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Daily Newsletter, Monday, 10/11/2004

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The Option Investor Newsletter                   Monday 10-11-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Setups  
Futures Wrap: See Note
Index Trader Wrap: Stocks edge higher on light volume 


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      10-11-2004           High     Low     Volume   Adv/Dcl
DJIA    10081.97 + 26.77 10098.78 10056.09 1.16 bln 1403/1345
NASDAQ   1928.76 +  8.79  1930.66  1920.76 1.15 bln 1789/1185
S&P 100   539.92 +  1.45   540.91   538.47   Totals 3192/2530
S&P 500  1124.39 +  2.25  1126.20  1122.14
SOX       391.53 +  2.01   392.89   384.63
RUS 2000  577.56 +  1.91   577.56   574.61
DJ TRANS 3336.17 +  0.17  3342.63  3322.63
VIX        14.71 -  0.34    15.27    14.28
VXO (VIX-O)14.99 +  0.04    15.54    14.70
VXN        20.05 -  0.64    20.46    19.94
Total Volume 2,316M
Total UpVol  1,282M
Total DnVol  1,002M
Total Adv  3192
Total Dcl  2530
52wk Highs  103 
52wk Lows    41
TRIN       0.93
PUT/CALL   0.81
*******************************************************************

Setups
Linda Piazza

With the Nikkei dark in overnight trading and bond markets closed
for Columbus Day, Monday proved to be a set-up day for trades
that might materialize later in the week.  Our Canadian neighbors
likely spent the day celebrating their Thanksgiving rather than
participating in our markets.  Closed government offices meant
that no economic releases were scheduled, and the holiday
produced light volume.  Total volume on the NYSE remained under 1
billion shares, at 944 million shares, while volume on the Nasdaq
was a stronger 1.2 billion.  

Those explanations could be embraced by fundamental traders,
while technical analysts would point to the need for a
consolidation day after several large-range declines late last
week.  On the SPX, the consolidation took the form of a possible
bear flag, seen here on the SPX's 60-minute chart.

Annotated 60-Minute Chart of the SPX:

 

This chart points out the potential role that Monday's tepid
trading action played in setting up a trade for later in the
week.  Bears would like to see the SPX move a bit higher into
resistance before rolling down again so that they'll have some
distance away from the 200-sma.  

A move above 1132-1133.50 suggests that something more bullish
occurs, however.  If that move occurs, bears would do well to
step aside and watch for a retest of the October high.  

That potential bear flag on the 60-minute chart shows up as an
inside-day candle on the daily one.

Annotated Daily Chart of the SPX:

 

Like the SPX, the Dow produced an inside-day candle.  Proponents
of inside-day theory would go long these indices on a move above
Monday's high with a stop below Friday's low.  Especially with
the Dow, that appears to be a risky move.  Much resistance
gathers above the Dow's closing position in the form of gathered
moving averages and historical resistance.  With the Dow still in
a downtrend, selling rallies appears to be a better approach.

Annotated Daily Chart of the Dow:

  

Merrill Lynch (MER) and Dow component Johnson & Johnson (JNJ)
report before the bell, with component Intel (INCT) reporting
after the close, so there's a possibility that reactions to
earnings or anticipation of earnings could get a directional move
started.  As long as the Dow remains within its descending
regression channel, any bounces should probably be watched for
potential bounce-and-rollover bearish entries rather than for
bullish ones.

With rising crude costs in the overnight market, techs had
generally shown weakness before the open on Asian and European
markets.  Rising crude costs also raised the specter of weakened
demand.  Deutsche Bank's downgrade of Texas Instruments (TXN) and
Micron Technology (MU) to sell ratings from their previous buy
and hold ratings didn't improve early sentiment toward techs. 
When downgrading TXN, Deutsche Bank cited the company's commodity
product exposure, saying that exposure could cause a decline in
gross margins.  In a pre-market note, Lehman mentioned continued
cautiousness toward analog semis MCRL, LLTC and MXIM.

In that climate, INTC earnings will assume extra importance. 
INTC printed a doji Monday and both TXN and MU sprang up from
their day's lows, with such action allowing the SOX to spring
from its day's low, too.  All three are components of the SOX. 
Among the SOX components, strongest gains were seen in AMD (3.33
percent), BRCM (2.19 percent) and ALTR (0.92 percent), however.  

Annotated Daily Chart of the SOX:  

 

Together with YHOO, also reporting after the bell tomorrow, INTC
may also hold the short-term fate of the Nasdaq in its grasp.

Annotated Daily Chart for Intel:

 

Although standard technical analysis suggests that a breakdown
entry on the Nasdaq occurs on a move below Monday's inside-day
low, the converging 100-sma and 200-sma just below make that a
problematic entry.  Bears instead might hope for a bounce-and-
rollover entry.

Both the TRAN, the Dow Jones Transportation Index, and the
Russell 2000 may offer arguments against the sell-the-rally
conclusion, and both should be watched.  After the close, a CNBC
commentator noted that crude prices have escalated 65 percent
year to date.  In a move that seems counterintuitive to some, the
TRAN has been climbing along with crude costs, from its 2365.36
year opening level to today's 3336.17 closing level.  For most of
the year, it's been climbing within an ascending regression
channel.  Although the TRAN produced a tweezer-top reversal
signal at the top of its ascending regression channel last week,
it has not retreated far and remains within striking distance of
the top of its regression channel.

Annotated Daily Chart for the TRAN:

 

Annotated Daily Chart for the Russell 2000:

 

MER and JNJ report before the open, but influences on our markets
begin this evening by the time the newsletter arrives at your
email address.  That's when the Nikkei will seize its first
opportunity to react to the drubbing U.S. markets received Friday
and further gains in crude.  Fighting and a strike in Nigeria,
difficulties ramping up production again in the Gulf of Mexico,
and worries about Yukos after a Russian court ruled that the
company must pay $1.34 billion in fines and penalties supported
crude prices Monday.

Watch how the Nikkei reacts and then how our markets react in
response to gauge strength or weakness.  A strong Nikkei decline
met with steady futures prices indicates strength.  A strong
Nikkei climb met with weakness in futures prices indicates
weakness.  At tomorrow's open, watch for breakouts above
yesterday's highs or lows on the SPX, OEX, Dow, NDX, and Nasdaq,
indices that all produced inside-day candles Monday.  For all but
the most adept scalpers, upside breaks should be treated as
opportunities for a new bounce-and-rollover entries, with the
rollover perhaps provided as soon as late tomorrow or Wednesday.

Tuesday's economic releases begin at 8:55, with Redbook Retail
Sales. The RLX, the S&P retail index, gained 1.01 percent Monday,
posting one of the strongest index gains behind the BTK, the
biotechnology index.  The BTK gained 1.19 percent. 

Economic releases continue at 10:00, with the September Richmond
Fed Manufacturing Index, followed at one-hour intervals by the
September Kansas City Fed Manufacturing Index and the August
Chicago Fed Manufacturing Index.  Those had last shown a gain of
18 and 15, and a drop of 0.6, respectively.  

Drawing at least as much attention as those economic releases
will be the after-the-close earnings reports of Intel (INTC) and
Yahoo (YHOO), of course, and all who consider taking positions
Tuesday should know before entering new positions whether they
intend to hold overnight.  Volume might continue to be light
ahead of those releases, so continue to be careful about new
entries.



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

Stocks edge higher on light volume

Stocks edged fractionally higher as bond traders took the day off 
in observance of Columbus Day, where the very broad NYSE 
Composite ($NYA.X) 6,643.17 +0.10% rose 6.7 points, trading a 
very tight 15-point range on extremely light volume of just 940 
million shares.

While most sectors recouped portions of Friday's losses, an 
earnings warning from oil service equipment maker Lone Star 
Technologies (NYSE:LSS) $29.25 -23.42% that higher steel prices 
would negate any positives from higher raw energy prices had the 
Oil Service Index (OSX.X) 120.42 -2.62% trading back from three-
year highs set on Thursday.  

Smith Barney was out raising its targets for the oil services and 
drilling stocks due to the rapid implementation of prices 
increases.

An upgrade of Biogen/Idec (NASDAQ:BIIB) $60.30 +2.29% by Lehman 
Brothers helped offset continued weakness from Chiron 
(NASDAQ:CHIR) $34.28 -3.78% and had the Biotechnology Index 
(BTK.X) 513.57 +1.19% edging out the CBOE Internet Index (INX.X) 
178.60 +1.12% and S&P Retail Index (RLX.X) 415.35 +1.01% for 
Monday's sector winners.

Market Snapshot / Internals - 10/11/04 Close

 

The Semiconductor Index (SOX.X) 391.53 +0.51% managed to shrug 
off some cautious, if not negative morning comments out of 
Deutsche Securities, where the broker doesn't see sector 
fundamental improving until mid-2005 at the soonest.

Deutsche cut its estimates for Texas Instruments (NYSE:TXN) 
$21.89 -0.72% and Micron Technology (NYSE:MU) $11.90 -0.91% 10-
15% below Wall Street's consensus estimates, and said it believes 
there may still be 25% to 30% downside from Friday's closing 
prices.  

Citing the firm's recent trip to Asia, Deutshe believes the 
sector is in a cyclical downturn, not a seasonal downturn as 
evidenced by Analog Device's (NSYE:ADI) $38.39 -0.64% and 
National Semiconductor's (NYSE:NSM) $15.63 -0.70% recent 
earnings, and few company's that expected a seasonal uptick saw 
it.

U.S. Market Watch - 10/11/04 Close

 

As bond traders took the day off, equity traders may have too, 
where volumes at both the NYSE and NASDAQ were hardly enough to 
fill a bullish or bearish sale.  

Market Volatility (VIX.X) slid fractionally with the SPX Dec. 
1,125 puts (SPT-XE) $27.00 -6.89% most active at 10,307 contract 
(OI 54,421), Dec. 1,025 puts (SPQ-XE) $5.50 -9.83% second-most at 
9,484 (OI 67,676), while premium sellers looked desperate with 
the Oct. 1,150 calls (SPT-JJ) $0.30 -33.33% trading 6,687 
contracts (OI 43,000).

Pivot Matrix - 

 

With three-days left until October expiration, the S&P 100 Index 
(OEX.X) closes right at its October "Max Pain" theory value of 
540 (5-point increments), while the more volatile NASDAQ-100 
Index (NDX.X) holds 12-points above its October "Max Pain" theory 
value of 1,425 (25-point increments), both below this week's 
WEEKLY Pivots.  Withstanding any big earnings surprises (up or 
down) that hadn't been warned about, we may well be bound between 
WEEKLY S1 and WEEKLY R1s this week, where the burden of proof is 
probably on bulls to get an OEX close above its 200-day SMA 
(548).

Jeff Bailey

 
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The Option Investor Newsletter                   Monday 10-11-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates:  GDW, APOL, LLY	
New Call Play:  PGR
Dropped Calls:  None
Dropped Puts:  None
Watch List:  Flu vaccines to banks and more!


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

GDW - call play - 
  Be prepared to exit.  Our target is the $115.50-116.00 range.
 
 
APOL - put play -
  Be careful here.  APOL was weak earlier in the session but
  managed to bounce back with heavy volume all session.
 
 
LLY - put play-
  Be prepared to exit.  Our target is the $58.00-56.50 range.


*************
NEW CALL PLAY
*************

Progressive - PGR - close: 85.31 chg: +1.26 stop: 82.59

Company Description:
The Progressive group of insurance companies ranks third in the 
nation for auto insurance based on premiums written, offering its 
products by phone at 1-800-PROGRESSIVE, online at progressive.com 
and through more than 30,000 independent agencies and insurance 
brokers.  (source: company press release)

Why We Like It:
We like PGR for its relative strength.  The stock has shrugged 
off the IUX insurance index's recent weakness.  We like how PGR 
is coiling for a breakout over resistance near $85.60 with a 
trend of higher lows.  The technical oscillators are a little 
mixed but they are improving.  The same can be said for the P&F 
chart, which is not yet in a buy signal but it's getting closer.  
We're willing to speculate on some short-term strength for PGR.  
The risk here is the amount of time left.  We checked two 
different sources.  One says that PGR is due to report on 
November 4th.  The other says PGR is due to report Q3 earnings on 
October 21st.  We're going to assume that PGR will report near 
the 21st so that doesn't give us a lot of time.  Only traders 
willing to take the risk of a short-term play should consider 
this one because we do not plan to hold over the earnings 
announcement.  To make this even more challenging we're going to 
use a TRIGGER.  We don't want to buy calls until PGR trades above 
$85.60.  Our ENTRY point will be $85.65.  Fortunately, PGR was 
strong throughout most of the session today and surged higher 
late in the afternoon on strong volume suggesting it could see 
some follow through tomorrow.  Our immediate target will be $90.

Suggested Options:
We're going to suggest the November calls.  Our favorites are the 
80s and 85s.  

BUY CALL NOV 80 PGR-KP OI= 894 current ask $6.30 
BUY CALL NOV 85 PGR-KQ OI=1005 current ask $2.60

Annotated Chart:

 

Picked on October xx at $xx.xx <- see TRIGGER
Change since picked:    + 0.00
Earnings Date         07/14/04 (confirmed)
Average Daily Volume =     700 thousand
Chart =



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

None


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

None


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

MedImmune - MEDI - close: 26.22 change: +0.61

WHAT TO WATCH: MEDI is the maker of FluMist, an alternative flu 
vaccine to the traditional shot-in-the-arm version.  With the 
CHIR news last week MEDI has charged forward to challenge the 
upper band of its trading range.  Currently MEDI has managed to 
breakout over the $26.00 level but the stock doesn't appear to 
have totally shaken off the grasp of its nine-month trading 
range.  Bulls can look for a new high over $26.75 while some 
traders may just want to consider MEDI a covered-call candidate.

Chart=


---

Baker Hughes - BHI - close: 43.60 change: -1.16

WHAT TO WATCH: In the MarketMonitor today we noted that the OSX 
oil services index had broken through the bottom of its narrow 
rising channel and technical support at the simple 10-dma.  The 
OSX had also produced a new sell signal from its badly overbought 
MACD indicator.  We see a similar move in shares of BHI.  The oil 
service stock is very overbought and due for some profit taking.  
Today's breakdown and MACD sell signal certainly looks bearish.  
But is this a trend reversal or just the beginning of a dip 
towards the simple 50-dma, where BHI bounced in August?

Chart=


---

Eaton Corp - ETN - close: 65.70 change: +0.88

WHAT TO WATCH: ETN continues to consolidate its recent rally from 
the $60.00 level and its breakout over $65.  The move helped 
produce a new P&F buy signal with an $86 target.  However, the 
stock is likely to trade sideways ahead of its earnings report 
expected on Thursday morning before the bell.  We're going to 
watch for a new high over $66.78. 

Chart=


---

M&T Bank - MTB - close: 99.83 change: +0.75 

WHAT TO WATCH: We've noted the recent rally in MTB before.  
Shares have surged strongly since September 30th to breakout to 
new highs over resistance at $99.00.  This move has produced a 
new triple-top breakout buy signal on its P&F chart with a $108 
target.  We are going to watch MTB tomorrow as investors react to 
the bank's earnings report that is due out Tuesday morning before 
the open.  Estimates are at $1.51 a share.

Chart=



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

CI $69.72 -0.21 - CI has been a frequent candidate on the watch 
list.  First we noted its surge toward resistance at $70, then 
its breakout.  We never suggested a long play because of 
technical resistance at its 200-week moving average.  Now the 
stock appears to be reversing and the drop back under $70 could 
be bad news.

PIXR $80.83 +0.67 - Significantly overbought PIXR is shaking off 
any notions of profit taking and edging higher.

SBUX $47.81 +0.42 - We're still watching SBUX for a new high or a 
dip back to $46.00.

EBAY $93.73 +1.14 - Strength in the Internet sector helped EBAY 
bounce from the $91 level today.  We're watching for a test of 
the $90 mark.

HSIC $60.28 +0.12 - HSIC may still be a put candidate.  Watch for 
a drop under $58.50.

ZMH $74.60 +0.39 - We're still watching ZMH.  Shares look ready 
to break down under $73.50.
 

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