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Daily Newsletter, Monday, 10/18/2004

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The Option Investor Newsletter                   Monday 10-18-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Flagpole Rally
Futures Wrap: See Note
Index Trader Wrap: Black gold, Big Blue and Big Tech 


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      10-18-2004           High     Low     Volume   Adv/Dcl
DJIA     9956.32 + 22.94  9960.15  9861.63 1.68 bln 1495/1290
NASDAQ   1936.52 + 25.02  1936.52  1904.50 1.49 bln 1782/1207
S&P 100   535.18 +  3.38   535.48   529.94   Totals 3277/2497
S&P 500  1114.02 +  5.32  1114.46  1103.33
SOX       384.35 +  2.98   384.37   374.67
RUS 2000  572.03 +  2.61   573.19   565.97
DJ TRANS 3382.71 + 30.03  3384.27  3332.75
VIX        14.71 -  0.33    16.16    14.64
VXO (VIX-O)14.69 -  1.20    16.27    14.69
VXN        20.72 -  1.08    22.96    20.61
Total Volume 3,181M
Total UpVol  2,070M
Total DnVol  1,014M
Total Adv  3277
Total Dcl  2497
52wk Highs  192 
52wk Lows   103
TRIN       0.59
PUT/CALL   0.77
*******************************************************************

Flagpole Rally
Jonathan Levinson

What started as a now-routine thrashing of the Dow and SPX, this 
time following bad news from MMM, whipsawed into a strong bullish 
reversal before noon.  Price ran vertically higher through 
multiple resistance lines, reversing a synchronous set of 
intraday downphases from what appeared to be a nearly perfect 
bearish intraday setup.

Merrill Lynch's Walter Murphy had been out this morning, 
forecasting that the Dow would blow the roof off this year in a 
terminal upside move to the 11000-11500 level.  Murphy expects 
the Dow to decline from there in 2005, and that the 4th quarter 
rally would mark the end of the rally from the 2002 lows.  He 
also noted that in every election year since 1932, the incumbent 
has lost the election where the Dow has lost 0.5% or more in 
October.

This seemed like the usual fluff, but the sudden upward launch in 
the indices lent it credence.  The bulls are still pretty far 
from being in control, however, as a quick look at the daily 
charts will reveal.  

Daily Dow Chart



The Dow posted a bullish doji hammer today, with the daily print 
coming close to a key outside reversal.  The Dow was below 
Friday's low when the burst of buying hit, with the Dow closing 
just north of 9950 resistance.  A daily cycle downphase still in 
effect, but with a potential bullish stochastic divergence.  If 
the bulls can close the Dow back above the rising trendline at 
10080, the resulting daily cycle upphase will launch from a 
higher stochastic high against the lower price low.  This is 
generally a setup for a powerful move, in this case to the 
upside, and would target the 100200  and 10250-60 confluences.


Daily S&P 500 Chart


The SPX printed a similar pattern, but bounced from a nominally 
higher low from Friday.  The bullish doji hammer broke Friday's 
high and targets 1122 trendline resistance next.   Because last 
week's selling wasn't as extreme as it was for the Dow, the SPX's 
potential bullish oscillator divergence isn't as sharp.  But it's 
still there, and bulls will be gunning for a close above 1128 
resistance to make good on it.

Daily Nasdaq Chart


The Nasdaq has been consistently stronger than its peers for the 
past two weeks, and today's candle underlines the point.  The 
bounce took place from above unbroken rising daily support, and 
blew past last week's closing highs.  The daily cycle downphase 
is the weakest of its peers.  Next resistance is at 1950, 
followed by 1980.  A close above 1950 should be enough to end the 
daily cycle downphase and print the first tentative daily cycle 
buy signals.


Weekly TNX Chart


FNM announced its intention to more aggressively court subprime 
borrowers, with CEO Franklin Raines announcing a 3 pronged 
strategy to encourage these mortgages.  This follows data in 
recent weeks showing a stall in mortgage activity as reported by 
the Mortgage Bankers Association, despite the recent declines in 
bond yields.  

Later in the session, the National Association of Home Builders 
announced a bounce in builder confidence, wit its Housing Market 
Index (HMI) rising 5 points to 72, more than offsetting 
September's 4 point decline.  The Current Sales index rose 5 
points to 78, and Expected Sales rose 9 points to 84.

As can be seen in the weekly chart of the ten year note yield 
(TNX), rates have been in a downtrend since the June high but 
have recently found support at the 3.9%-4% level.  This attempt 
to put in a higher low for the yield is potentially bearish for 
bonds, provided that TNX doesn't break lower rising bear wedge 
support at 3.885%.  A weekly cycle upphase is trying to form, and 
yield bulls/bond bears should be in business on a break above the 
4.35% level.  For the day, the TNX closed unchanged at 4.053%.


Weekly chart of Crude oil


Crude oil declined from a record high of 55.5 this morning to a 
session low of 53.10 in the afternoon on the Nymex.  Aside from 
technical factors, analysts speculated that weakness in oil was 
attributable to the drag that the rally has been exerting across 
all asset classes.  The selling in base metals and the equity 
indices last week were cited in support of this hypothesis.  
Greenspan's comments last week underlined the obvious deleterious 
effects of high energy prices on the economy, and today's 
downward action in oil prices was attributed to the damage 
already wrought by the rally.  In theory, any rally in energy 
should eventually choke itself off, though I'd be very skeptical 
of any attempt to correlate daily market gyrations with macro-
fundamental factors such as that.  For the day, November crude 
close at 53.725, +.05.


In corporate news, MMM announced its Q3 results, earning 775M or 
97 cents per share compared with 663M or 83 cents in Q3 2003 but 
missing estimates of 98 cents.  The company expects to earn 
$3.68-$3.69 per share for 2004 and anticipates an increase in 
sales of 7% from 2003.  Profits rose, but the miss was the first 
in seven quarters, with the company attributing part of this 
quarter's strength to weakness in the US Dollar.  In particular, 
the company's chairman and CEO, James McNerney, said, "We are 
optimistic about the strength of our diverse business and 
technology portfolio, but remain cautious on the global economy." 
Given the diversified nature of MMM's business, the company's 
outlook and results were seen as a shot across the bow of the 
indices today, and both the stock and the Dow led the indices 
lower for most of the morning.  MMM closed lower by 2.41% at 76.10.

Air conditioner, bathroom and vehicle control system maker ASD 
missed estimates with Q3 earnings of 156M or 71 cents per share 
on sales  of 2.396B.  Net of one time revenues, however, earnings 
were 65 cents, missing consensus estimates of 67 cents.  The 
company narrowed its range for 2004 earnings, expecting earnings 
of per share from the previous projection of $2.17-$2.27 per 
share to $2.21-$2.25.  ASD lost 4.55% to close at 36.46.

Printer supplier LXK beat estimates, announcing Q3 earnings of 
156.1M or $1.17 per share, up from 79 cents in Q3 2003.  This 
amount was increased by a non-recurring tax benefit without which 
earnings were $1.02 per share, 4 cents higher than consensus 
estimates.  Revenue was 1.27B, 200M less than forecast. LXK lost 
.75% to close at 81.78.

Toymaker HAS characterized its 2003 earnings as "disappointing", 
earning 45 cents per share (up from 38 cents in Q3 2003) but on 
decreased revenue of 947.3M from 971.1M last year.  Estimates had 
been for 51 cents on revenue of 992M.  MAT beat by a penny with 
earnings of 61 cents but revenue missed forecasts for 1.76B, 
coming in at 1.67B.  Sales were lower by 9%, with Barbie sales 
falling 13% and Fisher-Price rising by 7%. HAS got smoked for 6.5%, 
closing lower at 17.26.

There was action among the miners today, with South African miner 
HMY announcing that it would be submitting an 8.1B stock-based 
takeover of GFI.  This would represent a 29% premium over the 
past 30-days' price of GFI.  The proposal, which is contingent on 
the proposed IAG-GFI merger being scuttled, would see the 
issuance of 1.275 new HMY shares for each GFI share.  GFI's 
largest shareholder, Norilsk Nickel (NILSY) supports the deal.  
GFI closed lower by 4.35% at 14.29, IAG closed lower by 8.93% at 
7.24, and HMY lost 8.44% to close at 11.50.

Homebuilder and mortgage banker NVR beat expectations, reporting 
Q3 earnings of 147.7M or $19.04 per share, rising from 109.4M or 
12.55 in Q3 2003 and beating estimates of $16.91.  Revenue was 
higher by 19%, new orders by 9%.  The company expects a 22%-24% 
increase in earnings for 2004. NVR closed higher by 2.27% at 
559.40.

After the bell, IBM announced earnings that beat estimates by 3 
cents at $1.17 per share and meeting estimates of 23.4B in 
revenues.  The EPS number excludes an 11 cent or 320M pension 
fund dispute.  IBM had closed higher by 1.26% and added another 
1.61% afterhours, trading 87.30 as of this writing. TXN was 
slightly lower afterhours at 21.05 after topping estimates of 27 
cents EPS with 32 cents.  TXN's profit represented an alltime 
high, doubling Q3 2003's result while revenue increased 28% over 
last year.  As was the case with MMM, the company noted 
challenges in the current environment but expressed confidence as 
to its measures, including tightening expenses and reducing 
production. 

JDAS also took off despite missing by a penny, adding 5.88% as of 
this writing to trade 11.70.  Q3 revenue for JDAS was down from 
11 cents per share in Q3 2003 to 6 cents, with earnings falling 
to 1.6M from 3.4M.  The company cited delays in software 
licenses.

With earnings season upon us, the markets should continue to 
deliver knee-jerk reactions in both directions.  What was a 
bearish market mover in MMM this morning was treated as bullish 
for TXN afterhours.  What appeared as a common thread was an 
acknowledgement of challenging conditions and a less optimistic 
outlook going forward.  Boosts from the foreign exchange 
differential, cost cutting or layoffs may increase short term 
profitability, but they grow increasingly difficult to repeat.  
As Henry Ford would have pointed out, companies cannot profit 
endlessly in an environment of wage deflation.  Cost-cutting 
increases competition between companies and is ultimately a 
double-edged sword.

For tomorrow, the key question will be whether today's big moves 
will hold.  The upside action in equities had an impulsive 
feel to it.  If bulls can hold within the flag atop today's 
flagpole rally, then the daily cycle downphases will convert to 
the upside, led by the Nasdaq.  However, a return to today's lows 
will do so minus most of the shorts who got blown out of their 
positions today, and will therefore have that much less support 
as prices fall.


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

Black gold, Big Blue and Big Tech 

The major indices reversed early session weakness to close at or 
near their highs of the session, where oil's reversal from new 
contract highs helped the Dow Industrials (INDU) 9,956 +0.23% 
recover after 3M (NYSE:MMM) $76.10 -2.41% plunged as low as 
$73.31, coming within 4 cents of a new 52-week low on weaker than 
expected earnings.

But strong earnings from IBM (NYSE:IBM) $85.92 +1.26% and a 
positive outlook had "Big Blue" extending gains in after-hours 
trading at $88.10, while fellow Morgan Stanley High Tech Index 
(MSH.X) 453.30 +1.46% component Texas Instrument (NYSE:TXN) 
$21.09 -0.61% traded as high as $22.20 after reporting quarterly 
earnings of $0.32, which was 4-cents better than consensus 
estimates. 

November Crude Oil Futures (cl04x) - 30-minute intervals

 

Stocks reversed losses and extended gains just after the November 
Crude Oil futures (cl04x) slipped under its WEEKLY Pivot of 
$53.80 at 12:00 PM EDT, but buyers held firm at a near-term 
rising trend, which may have capped gains for the major indices 
into their close.  I had to go back to early September to find a 
daily settlement below a WEEKLY Pivot, where even then, oil would 
not go below a WEEKLY S1, which would be $52.60 if a pattern of 
DIVERGENCE were to occur.

As I type (05:58 PM EDT), the NYMEX has November Crude Oil 
futures (cl04x) down 45 cents at $53.22, where session low has 
been $53.01 and Tuesday's high was made at the opening tick of 
$53.64.

Market Snapshot / Internals - 10/18/04 Close

 

The major indices recovered from their morning lows and began 
making a more notable attempt to build gains after 12:00, where 
the advance/decline lines turned positive at both the NYSE and 
NASDAQ by 01:00 PM EDT.  

Both the NYSE and NASDAQ's 10-day NH/NL ratios are now in a 
column of "O" where it will most likely be up to stocks like IBM 
and TXN, or "big tech," as well as an abating oil price to push 
the major indices back higher.

While bullish leadership is starting to wane at the NASDAQ, 
bullish leadership hasn't totally evaporated.  Here's an updated 
NASDAQ NH/NL point and figure chart with "f"ive day ratios 
charted, and the more important 10-day NH/NL ratios charted using 
the 3-box reversal method (2% box size) where O's depict supply 
exceeding demand, and X depicting demand exceeding supply.  I 
plot correlative date PRICEs of the NASDAQ Composite (COMPX) 
1,936.52 +1.3% in relation to the faster moving 5-day NH/NL 
ratios, which does continue to hold bullish confirmation of 
internals matching price action.

NASDAQ Composite NH/NL Ratio Chart - 2% box scale

 

Friday's "f"ive day ratio fell 2.7%, and today's "f"ive day ratio 
slipped a more fractional 0.2% as if the "f"ive day ratio of new 
highs versus new lows might not be willing to give a "sell 
singal" at 50%, but recent session's decline in the COMPX has 
seen some of the bullish leadership wane.

We can perhaps see how a reversal back higher in the 5-day NH/NL 
ratio would continue to suggest the possibility for bullish 
leadership to resume, perhaps enough to have the 10-day NH/NL 
ratio, which I just begin charting with "red O" also keep from 
giving a "sell signal" at 60%, which would violated the early 
October (Blue A) 62% reading.

Now let's take a look at our NASDAQ Composite (COMPX) 1,936.52 
bar chart, where 1,900 has been holding as support.

NASDAQ Composite (COMPX) Chart - Daily Intervals

 

The very broad NASDAQ Comp. (COMPX) recently struggled with its 
rounding lower 200-day SMA, but found some important near-term 
support near its conventional 38.2% retracement of 1,905 and 
1,900 round-number resistance.  Since I'm monitoring the 52-week 
high/low ratios at the NASDAQ, I looked at the 35 components 
within the Morgan Stanley High Tech 35 (MSH.X) 453.30 +1.46%.  
Qualcomm (NASDAQ:QCOM) $43.60 +2.66% continues its torrid move 
higher with a new 52-weeker in today's session.  LM Ericsson 
Telephone (NASDAQ:ERICY) $32.20 +1.54% is closing in on its most 
recent 52-week high of $32.32 found back in April.

Hey, both of these company's make either cell phone, or cell 
phone technology.  Texas Instruments (NYSE:TXN) $21.09 is the 
worlds largest chipmaker for cell phones and is a component of 
the MSH.X.

Morgan Stanley High Tech 35 (MSH.X) - Daily Intervals

 

IF oil is going to reverse course, then it may be the "high beta" 
trade that buyers revert to, as buyers look for the "greater 
risk, but greater potential reward" trade to take hold.  

As the MSH.X challenged its 200-day SMA just eight sessions ago, 
"Big Blue" traded $88.00 resistance for 4-days.  As I type, last 
tick on IBM is.... $87.99, so sellers haven't given up yet.

Another individual stock benchmark I make is just last week and 
the MXH.X finding resistance at its 50% retracement when after 
Intel (INTC) $20.79 +0.87% reported its quarterly results, the 
stock trade an intra-day high of $21.53, but faltered from there.

Something's up in wireless telecom.  Nokia (NYSE:NOK) $14.84 
+5.84% is a percentage winner over the last 5-sessions.  I've 
quickly listed the top 5 percentage winners and losers from the 
prior 5 sessions.

U.S. Market Watch - 10/18/04 Close

 

The CBOE Internet Index (INX.X) which has been flip-flopping 
either side of its slowly trending higher 200-day SMA (180) was 
today's sector winner with Internet security firm Checkpoint 
Systems (NASDAQ:CHKP) $21.10 +17.7% surging toward its 200-day 
SMA ($21.42) on stronger-than-expected earnings and upbeat 
outlook.  

The S&P Insurance Index ($IUX.X) 284.12 +0.66% after its recent 
shellacking where Hartford Financial (NYSE:HIG) $54.35 -3.46% was 
a percentage loser in the sector.  It's chart looks very similar 
to non-component Marsh McLennan (NYSE:MMC) $25.57 -12.43%, which 
sunk back towards Friday's 6-year low.

The AMEX Gold Bugs Index ($HUI.X) 221.36 -2.68% was lower, not on 
dollar strength, but Harmony Gold (NYSE:HMY) $11.50 -8.43% saying 
it might buy Gold Fields Ltd. (AMEX:GFI) $14.29 -4.35% should its 
proposed deal with IAM Gold (AMEX:IAG) $7.24 -8.93% not go 
through.  All three stocks comprise the non-weighted $HUI.X.  
Sector bellwether Newmont Mining (NYSE:NEM) $44.75 -0.06% edged 
down 3 cents.

Pivot Matrix - 

 

Prior to the 04:15 PM EDT closes for the trackers (DIA, SPY, QQQ) 
we did see a buy program premium generated, just as IBM reported 
its headline numbers.

While the SOX.X never could get a trade at its WEEKLY Pivot, and 
perhaps "confirm" some of the last session strength that the 
NDX/QQQ were finding just above their WEEKLY R1s, the earnings 
from Texas Instruments (NYSE:TXN) and higher trade in after hours 
did have the Semiconductor HOLDRs (AMEX:SMH) $29.92 +0.53% 
trading as highs as $30.59 at last tick in tonight's extended 
session.

I looked at the QCharts-derived WEEKLY Pivot levels for the SMH 
which are as follows (S2 to R2), $28.51, $29.13, piv=$30.25, 
$30.87, $31.99, which would suggest a SOX.X opening above its 
WEEKLY Pivot.

Jeff Bailey


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The Option Investor Newsletter                   Monday 10-18-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: CMI, GDW, OSIP, PGR, SBUX, APOL, FLIR, WHR	
Dropped Calls: None
Dropped Puts:  None
Watch List: Banks to Conglomerates and more!


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

CMI - call play -
  Remember - CMI reports earnings on Wednesday
  so we are ending the play on Tuesday at the close.
  Raise the stop from $69.99 to $71.49.
 
 
GDW - call play -
  Earnings are approaching on Thursday.  We are 
  going to exit this play on Wednesday at the close.
 
 
OSIP - call play -
  Shares of OSIP rose another 3 percent on Monday
  with a breakout over resistance at $64.60 and its
  simple 100-dma.  Raise stop from $59.99 to $61.99.
 
 PGR - call play -
  PGR gapped higher on Monday after releasing positive
  news for its Dutch auction to buy 16.9 million shares of 
  its stock at $88 a share.   The move produced a new 
  MACD buy signal.  The high today was $89.59 but that's
  not quite our initial target of $90.00.  We're looking for
  some follow through tomorrow.
 
 
SBUX - call play -
  Newly added bullish candidate SBUX broke through
  round-number resistance at the $50.00 mark on Monday.
 
 
APOL - put play -
  Warning!  APOL soared 4.5 percent on Monday after a 
  strong broker upgrade.  The stock rebounded back above
  round-number support/resistance at the $70.00 mark and
  its simple 10-dma.  Conservative traders may want to exit
  now and minimize any losses.  We're going to see if the
  late September lows hold as resistance.
 
 
FLIR - put play -
  Remember - we are going to exit FLIR on Tuesday at the
  close to avoid the Wednesday earnings report.
 
 
WHR - put play -
  We are going to close WHR on Tuesday afternoon to avoid
  the Wednesday earnings report.



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

None


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DROPPED PUTS
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None


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

Suntrust Banks - STI - close: 69.38 change: +0.72

WHAT TO WATCH: Banking stocks appear to be bouncing and STI is 
participating in the rebound.  Actually STI has been climbing in 
a rising channel for the last few months and the recent bounce 
from the simple 200-dma also happens to be near the bottom of its 
channel.  This looks like an entry point for bullish positions.  
However, the stock is currently under an informal SEC inquiry and 
it has postponed its Q3 report until it restates its Q1 and Q2 
numbers.  Tread carefully and be aware of the headline risk.

Chart=


---

3M Co - MMM - close: 76.10 change: -1.88 

WHAT TO WATCH: MMM lost 2.4 percent on Monday with massive volume 
on the decline after missing Wall Street's earnings estimates by 
a penny and guiding lower for the fourth quarter.  MMM did 
rebound strongly off its lows but we suspect that shares of the 
stock could roll over again near current resistance in the 
$77.50-78.00 region.  We're going to watch it for a failed rally 
and consider potential bearish positions.  The P&F chart is now 
displaying a new triple-bottom breakdown sell signal and a $65 
target. 

Chart=


---

Kmart Holdings - KMRT - close: 91.02 change: +4.31

WHAT TO WATCH: Oh the humanity!  Evidently we had our stop loss 
just a little too close on Friday.  When KMRT traded under round-
number support at the $85 mark we were stopped out.  Today saw 
shares climb higher for a 5 percent move on above average volume.  
This looks like a new entry point but traders may want to wait 
for KMRT to breakout over the $92 level and then target a move to 
$100.

Chart=


---

Merrill Lynch - MER - close: 52.22 change: +0.59

WHAT TO WATCH: The worst may be behind it for MER.  The stock has 
put in a new higher low from its August nadir.  Yet so far the 
stock has not produced a new higher high.  Watch MER for a 
breakout above its exponential 200-dma near $53.  If shares fail 
here than bears may want to pounce on a new low under $49, 
especially with the bearish P&F chart. 

Chart=



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

AIG $59.68 +1.83 - AIG is looking pretty short-term oversold here 
and the bounce has begun.  

AZO $79.50 +1.23 - There's that breakout over resistance and its 
simple 100-dma.

KRI $68.68 +0.92 - The rally continues for KRI and the stock is 
breaking out over its simple 100-dma.

SIE $49.63 +0.28 - SIE is coiling closer to resistance at $50 and 
looks ready to breakout but watch for the upcoming earnings 
report.


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would welcome you as a permanent subscriber.

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price is $129.95 which is $20 off the monthly rate.

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subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at

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and click on "subscribe" to use our secure credit
card server or you may simply send an email to

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or you may call us at 303-797-0200 and give us the
information over the phone.

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Option Investor Inc
PO Box 630350
Littleton, CO 80163

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