200-dma's just north of $43.

Picked on September 22 at $48.94
Change since picked:      - 1.59
Earnings Date           07/13/04 (confirmed)
Average Daily Volume =       1.8 million 
Chart =


*************
NEW PUT PLAYS
*************

Invitrogen - IVGN - close: 53.83 chg: -1.84 stop: 56.25

Company Description:
Invitrogen Corporation provides products and services that 
support academic and government research institutions and 
pharmaceutical and biotech companies worldwide in their efforts 
to improve the human condition. The company provides essential 
life science technologies for disease research, drug discovery, 
and commercial bio-production. Invitrogen's own research and 
development efforts are focused on breakthrough innovation in all 
major areas of biological discovery including functional 
genomics, proteomics, bioinformatics and cell biology -- placing 
Invitrogen's products in nearly every major laboratory in the 
world. Founded in 1987, Invitrogen is headquartered in Carlsbad, 
California and conducts business in more than 70 countries around 
the world. The company globally employs approximately 4,000 
scientists and other professionals.
(source: company press release)

Why We Like It:
Investor expectations are already diminished for IVGN because the 
company issued an earnings warning back in July when it reported 
its Q2 numbers.  The stock managed to rally back to the bottom of 
its gap down in September but couldn't break into the gap.  Now 
shares are sinking in a trend of lower highs and lower lows as 
the BTK biotech index begins to turn lower from overbought levels 
and the DRG drug index sinks under bad news from heavy weights 
like MRK and PFE.  IVGN's breakdown under the $55 and $54 levels 
on Thursday looks like a new bearish entry point.  Short-term 
technicals like the RSI and stochastics are negative and its MACD 
is in a new sell signal.  We're going to set an initial target of 
$50.00 but we suspect that IVGN could trade lower.

Suggested Options:
We are going to suggest the November puts even though we do not
plan on holding over the October earnings report.

BUY PUT NOV 55 IUV-WK OI=244 current ask $3.50
BUY PUT NOV 50 IUV-WJ OI=662 current ask $1.45

Annotated Chart:

 

Picked on October 07 at $53.83
Change since picked:    - 0.00
Earnings Date         10/21/04 (unconfirmed)
Average Daily Volume =     1.5 million 
Chart =


---

Whirlpool - WHR - close: 59.03 change: -1.27 stop: 61.05

Company Description:
Whirlpool Corporation is the world's leading manufacturer and 
marketer of major home appliances, with annual sales of over $12 
billion, 68,000 employees, and nearly 50 manufacturing and 
technology research centers around the globe. The company markets 
Whirlpool, KitchenAid, Brastemp, Bauknecht, Consul and other 
major brand names to consumers in more than 170 countries.
(source: company press release)

Why We Like It:
We like WHR as a put candidate for its relative weakness.  The 
stock has been slowly sinking for months and after several weeks 
of consolidating sideways it looks ready for another leg down.  
That's especially true with the three-week trend of lower highs 
and the breakdown under support at $60.00.  Investors are worried 
that the rising cost of steel and raw materials are going to 
impact earnings from appliance makers like WHR.  While WHR has 
recently settled legal action with its steel supplier Ispat 
shares of WHR are still sinking.  The P&F chart on WHR is bearish 
with a $53 target.  We're only going to target a drop toward $55, 
where WHR appears to have potential long-term support.

Suggested Options:
We are going to suggest the November puts even though we do
not plan to hold over the October 20th earnings report.

BUY PUT NOV 60 WHR-WL OI= 575 current ask $3.00
BUY PUT NOV 55 WHR-WK OI= 182 current ask $1.00

Annotated Chart:

 

Picked on October 07 at $59.03
Change since picked:    - 0.00
Earnings Date         10/20/04 (confirmed)
Average Daily Volume =         thousand
Chart =



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

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The Option Investor Newsletter                 Thursday 10-07-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: A handful of bearish candidates
Traders Corner: SUBSCRIBER MAIL + FLAG PATTERNS 
Combos/Straddles: Make It Your Business To Make It Your Business 

**********
WATCH LIST
**********

A handful of 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.
___________________________________________________________________


Zimmer Holdings - ZMH - close: 75.70 change: -2.40

WHAT TO WATCH: We came very close to adding ZMH to the play list 
tonight as a put candidate.  The stock has been struggling under 
resistance at $80.00 and its simple 100-dma. for more than two 
weeks before the recent declines.  Now ZMH has broken through its 
simple 200-dma and looks poised to breakdown through the $75.00 
level.  We decided to wait because the $75 level is underpinned 
by its simple 50-dma and the exponential 200-dma.  Plus, its P&F 
chart is still bullish.  However, in contrast the MACD is bearish 
with a fresh sell signal.  Watch for the breakdown under $75 and 
target $70.

Chart=


---

Baush & Lomb - BOL - close: 65.14 change: -1.60

WHAT TO WATCH: It looks like trouble for BOL shareholders.  The 
stock is looking tired and it just broke down through technical 
support at its simple 50-dma and it looks ready to break down 
under round-number, psychological support at $65.00.  Should this 
occur look for BOL to retest technical support at its simple 200-
dma currently near $61.

Chart=


---

Coca-Cola - KO - close: 40.12 change: -0.78

WHAT TO WATCH: This may be a bearish entry point on KO again.  
The stock has been struggling with the $41 level lately and 
today's decline looks like a failed rally at $41 and a bearish 
engulfing candlestick.  If the Dow Industrials continue to sink 
then KO may not only follow but help lead the way lower.  The P&F 
chart is bearish with a $26 target. 

Chart=


---

Apollo Group - APOL - close: 71.90 change: -2.05

WHAT TO WATCH: The recent bounce back above the $75 mark is 
failing and APOL has now broken minor support at the $72 level.  
We feel that readers can keep APOL on their personal watch list 
for a drop under round-number, psychological support at $70.00.  
The P&F chart is currently bullish but a drop under $71 should 
actually reverse that into a new sell signal.  

Chart=


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

MTB $99.25 +0.59 - We're still watching MTB for a breakout over 
$100.  Today's move over $99 produced a new high!

GENZ $52.39 -1.74 - GENZ is looking very similar to the BTK 
biotech index.  Both are rolling over from overbought levels.  
GENZ could test the $50 level soon.


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**************
TRADERS CORNER
**************

SUBSCRIBER MAIL + FLAG PATTERNS
By Leigh Stevens
lstevens@OptionInvestor.com


OIN SUBSCRIBER - 
"How much of Friday's action (10/1/04 strong advance) in the 
market do you figure was just end of the quarter window dressing? 
It seems that the end of a month and beginning of another when 
fund managers put new money to work has had a positive impact on 
the market, especially with low volume levels. The end of a 
quarter, the combination of new money going to work and window 
dressing by fund managers would have a greater impact on the move 
in the market, at these volume levels. 

I could also see how this might spook some shorts into covering." 

RESPONSE – 
It's difficult to quantify how much of this past Friday's strong 
rally, in the face of record high oil prices, was due to buying 
on the first day of the new quarter - "window dressing" of course 
refers to portfolio managers buying in the last day of the 
quarter to "dress up" their portfolios.  

It seems that yes, buying possible most related to the first day 
of a new quarter, helped set off a scramble to cover shorts, 
especially as prices took out the prior rally high - but again, 
it's nearly impossible to quantify these things or entirely 
understand the rationale sometimes of professional money 
managers. There were some bullish reports on the chip cycle also.

We can look at things like the block trading activity to see if 
there was greater than average institutional activity to see how 
much fund influence there was. Institutional fund managers do 
tend to follow each other into the market.  Not wanting to under-
perform the market (averages) compels them to put more money to 
work in equities when there are large surges like this last one.  
As they take a long view, things like near-term political 
uncertainty, sharp increases in energy prices and the like may at 
times take a back seat to more objective things like assessment 
of earnings growth trends and potential.    

There could have been a big buy program being worked - "buy 
program" here meaning, that some monster fund decided to simply 
up its percentage in stocks (reduce cash) and a broker-dealer was 
buying blocks of stocks during the day and toward the close to 
get this done for such a fund or funds. As you say, in a low 
volume situation, this tends to be magnified. 

The first day of new quarter could have some favor for timing in 
carrying out such a buy program(s).  With tech underweighted in 
many portfolios and with the JP Morgan report on their thinking 
that the semiconductor stocks/business had bottomed out, Nasdaq 
had the biggest move.  

In a certain way, I like unexpected action, as I can not only be 
WRONG! but learn from the times when the market just does some-
thing rather unexpected or not easily explained by the "known" 
fundamentals - this takes me back to see perhaps what I "missed" 
in technical patterns and indicators if I didn't see it coming.  

The technical aspects will usually highlight that the market is 
ready to rally, but won't tell you "why" - this often comes out 
later so to speak.  

OIN SUBSCRIBER - 
"You said in your last Sunday Index summary (10/3/04) that the 
way it looked to you, both oil and the market would go up I think 
you said from 50 to 52 next. How did you predict oil to keep 
going up when 50 seemed so high already?  I also thought that if 
oil kept going it would have to bring stocks down.  Oil touched 
53 today and which finally seemed to push stocks down."  

RESPONSE: FLAG PATTERNS - 
Oil was an easy prediction I guess based on the bullish flag 
pattern that I was seeing on the November futures chart – 
actually, it had a projection to around $54 but 52 was an easy 
and snap answer.  This leads me into a discussion about flag 
patterns, which we see on stock charts a lot and somewhat less on 
index charts – we also have to loosen up our interpretation of 
what a flag is. 

A flag pattern is basically a certain type of minor consolidation 
of the current trend that, when outlined on a bar or candle 
chart, traces out a slope that is in the opposite direction of 
the trend. 

A flag, sometimes also called a pennant when the flag gets 
triangular, can be bullish OR bearish; Bull Flags, Bear Flags. 

Bull flags are when the trend is up or has just started up, 
followed by a pullback when prices fall some. Such a counter-
trend decline when outlined has the appearance of a flag that 
slopes downward; i.e., a "bull flag".  When the trend is down, a 
consolidation will tend to rebound a bit, forming an upward 
sloping flag; i.e., a "bear flag".  

This question started about my prediction of $52 oil when it was 
at 50, so here's that chart below, which has a bull flag 
outlined.  A flag pattern is usually (not always) considered to 
have started if there is first a spurt, a bigger than usual move 
– this makes the so-called "flagpole".  

Next comes a pullback of a few days; or any trading intervals 
depending on the type chart; e.g. hourly, weekly, etc.  Drawing 
two parallel lines through the highs and lows tends to outline 
the shape of a DOWN-ward sloping flag.      


 

To complete this bull flag, a next rally comes along that pierces 
the upper line of the flag – the next advance will often then be 
equal to the distance of the flagpole (first short spurt), added 
to where the rally penetrated the top line of the flag. This 
gives the chart objective (above) of $54 on November Crude Oil.  

Flag patterns, are pretty common in the commodities markets and 
have a lot of predictability.  That is, they signal reliably that 
the trend is continuing.  Valuable to see the next price swing 
coming!

A Bear Flag example – 

Several consolidations that looked like flag type patterns are 
shown below on the S&P 500 (SPX) chart in late-99/early 2001 – 

You'll notice that two of these flag patterns have the initial 
spurt that looked a lot like a flagpole. However, flag patterns 
that followed, did not look quite like the others.


 

These OTHERS, while lacking an initial spurt, fit the definition 
of a flag as – which is the MAIN thing – the outline of the highs 
and lows form a pattern that slopes AGAINST the direction of the 
trend that preceded the flag formation.  

Again, its handy to see when rallies are counter-trend rallies 
only and the next move of size and strength is likely to be DOWN. 
And, to see when declines are counter-trend declines and that the 
next move of size and strength is likely to be UP.  

This is what flag patterns show us often enough to trade off them 
and several flags, both bull and bear variety, are outlined on 
two bellwether Dow stocks below; General Electric (GE) and 
Citigroup (C) –

I haven't any commentary about specific flag patterns except to 
just outline some them, and they can be common patterns that give 
a sense of seeing how the trend is unfolding and to trust the 
trend. Not for nothing the saying the "trend is your friend".  

Note, in the GE chart below that the flag that formed after the 
first decline had the UP-ward sloping bear flag pattern and note 
the big fall that came after this bear flag consolidation.   


 
 

INTRADAY CHARTS - 

You can see flag patterns forming all the time on intraday 
charts. The one below is of the last 30 days of so of hourly 
trading in Citigroup (C) - 


 

The last thing to say in this small talk on flag patterns here, 
is about pattern failures - in plain English this is about when 
patterns DON'T WORK – when the thing zigged instead of zagged.

The OEX chart below, which is up to date as of the 10/7/04 close, 
shows a possible pattern failure setting up.  By pattern 
"failure" is meant that the breakout move doesn't occur in the 
expected or anticipated direction and the rally "fails" – 


   

The thing about direction is important.  The next good-sized move 
out of or after a flag pattern forms, is that the move should be 
in the SAME direction as the dominant or recent trend. When 
prices start breaking lower, like the OEX last day shown on the 
above chart, a definite possibility now is looking like another 
downswing.

OR –
If the rally resumes within a short time (e.g., 1-2 days) and 
prices go on to penetrate and rise above prior highs at the top 
end of the flag, there's of course no rally failure. 

I doubt it! It looks to me like this Index is headed lower.  The 
combination of the break below the flag pattern that was forming 
and the possible double top looks bearish - stay tuned however! 
 

****************
Combos/Straddles
****************

Make It Your Business To Make It Your Business
By Mike Parnos

Buy Low – Sell High.  Sell High – Buy Low.  Couch Potato Trading 
Institute words to live by.  Sounds easy, doesn’t it?  Well, 
there’s a little more to it than that.  Buy what?  Sell when?  
Who’s high? What’s low?

A few years ago, thousands of people left high paying jobs in the 
hopes of making a living by trading in the stock market.  Little 
did they know . . . And that “little” is why they’re now working 
their way back up the corporate ladder one cheeseburger at a time.  

Can you make a living trading?  Of course you can, but you have to 
treat it like a business.  Before you can properly invest – whether 
you’re trading options, stocks, baseball cards or Barbie Dolls – 
you need to invest in yourself.  You need to prepare yourself 
mentally, physically, and financially.  It takes commitment!
 
What Do You Need To Succeed?
1.  EDUCATION:  Jethro Bodine’s dream was to be a brain surgeon or 
a fry cook.  We’ll never know if he succeeded, because the show was 
cancelled. Well, each endeavor takes its own form of expertise.  
Trading is no different.

The fact that you're reading my column is a giant step towards that 
end.  I have discussed everything, from aggressive trading 
strategies to conservative trading strategies (our favorite) to 
technical analysis to fundamentals -- and I've shared my opinions 
with you (I'm not shy).  But, it takes more than just reading the 
information.  You have to be able to implement it.

2.  INFORMATION:  You need to have access to the Internet for a 
variety of reasons. You need a computer with sufficient speed and 
RAM.  A DSL or cable modem is best, but you can get by with a 
dialup modem.

The Internet (not CNBC or your barber) is your primary source of 
information. Without information from Yahoo Finance (or any number 
of similar sites) information, you’re flying blind.  It’s not 
healthy.  Just ask Ricky Nelson and John Denver.

a)  Ideally you should have streaming stock and index quotes 
available.  Most decent brokerages now offer that at no charge to 
their clients.  Some Internet sites offer 15-minute delayed quotes, 
but that’s not good enough.  The markets move much too fast.  

b)  Often, the streaming real time quotes also include daily and 
real time intraday charting.  If not, there are a number of free 
Internet sites that will give you 15-minute delayed daily and 
intraday charts.  They are interactive charts that can, upon 
request, show you different time frames, chart sizes, various 
indicators, moving averages, volumes, etc.  For a small monthly 
fee, you can upgrade to their real-time charts.

There are many quote and charting services available.  ESignal is 
my personal favorite -- and it's reasonably priced.  Check out 
www.eSignal.com for more information.  For the most sophisticated 
stock traders, NASDAQ Level II quotes and tick-by-tick charting can 
help with entering and exiting trades.  Some brokerages even offer 
free Level II quotes and charting services to very active traders

3.  BROKERAGE ACCOUNT:  You will need to have an online margin 
brokerage account.  Accounts where you have to talk to a human (?) 
to place your order will invariably cost you money.  Why?  Because 
by the time you dial the phone, get connected to a broker (or 
customer service representative), explain what you want to do, get 
a quote, have him repeat it back to you, and place the order, the 
underlying could have moved a point in either direction. In that 
extra minute or two, the information you just received on the phone 
may now be obsolete and useless.

Since we trade credit spread strategies, it's important that you 
find out the maintenance policies of the brokers you are 
considering.  On Iron Condor positions, the broker should hold 
maintenance on ONLY ONE SIDE  -- which allows for a more efficient 
use of your trading dollars.

Ideally, an on-line account will have software that will show you 
the bid and ask prices of an option on ALL exchanges on which the 
option trades.  As you know, the prices for an option can vary from 
one exchange to another.  By seeing the different exchange, it 
enables you, with a simple mouse-click, to send your order directly 
to the exchange offering the best price – instantly.  If you send 
your limit order at the bid or the ask, it will likely be filled in 
a matter of seconds.  No phones, no fouls. 

When you open your account, you’ll need to get approval to trade 
options.  The levels of approval go from novice to professional.  
The more experience you have, the higher approval level you’ll get.  
The brokerages do this to cover themselves.  If you lose the family 
jewels trading options, you won’t be able to sue the brokerage firm 
to get them back. 

If you’re relatively new to options, you’ll probably get approval 
to sell covered calls and the straight purchase of puts and calls.  
If you have more experience, you’ll be able to trade spreads.  The 
highest approval level will allow you to sell uncovered options.   

4.  MONEY:   If you’re planning to treat trading, whether it’s 
stocks or options, as a business, your money and your positions 
represent your inventory.  They say, “It takes money to make 
money.”  It wouldn’t be a cliché if it weren’t true. 

How much money is necessary to start your business?  It depends on 
what strategies you want to use.  Do your strategies involve stock 
purchases?  If so, then you’ll need enough to subsidize the 
purchase (or half the purchase on margin) of the stocks.  If you’re 
going to simply buy calls and puts, you need enough to cover the 
purchases of the puts and calls.

For spread trades or trading naked (uncovered) options, the 
brokerage will likely require an account minimum.  When spread and 
uncovered option trading, if you’re going to do it properly, you’ll 
need to have cash or other marginable securities (stocks, mutual 
funds, bonds, CDs, etc.) in your account to enable you to make the 
trades and adjustments in your positions.  Brokerages have 
different policies in determining what securities they accept as 
marginable.

5.  TIME:  You’ve got it.  Now, you just have to prioritize it.  If 
trading is your business, you’ll have to do research on what to 
buy, when to buy it and what’s the right price.  That takes time.

6.  EMOTION:  You can’t afford it.  It has no place in the business 
of trading.  Cry at sad movies, not over spilled milk or lost 
money.  If you properly followed your trading rules, a loss is just 
a cost of doing business.  Nothing more.

Keep your emotions, along with your ego, on a short leash.   You’ll 
have good streaks and bad, but, if you use common sense, and know 
every aspect of your business, you can do just fine.

7.  DESIRE:  You have to want it badly enough.  You'll be amazed, 
if you want something bad enough, by the number of sacrifices 
you’re willing to make in order to achieve it.  You’ll be surprised 
how far desire will take you.

Knowledge is Power
If you want to trade for a living, you’ll spend the time to learn 
the strategies.  You’ll find the strategies that are most 
comfortable and learn them inside and out.  You’ll know what to do 
when the strategy works or if it goes against you.  You’ll know the 
adjustments you can make and when to make them.  You’ll know how to 
research and recognize opportunities and what strategies to use to 
take advantage of them.   Those are the things we try to teach in 
my columns and at my seminars.  It’s there for the learning.

The Secret of Survival
It comes down to survival.  If you want to stay in business, you 
must concentrate on making good trades.  You have to protect your 
inventory.  How?  Self-discipline.  It’s a rare commodity (not like 
pork bellies). You can’t buy it at Office Depot or Victoria’s 
Secret or Dairy Queen.  Either you have it, or you don’t.  It’s 
like your money.  Either you’ll have it, or you won’t.

___________________________________________________________

Position Adjustment  
In our QQQ ITM Strangle, we rolled out our Oct. $34 call to the 
November $34 call for a $.25 credit.  We also rolled out the Oct. 
$37 puts to the November $37 puts for a $.45 credit.  Total credit 
of $.70 ($700).

Also, it should be noted that, I did not do a great job of rolling 
out a few times during the life of this trade.  Consequently, for a 
long time, we have found ourselves with our short positions deeper 
in the money than we would like.  As a matter of fact, we prefer to 
be much closer to where the QQQs are trading -- and even a bit out 
of the money if possible -- even if we have to sacrifice some 
premium along the way for the sake of a more advantageous position 
for future rollouts.  

___________________________________________________________________

OCTOBER CPTI HYPOTHETICAL POSITIONS
October Position #1 - SPX Iron Condor - 1130.65
We sold 10 SPX October 1160 calls and bought 10 SPX October 1175 
calls for a net credit of about $1.75 ($1,750).  Then we sold 10 
SPX October 1075 puts and bought 10 SPX October 1060 puts for a 
credit of about $1.30 ($1,300).  Total net credit of appx. $3.05 
($3,050).  Maximum profit range is 1075 to 1160.  Maintenance is 
$15,000.
 
Position #2 -- RUT Iron Condor - 582.60
We sold 10 RUT Oct. 610 calls and bought 10 RUT Oct. 620 calls for 
a credit of about $.65 ($650).  Then we sold 10 RUT Oct 530 puts 
and bought 10 RUT Oct 520 puts for a credit of about $.55 ($550).  
Total net credit of about $1.20 ($1,200).  Maximum profit range is 
530 to 610.  Maintenance is $10,000.  

Position #3 - OEX Iron Condor - 542.28
We sold 10 OEX October 520 puts and bought 10 OEX October 510 puts
for a credit of about $.70 ($700).  Then we sold 10 OEX October 565 
calls
and bought 10 OEX October 575 calls for a credit of about $.50 
($500).   Total net credit of about $1.20 ($1,200).  Maximum profit 
range is 520 to 565.  Maintenance is $10,000.  

Position #4 - BBH Iron Condor - $138.85
We sold 10 BBH October $150 calls and bought 10 BBH October $160 
calls for a credit of about $.95 ($950).  Then we sold 10 BBH 
October $135 puts and bought 10 BBH October $125 puts for a credit 
of about $.55 ($550).  Total net credit of about $1.50 ($1,500).  
Maximum profit range is $135 to $150.  Maintenance is $10,000.  Be 
careful.

Position #5 -- SPX "Sure Thing" Strategy - 1130.65
Formerly called the "Credit Spread Boogie."  The market seems to be 
in an uptrend since mid-August.  Let's go with the flow until the 
market tells us otherwise.  We sold 3 SPX 1120 October puts and 
bought 3 SPX 1095 October puts for a net credit of about $6.50 
($1,950).  The initial maintenance is $7,500.

When the SPX traded in the low 1100s, it was time for an 
adjustment.  We closed out the original bull put spread for $13.20 
($3,960).  We then opened a seven-contract position of a 1115/1140 
bear call spread, taking in $6.35 ($4,445).  That means we've taken 
in some extra premium.  Our new profit potential is $2,435 -- if 
SPX closes below 1115.  This one's going to be exciting. 

ANOTHER POSITION ADJUSTMENT:  Well, I said it was going to be 
exciting.  This is one of those times where we are "tested" -- at 
least our brokerage account is going to be tested as we are in the 
midst of getting whipsawed.  The market did an about face and took 
off.   What did it take off?  It disrobed -- shedding its bearish 
persona and looking up.   

So we unwound our 1115/1140 7-contract bear call position at $13.80 
($9,660).  We then put on a November 14-contract 1120/1095 bull put 
spread (coincidentally, right back where we started) at $7.00 
($9,800).  The maintenance is getting pricey at $35,000.  That's 
why this strategy is not for everyone.  Our potential profit is 
still $2,435.  
____________________________________________________________

ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $36.24
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of 
the 2005 QQQ $29 calls for a total debit of $14,300.   We make 
money by selling near term puts and calls every month.  Here’s what 
we’ve done so far:  Oct. $33 puts and Oct. $34 calls – credit of 
$1,900. Nov. $34 puts and calls – credit of $1,150. Dec. $34 puts 
and calls – credit of $1,500.  Jan. $34 puts and calls – credit of 
$850.  Feb. $34 calls and $36 puts – credit of $750. Mar. $34 calls 
and $37 puts – credit of $1,150. Apr. $34 calls and $37 puts – 
credit of $750.  May $34 calls and $37 puts – credit of $800. June 
$34 calls and $37 puts -- total net credit of $750.  We rolled out 
to the July $34 calls ($.20 credit) and $37 puts ($.60 credit) and 
took in a credit of $.80 ($800).  We rolled to the August $34 calls 
and $37 puts, taking in a credit of $900.  We rolled to the Sept. 
$34 calls and $37 puts, yielding $.45 or $450 for the cycle. For 
October we were again limited to a $.45 ($450) rollout.  We rolled 
to the Sept. $34 calls and $37 puts for a total of $.70 ($700). Our 
new total credit is now $12,900. (See "Position Adjustment" 
description in column text)

Note:  We haven't included the proceeds from this long term QQQ ITM 
Strangle in our profit calculations.  It's a bonus!  And it's a 
great cash flow generating strategy.  

ZERO-PLUS Strategy.  OEX – 542.28
In my Feb. 8th column, I outlined a strategy based on an initial 
investment of $100,000.  $74,000 was spent on zero coupon bonds 
maturing in seven years at a value of $100,000.  The principal 
$100,000 investment is guaranteed.  We’re trading the remaining 
$26,000 to generate a "risk free" return on the original 
investment.
Our current position:  We own 3 OEX December 2006 540 calls @ $81 
(x 300 = $24,300).  Our cash position as of August expiration was 
$8,390.  In September we added another $975 for a new total of $9,365.

New Zero Plus Positions For October  
Not a lot of credit available this month.  October bull put spread 
520/510 for credit of $.65 x 5 contracts = $325.  October bear call 
spread 565/575 for another credit of $.65 x 5 contracts = $325.  If 
all goes well, we'll be able to add $650 to our cash position.
__________________________________________________________

Happy Trading! 
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In 
trading, as in life, it's not the cards we're dealt. It's how we 
play them.
   
Mike Parnos, Options Therapist and CPTI Master Strategist
***************************************************************


Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the 
numbers represented here may have been achieved or beaten by our 
readers, we make no representation that any individual investor 
achieved these exact results. The tracking for the plays listed in 
this section uses closing prices for the day the newsletter is 
published and it is not meant to imply that any reader actually 
received those prices or participated in these recommendations. The 
portfolio represented here is hypothetical and for investment 
education purposes only. It is only an illustration of what type of 
gains a knowledgeable investor might receive utilizing these 
strategies.


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