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Daily Newsletter, Wednesday, 10/20/2004

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The Option Investor Newsletter                Wednesday 10-20-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Bull in a China Shop  
Futures Wrap: See Note
Index Trader Wrap: See Note


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      10-20-2004           High     Low     Volume   Adv/Dcl
DJIA     9886.93 - 10.69  9895.70  9804.19 2.12 bln 1520/1269
NASDAQ   1932.97 + 10.07  1934.32  1910.83 1.65 bln 1672/1307
S&P 100   530.72 -  0.27   531.15   526.62   Totals 3192/2576
S&P 500  1103.66 +  0.43  1104.09  1094.25
SOX       393.36 +  5.07   396.70   382.91
RUS 2000  570.13 +  3.46   570.35   562.82
DJ TRANS 3386.74 + 41.40  3387.07  3337.15
VIX        14.85 -  0.28    15.53    14.80
VXO (VIX-O)15.10 -  0.53    16.25    15.05
VXN        20.65 -  0.19    21.36    20.35
Total Volume 3,770M
Total UpVol  2,046M
Total DnVol  1,659M
Total Adv  3192
Total Dcl  2576
52wk Highs  101 
52wk Lows   100
TRIN       0.94
******************************************************************

Bull in a China Shop
Linda Piazza

In a twist on the usual version of the bull-in-a-china-shop
story, today China delivered a blow to bulls.  Fears about
China's slowdown, perhaps to be revealed in the GDP number to be
released this week, smashed overnight markets.  Almost all posted
losses.  The dollar dropped to new recent lows against both the
euro and the yen.

Coming into Wednesday's trading, many must have wondered if China
would do the same to U.S. markets, but we had a few plate
throwers of our own.  U.S. futures showed no sign of reacting as
overseas markets had, even climbing off the low reached in after-
hours Tuesday night as Motorola lowered its forecast.  Whirlpool
perhaps cast that first plate at the bulls' muzzles.  

The company used the wee hours of the morning to trim its
outlook, citing high commodity costs.  By the time cash markets
opened, JP Morgan (JPM), Pfizer (PFE) and Coca-Cola Bottling
Consolidated (COKE) had hurled plates at the bulls, with those
missiles taking the form of disappointing earnings or lowered
expectations.  Citigroup was rumored to be considering a
corporate reshuffle, the SEC's probe of Fannie Mae (FNM) had been
termed a formal investigation and Spitzer broadened his probe
into bidding practices to include the health insurance sector.

By the time the plate-throwing was over, bulls were backing out
of the shop, stampeding off before the crude inventories could be
released, tiptoeing tentatively back afterwards.

Annotated Five-Minute Chart of the SPX:

 
  
When seen on a daily chart, this action produced a bullish
hammer, but MACD continued its turn down through the signal line,
its bearish outlook unchanged as yet.  Horizontal S/R and the
200-ema provide benchmarks by which to assess bullishness and
bearishness in this index.

Annotated Daily Chart of the SPX:

 

While all movements of the SPX Wednesday could not be pegged on
crude inventories, the release of those inventories clearly
affected the SPX's behavior near 10:30.  Those inventories showed
declines of 1.9 million barrels in distillates according to the
Department of Energy and 1.2 million barrels according to the
American Petroleum Institute.

Declines in distillate inventories were expected, but declines in
gasoline inventories weren't, and those declined 700,000 barrels
according to the DOE and 2.4 million barrels according to the
API.  That decline sent the average price of regular unleaded
gasoline to $2.019 per gallon.  

Crude inventories climbed 1.2 million barrels according to the
DOE but fell 972,000 barrels according to the API.  Market
watchers deemed those numbers disappointing. Only a loan from the
Strategic Petroleum Reserve saved the DOE from having to report a
drop in crude inventories, some mentioned.  The disappointment in
inventories numbers sent crude costs higher again.  

Annotated Weekly Chart of Crude Futures for December Delivery:

 

Perhaps inventory numbers weren't the only influence on crude
prices.  Crude futures for November delivery stopped trading
today.  During the last opex cycle, shorts drove the contract
higher as they rushed to cover after it became apparent that the
expected pullback wasn't going to occur.  After the turnover to
the November contract, crude futures did pull back for a few days
before shooting higher again.  Market watchers should perhaps be
on the lookout for similar behavior this cycle.  

A pullback in crude futures might lift some pressure from the
equities, but damage may already have been done, as was apparent
by the SPX's drop below 1100 and close at resistance after the
rebound Wednesday.  Some reporting companies cite higher
commodity costs when they list their concerns about the next
quarter or pressures during the just-concluded one.  The XAL, the
Airline Index, has been in a tailspin through the summer, and may
now be forming an ominous bearish right triangle at the bottom of
its decline.  

Annotated Daily Chart of the XAL:

 

While there's nothing yet to encourage bulls in that sector, one
beaten-down sector does offer hope of at least an oversold
bounce, if only New York Attorney General Eliot Spitzer would
give his plate-throwing arm a little rest and allow sector bulls
to venture forward again.  

Annotated Daily Chart of the IUX:

 

Another beaten-down sector showed promise, too, or did it?

Annotated Daily Chart of the SOX:

 

These diamond formations typically form at market tops rather
than market bottoms, but can occasionally serve as continuation
rather than reversal patterns.  Be forewarned that the formation
suggests weakness rather than strength, but as always wait for
price to tell you what direction the breakout will occur.  Be
prepared to be whipsawed by a false breakout.  

The Nasdaq sports a similar formation.  Although the Nasdaq's
version isn't as cleanly formed, it's somewhat ominous that the
diamond forms under the 200-sma's resistance.

Annotated Daily Chart of the Nasdaq:

 

The Russell 2000 also sports a diamond shape at the top of its
climb.

Annotated Daily Chart of the Russell 2000:

   

Although the Russell 2000, SOX, Nasdaq, and SPX, were able to
post gains, minimal in the case of the SPX, the Dow may have
suffered the biggest blow.  Dow bulls spent the day dodging all
those plates lobbed their direction. Dow blue chips JPM and PFE
dropped 1.92 and 2.41 percent, respectively.  The Dow did not
manage a climb into positive territory, nor was it able to regain
9900. The Dow did manage a bullish hammer, however.  

Annotated Daily Chart of the Dow:

   

Many indices posted small gains or potential reversal signals,
but bulls stumble around with tender muzzles, perhaps made gun-
or plate-shy, especially with earnings season getting into full
gear amid signs of a global slowdown in demand.  Today, Bear
Sterns downgraded McDonald's (MCD) on fears that Europe's
turnaround had stalled.  One report speculated that the Bank of
Japan would be unable to undo its accommodative status and begin
raising rates due to a feared slowdown in the markets to which
Japan exports.  Don't forget that all the plate-throwing today
began with fears about China's GDP growth, too.

Despite some bullish signs on the charts, selling rallies may
still be the preferred tactic, but you don't have to take my word
for that. Charts set up beautiful bullish/bearish benchmarks. 
Watch those diamond shapes in the SOX, Russell 2000, and Nasdaq
for bullish or bearish breakouts.  Watch 3389-3400 on the TRAN
for signs of an upside breakout or a continued rolling down from
the potential double top.  Watch 9,500-10,000 in the Dow, with
breaks above that zone bullish and rollovers beneath it bearish. 
Watch 1100-1104 on the SPX, with a break above that zone
tentatively bullish and a rollover beneath it bearish.  Whatever
position taken, be prepared to be whipsawed and change sides if
markets prove that the original breakout or breakdown was a false
one.

Futures stayed steady after the cash close.  After-hours
developments included raised guidance from eBay (EBAY) with sales
up 52 percent.  Chiron (CHIR), the company unable to deliver flu
vaccine this season, was due to report, but had not done so as
this report was prepared. Software manufacturer Siebel Systems
(SEBL), biotechnology company Amgen (AMGN), Capital One Financial
(COF), chip manufacturer STMicrolectronics (STM), and insurer
Allstate (ALL) all reported or were due to report, representing a
variety of industries and a variety of results.   SEBL missed,
and AMGN and COF beat expectations.

Other companies reporting after the bell included AFFX, ALTR,
CRUS, CTXS, CA, ERES, SYMC and VRSN.  Thursday morning continues
the reports, with T, COCO, GDT and STMP reporting before the
bell.  

Also being announced before the bell are the initial jobless
claims.  Last week's number was 352 thousand, above the benchmark
350 thousand.  Economic reports trickle in through the rest of
the day, with September's leading indicators and the DJ/BTM
Business Barometer released at 10:00, natural gas inventories at
10:30, the October Philly Fed Index at noon and the Money Supply
figure after the close at 4:30.


***************
FUTURES MARKETS
***************

Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.
http://www.OptionInvestor.com/indexes/futureswrap.asp


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*****************
INDEX TRADER WRAP
*****************

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_102004_1.asp


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The Option Investor Newsletter                Wednesday 10-20-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Watch List: Oil to Specialty Retail and more!
Stop Loss Updates: None
Dropped Calls: MTB
Dropped Puts: None
New Calls: APC
New Puts: TDS

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

Oil to Specialty Retail and more!

___________________________________________________________________

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.
___________________________________________________________________


Amerada Hess Corp - AHC - close: 88.47 change: +2.23

WHAT TO WATCH: With the rebound in the oil sector today we 
strongly considered adding AHC to the play list as a call 
candidate.  The recent profit taking stalled at the $85.00 level.  
This was previous resistance back in July and now it's acting as 
support.  Short-term technicals like the RSI and stochastics are 
bullish and aggressive traders may want to buy the bounce.  The 
challenge is that AHC is due to report earnings on Oct. 27th and 
we don't want to hold over the report.




---

Guitar Center - GTRC - close: 46.78 change: +1.49

WHAT TO WATCH: GTRC is trading near new three-month highs and the 
stock looks like a bullish candidate.  Short-term technicals are 
positive and its MACD just produced a new buy signal.  We 
strongly considered adding GTRC with a trigger over its current 
all-time high from June near the $47.50 mark.  Unfortunately, 
earnings are on Oct. 26th and that doesn't give us enough time.  
A move over $47 would be a new triple-top breakout buy signal on 
its P&F chart.  




---

Lear Corp - LEA - close: 49.73 change: -0.78

WHAT TO WATCH: LEA continues to sink on heavy volume.  The stock 
tried to bounce Friday-Monday but the rebound failed at its 
simple 10-dma after filling the minor gap down on Oct. 14th.  Now 
the stock is under round-number support at the $50.00 mark and 
investors seem to be rotating out of the stock before its Oct. 
21st earnings report tomorrow morning.  Estimates are for $1.13 a 
share.  The P&F chart is bearish and points to a $42 target but 
there is support near $48.  We want to see if LEA breaks under 
the $48 level after they report.




---

Whole Foods Market Inc - WFMI - close: 84.69 change: +1.28

WHAT TO WATCH: We're keeping our eye on WFMI again.  The stock is 
bouncing from its simple 50-dma an has apparently filled the 
small gap down from Oct. 12th.  Short-term technicals are 
positive again and the stock has room to run before its November 
11th earnings report.  Although it is noteworthy that its P&F 
chart is currently in a sell signal.  






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

None

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

M&T Bank - MTB - close:  98.78 change: -0.72 stop: 98.00

A big sell-off in financial stocks sent shares of MTB gapping 
lower and eventually trading under short-term support at the 
$98.00 level.  That was more than enough to stop us out at $98.  
We had a relatively tight stop on purpose.  We liked the 
technical breakout but MTB's MACD was looking weak.  Currently 
we're now looking for more weakness ahead with a potential failed 
rally under the $100 level.  

Picked on October 18 at $100.83
Change since picked:     - 2.05
Earnings Date          10/12/04 (confirmed)
Average Daily Volume =      327 thousand



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

None


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

Anadarko Petroleum - APC - close: 69.87 chg: +2.34 stop: 66.99

Company Description:
Anadarko Petroleum Corporation's mission is to deliver a 
competitive and sustainable rate of return to shareholders by 
developing, acquiring and exploring for oil and gas resources 
vital to the world's health and welfare. As of year-end 2003, 
Anadarko had 2.5 billion barrels of oil equivalent of reserves, 
making it one of the world's largest independent exploration and 
production companies. Anadarko's operational focus extends from 
the deepwater Gulf of Mexico, up through Texas, Louisiana, the 
Mid-Continent, western U.S. and Canadian Rockies and onto the 
North Slope of Alaska. Anadarko also has significant production 
in Algeria, Venezuela and Qatar.
(source: company press release)

Why We Like It:
Oil and energy bears have got to be scared.  The entire oil group 
was hit by profit taking over a week ago.  Almost every chart 
shows a clear sell signal in the MACD from overbought levels.  
Yet now, in the last couple of days, almost every oil-related 
chart is also showing a bounce from support.  If you're a 
Fibonnaci trader most of these rebounds are in the 25 percent to 
38.2 percent retracement levels of the August to October rally.  
A lot of stocks we considered adding have earnings in the next 
few days.  APC isn't due to report earnings until Friday, Oct. 
29th.  That doesn't give us a lot of time and makes this a more 
aggressive play.  However, the plan is simple.  APC is a momentum 
machine and with crude oil hitting new highs again both appear to 
be steadily rising.  APC just broke out above its short-term 
trend of lower highs and is poised to breakout to new highs.  We 
are going to ride the momentum for one week from Thursday to 
Thursday.  Yet, just to make sure we're catching the breakout 
we'll use a TRIGGER above the current high at $70.38.  Our entry 
point will be $70.40.  If triggered our stop loss will be $66.99 
under Tuesday's low.

Suggested Options:
We're going to use November options.  Remember this is a  one-week 
play.  We like the 65s and 70s.

BUY CALL NOV 65 APC-KM OI=2616 current ask $5.50
BUY CALL NOV 70 APC-KN OI=2786 current ask $2.00

Annotated chart:

 

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked:    + 0.00
Earnings Date         10/29/04 (confirmed)
Average Daily Volume =     1.6 million 





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

Telephone Data Sys - TDS - close: 79.75 chg: -3.20 stop: 82.51

Company Description:
TDS, a FORTUNE 500 company, is a diversified telecommunications 
corporation founded in 1969. Through its strategic business 
units, U.S. Cellular and TDS Telecom, TDS operates primarily by 
providing wireless and local telephone service. TDS builds value 
for its shareholders by providing excellent communications 
services in growing, closely related segments of the 
telecommunications industry. As of Sept. 30, 2004, the company 
employed 11,200 people and served nearly 6 million 
customers/units in 36 states. (source: company press release)

Why We Like It:
Ouch!  TDS totally fumbled the earnings ball today.  Analysts 
estimates ranged from 43 to 81 cents with the average at 59 cents 
a share.  TDS turned in Q3 earnings of 35 cents.  Revenues were a 
bit better than expected, which may have saved TDS from a 
stronger sell-off.  However, the reaction was negative.  TDS 
broke support at the $82 level, the $80 level, the simple 40 and 
50-dma's on move than twice the average volume.  This looks like 
the beginning of a new trend change or at least a consolidation 
back toward the $75 level and/or the 200-dma near $73.  We've 
played TDS before and it was a high-risk play because of the low 
volume.  The stock trades with low volume and the options trade 
with low volume.  Keep that in mind as you consider your 
strategy.  

Suggested Options:
November and December options are available but we're going to 
suggest the January's.  More aggressive traders may want to 
consider the November 80s.

BUY PUT NOV 80 TDS-WP OI=13 current ask $2.45

BUY PUT JAN 80 TDS-MP OI=12 current ask $4.00
BUY PUT JAN 75 TDS-MO OI=17 current ask $1.85

Annotated chart:

 

Picked on October 20 at $79.75
Change since picked:    - 0.00
Earnings Date         10/20/04 (confirmed)
Average Daily Volume =     155 thousand





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If you like the results you have been receiving we
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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**********

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