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Daily Newsletter, Tuesday, 10/26/2004

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The Option Investor Newsletter                 Tuesday 10-26-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Better Late Than Never
Futures Markets: See Note
Index Trader Wrap: Insurers breath sigh of relief
Market Sentiment: Is the rally here?


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      10-26-2004           High     Low     Volume   Adv/Dcl
DJIA     9888.48 +138.50  9888.48  9749.55 1.98 bln 2213/ 879
NASDAQ   1928.79 + 14.80  1928.80  1905.49 1.81 bln 1796/1275
S&P 100   531.69 +  7.69   531.60   524.00   Totals 4109/2154
S&P 500  1111.10 + 16.30  1111.10  1094.81 
SOX       396.77 -  1.10   400.27   393.38
RUS 2000  577.61 +  5.94   577.99   567.32
DJ TRANS 3435.61 + 55.40  3437.83  3366.07
VIX        16.40 -  0.18    16.87    15.97
VXO (VIX-O)16.48 -  0.39    17.28    16.12
VXN        22.40 -  0.03    23.14    22.36 
Total Volume 4,094M
Total UpVol  2,854M
Total DnVol  1,183M
Total Adv  4498
Total Dcl  2469
52wk Highs  270
52wk Lows   121
TRIN       0.55
NAZTRIN    1.14
PUT/CALL   0.68
************************************************************

Better Late Than Never
by Jim Brown

The historical end of October ramp finally appeared but
the reasons remain far from clear. The Dow has been the
laggard for weeks but today the blue chip index roared
higher with a +138 point jump to almost regain the 9900
level. It is amazing we had sunk so far that a +138 point
gain does not make it back to 9900 and a level that was
support then resistance over the last two weeks. 

Nasdaq Chart

 
SPX Chart

 
Wilshire Chart

 

The morning started off far different than it finished.
The indexes dove at the open in anticipation of the 
Consumer Confidence number with the Dow retesting 9750
before the numbers hit the wires. The Consumer Confidence
came in less than expected at 92.8 with a decline on
almost all internal components. The magnitude of the
declines were minimal on each internal component but 
the forward looking views were the most telling. Most
consumers are backing away from a potential home or 
major appliance purchase and feel business conditions
and employment will be worse six months from now. Only
autos showed an increase in purchase expectations and
that was due to the new model year and the very strong
incentives now being offered for year end inventory 
reductions. This was the third consecutive month of 
declines and this is the lowest level in seven months.
The high was 105.7 in July making today's number a 
-13 point drop in only three months. 

After the headline number was announced the markets
rebounded off the lows on decent volume despite the
worse than expected results. Traders claim the whisper
number was far worse based on the negative campaign
ads, mudslinging and the rise in energy prices. The
drop was not as severe as the recent Michigan Sentiment
and analysts expect the low interest rates will help
buoy confidence once the election is over. Retail 
prices are still experiencing some deflation from 
excess inventory and are expected to rise but the
elimination of apparel quotas should lower apparel
prices after the first of the year. Bottom line is
a continued decent environment for consumers as long
as the Fed does not get carried away in Nov/Dec. 

Weekly Chain Store sales posted their second week of
declines with a -0.6% loss which indicates the high
gas prices are continuing to drag on consumer budgets.
The index fell to the second lowest level since the
beginning of April and has nearly erased the early
October bounce. However the ICSC feels growth will
improve for the entire month to something in the +3.5%
range compared to only +2.4% in September. Somebody
better buy a lot of Halloween candy very soon because
October is about over.  

While the economics probably did not provide a large
boost to the market the Marsh Mclennan news did. The
extremely quick turnaround by MMC to the Spitzer claims
has cooled the Spitzer attack. Spitzer has removed the
criminal portion of the claims and said the problem
can be handle on a civil basis. This removes the 
potential death sentence for MMC and by association
several other companies. The board of MMC quickly
addressed the problem and came up with a huge bundle
of changes structured to make buyers, investors and
Spitzer happy once again. Investors have moved back
into the stock over the last three days based on 
changes being made and discussed and the calming of
the Spitzer attack. MMC gained +2.45 today to $28.81
and well above the $22.75 low from last week. 

AIG was a major winner with a +4.23 gain. As a Dow 
component this equates to about +35 points of the Dow
rebound. The AIG chairman is Hank Greenberg and the
father of Jeffery Greenberg the CEO who resigned from
MMC. The Dow also got help from GE after GE backed
4Q and full year estimates citing strength across all
divisions. GE rose +0.73. Also helping were CAT +1.07,
HD +1.00, BA +0.98, AA +0.98. IBM also rose slightly 
after authorizing a $4 billion stock buyback. 

Despite the gains by the major insurers, AET +4.49, 
ATH +3.84, CB +4.56, CI +3.69, WLP +4.67, there is
another lion prowling the woods. Connecticut Atty
General Richard Blumenthal confirmed he had issued
35 subpoenas to insurance companies and brokers who
operate in his state. Anthem was the headliner for
this effort but ATH downplayed the event saying it
was not material to their business. Bloomenthal said
he was working with his counterparts in other states
to sift through not only property and casualty but
also health, auto and employee benefits. The wide net
approach is sure to trip over some more practices they
feel are contrary to the public good. Hopefully the
fear has already been seen in the boardrooms and when
any problems are found there will be a swift response.
Given the cash cow that could be milked by aggressive
states currently in financial stress the odds are 
very good there will be some heated discovery and 
the insurance companies will eventually pay. 

The Dow rebound this morning may have pulled it out
of danger for making the history books. At the open
the Dow had lost -2.3% for the month, more than any
October since 1997. The +1.4% one-day jump erased more
than half of that drop for the month. The key question
is obviously how long will it last? With 9900 resistance
looming overhead and 9950 almost as strong there is
going to be some potholes in the road. However this
is October and this is the week that should see a
strong rally. At least in normal years we could expect
a rebound from the October lows to set us up for the
Nov/Dec year end run. 

The Dow actually pegged the pattern almost to the point
with Monday's drop to 9700. The downtrend since February
was looking for a lower low and 9700 was the earliest
potential rebound point once the August lows at the 9800
level was broken last week. 

Dow Chart

  


The Nasdaq was not as lucky. A couple of high profile 
warnings from FLEX and SLAB and the SOX was knocked for
a loss that almost took the Nasdaq down with it. FLEX
dropped -$1 after it said profits would be below prior
analysts estimates on weaker than expected sales. While
that warning hurt the market more than it hurt the FLEX
stock price the damage from SLAB was much more drastic. 
SLAB was slammed to a -6.56 point loss after warning 
that high inventory levels and cautious customers had 
turned the outlook "extremely murky" according to one
analyst. SLAB said they expected the current inventory
excess impacting the entire sector to take time to work
itself out. SLAB expects Q4 sales to fall to $95 million
from prior estimates of $125 million. That slash in 
outlook knocked three times that amount at -$370 million
off the market cap for SLAB. DBS and FB downgraded the 
company to inline levels making the last six ratings 
changes all downgrades on SLAB. It seems the analyst 
community has turned sour on SLAB. 

The challenge was not the downgrades to FLEX/SLAB but 
the impact to the markets. The SOX clung to support at
395 and tried several times to rally to no avail. The
SOX closed flat at -1.10 at 396. The lack of SOX support
for the Nasdaq kept the Nasdaq from joining the Dow party
and held it to only a +7 gain at 1920 until the closing
spike. The closing spike was due to a couple buy programs
on the S&P and the Russell which pushed the Russell to 
a three week high at 577.63 and over strong resistance.
The result was a Nasdaq that moved right back into the
middle of its recent range (1900-1950) at 1927 and a 
+15 point gain. 

Last week the chip stocks could do no wrong in the eyes
of investors. Of the 20 or so chip stocks reporting 
earnings one analyst said 19 either missed estimates 
or guided lower. Yet the SOX rallied off its 375 low 
to a high of 411 last Thursday. So what changed? The
reason for the SLAB warning was exactly the same as the
rest but the market timing was different. Last week you
could not give away insurance stocks and huge amounts
of money was flowing into sectors not related to insurance.
Once the get out of jail free card was played by Spitzer
that cash suddenly saw returning value in insurance and 
weakness in chips for Q4/Q1. As you can tell by the gains
in the insurance stocks I reported above the funds were
rushing back into the sector and away from techs they
loved last week. Why? Insurance stocks were suddenly 
undervalued repositories for excess cash ahead of the
fund year end on Friday. Those funds wondering what to
do with cash generated from the portfolio rebalancing
over the last three weeks suddenly decided Chubb, AIG,
AET, HIG and CI were better investments at their current
valuations than chip stocks where 19 of 20 had warned. 

Another factor sending the indexes higher was the AT&T
Wireless sale to Cingular. According to futures traders
the close of the deal produced a huge index disparity in
the S&P-500. S&P dropped AWE from the S&P-500 and added
CIT. AWE had a market cap of $41 billion and CIT only 
$8 billion. This meant index funds had to buy the index
equivalent $33 billion of other S&P stocks to make up 
for the reduction to the overall market cap loss in the
S&P. Rick Santelli said that about 12,000 S&P futures 
contracts would need to be bought to cover the changes.
Obviously the S&P got a much needed shot in the arm and
the rebound in insurance stocks definitely did not hurt. 

I am sure you are thinking the same thing I am. What
does that mean for tomorrow? Based on the procrastination
factor I would expect more S&P buying tomorrow. I really
doubt that every fund that needed to make the change did
it today. The Justice Dept did not make the announcement
until 3:26 pm on Monday and there were some qualifications. 
S&P did not announce until 5:46 PM on Monday what changes
would be made to the various indexes. This means funds 
could not make changes until today and just given the 
enormous amount of money to be shuffled and the number
of funds needing to make the change the odds are very
good we have not seen the last of it. 

After setting the stage I suggest we look at it from 
the bears point of view. Oil closed over $55 again and
is moving higher overnight. The S&P closed at 1110 which
is just below strong resistance at 1112 where the 50dma
and 100dma converge. That resistance won't matter if 
funds still need to buy billions in S&P stocks. The 
tech sector did not join the party despite the S&P 
being better than 25% weighted in tech stocks. That 
may change tomorrow once fund traders are shocked
but the big gains in some non tech stocks. Non-techs 
may look suddenly over valued and techs may be combed
over once again for bargains. 

The calendar is right for more buying as funds put the
finishing touches on their portfolios for year end. The
calendar is also wrong for a continued rally based on 
the current election surveys. With the election still
a dead heat according to the surveys there are some 
other sources predicting a Kerry victory with the 
University of Minnesota releasing its latest projection
on the election saying that Bush has less than a 30% 
chance of being reelected. The missing 350 tons of 
explosives made the news all afternoon and the blame 
is being placed on Bush despite him not even knowing 
it was there. Late news today suggests a setup by Dr. 
ElBaradei in an effort to discredit Bush ahead of the
election. The IAEA Director General Dr. Mohamed ElBaradei
is no friend of the Bush administration and releasing 
this news the week before the election could be payback.
For whatever reason it was released this week it is not
doing the Bush campaign any good. This causes even more
confusion for investors with only four trading days 
until the election. 

The combination of these events suggests more confusion
in the markets but a potential upward bias from the S&P
changes. The Nasdaq has room to run and the S&P could
break 1115 if the fund shuffling continues. The Dow has
the biggest challenge at 9900 and 9950 but a textbook
support low is in place at 9700. This could be all the
bulls need to justify continued buying. Were it not for
the election I would bet we close higher on Friday than
we did today. However, the election mudslinging on both
sides and the closeness of the race will continue to keep
the market outcome in doubt. Fortunately October and the
election will be history in five trading days and we will
be free to trade on fundamentals once again. That may 
have it's own set of problems but at least it will be 
different than the ones we are facing this week. 

Enter Passively, Exit Aggressively. 

Jim Brown
Editor

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

Insurers breath sigh of relief

Despite an intra-day turnaround in oil, with December Crude Oil 
futures (cl04z) 55.17 +1.15% closing up 63 cents ahead of 
tomorrow's weekly inventory data, the major indices staged an 
impressive rebound as one cloud of uncertainty regarding some 
insurers was put to rest.

The S&P Insurance Index ($IUX.X) 290.27 +5.31% as well as the HMO 
Index ($HMO.X) 921.87 +5.02% were partially reflated, where more 
than likely, sector bears rushed for cover after New York 
Attorney General Eliot Spitzer said he would not seek criminal 
prosecution of Marsh & McLennon (NYSE:MMC) $28.87 +9.27% after 
the company agreed to name a new CEO.

Dow component American International Group (NYSE:AIG) $60.33 
+7.54, which Eliot Spitzer's office has subpoenaed, jumped $4.23 
on the session, but well off its $67-level of trade found as 
recently as October 14, when insurers became a greater focus of 
the New York Attorney General.

S&P 100 Index (OEX.X) 531.69 +1.46% components, which also 
include AIG had health insurer Cigna (NYSE:CI) $63.50 +6.16%, 
property/casualty insurer Allstate (NYSE:ALL) $47.61 +1.94% and 
diversified insurer Hartford Financial (NYSE:HIG) $58.74 +6.5% 
gaining on the session.  Allstate (ALL) is not a company that had 
been reported as a primary focus of the NY AG.

NASDAQ-100 Index (NDX.X) 1,422 +0.66% component and health 
insurer First Health Group (NASDAQ:FHCC) $15.92 +4.05% rose 62 
cents.  First Health currently in talks to be acquired by 
Coventry Health (NYSE:CVH) $39.60 +3.01%.

The bottom line on many of the insurance stocks that had been 
under heavy selling pressure in recent weeks saw relief today, 
where it would appear that as long as company executives show a 
willingness to cooperate with the NY Attorney General, then 
there's a good chance criminal prosecution of the COMPANY itself 
can be avoided.  

Most investment houses tended to shy away with bullish calls of 
the large underwriters, as the market doesn't know what the size 
of fines will be.

One could begin to think that if the worst is over, then recent 
lows for the IUX.X (270) and HMO.X (860) should be the important 
determiner.

U.S. Market Watch - 10/26/04 Close

 

Homebuilders built on Monday's gains, surging back above their 
rising 50-day SMA (628).  Pulte Home (NYSE:PHM) $54.52 +5.86% 
warned analysts that their 2004 and 2005 profit projections were 
to low.

Earlier this month, Pulte cut its current quarter forecast after 
its Las Vegas operations tanked when aggressively raised prices 
scared off potential buyers.  That sent the stock's price 
tumbling from around $62 per share and had the DJUSHB retreating 
from the 660 level.

Market Snapshot / Internals - 10/26/04 Close

 

A reversal for insurers gives the NYSE a greater price lift than 
the NASDAQ, while the more beaten down INDU/SPX/OEX out gained 
the RUT.X and QQQ, which had been relative strength performers 
during the "insurance scandal."

I'll make note that the Market Volatility Index (VIX.X) 16.46 was 
relatively steady all day.  Take note of this as I will quickly 
touch on current VIX.X readings and tie in with SPX.X 30-minute 
interval bar chart later.  

TRIN, which sat at its DAILY S2 for the better part of the 
session, suggests today's trade was all about stocks and volumes 
were rather brisk.  As of last night's close, daily volume was 
running an average of 1.47 billion shares per day at the NYSE and 
1.69 billion per day at the NASDAQ.  

NH/NL ratios try to stabilize again, but remain in a bearish 
leadership state.  I think tomorrow's "oil trade" lies in the 
balance.  

Pivot Matrix -

 

Same NSDAQ/QQQ resistance correlations tomorrow, that were 
present in last night's wrap.  The semiconductor's digested some 
more "bad news" with Silicon Laboratories (NASDAQ:SLAB) $27.88 
-19.04% a casualty.

I'm going to make the case that last night's Spitzer news and 
today's trade now has the MARKET fully compensating, or believing 
there will be no insurance companies going out of business under 
the scenario of criminal wrongdoing.  At least, criminal 
wrongdoing that can't be settled out of court with a pretty hefty 
fine.

S&P 500 Index (SPX.X) - 30-minute intervals

 

I'm showing a 30-minute chart of the SPX.X, with QCharts' 
calculated WEEKLY Intervals.  As the SPX.X first broke below its 
MONTHLY Pivot 1,115, it was the stepped up allegations of 
wrongdoing by Mr. Spitzer that had the SPX falling below MONTHLY 
Pivot, and staying there for the last two weeks.  

Today, the SPX started out right at the 21-period SMA (thin pink) 
and with the help of 3 buy program premium alerts from 10:00 AM 
EDT to 10:20 AM EDT was able to gain to its WEEKLY Pivot of 
1,103.  

One last buy program premium at 12:10-12:15 had the SPX clearing 
its WEEKLY Pivot.  

I went back and reviewed some notes from a Market Monitor Archive 
on 10/21/04 at 02:21:19 AM, when I was answering a trader's 
question regarding "what does it mean when you post sell program 
premium."  

In that post I made a record 8 different sell program premiums 
generated during the  10/20/04 and all activity was right around 
the MONTHLY S1 from 1,096.73-1,101.74.

I could make the case, based on this observation, that the 
"insurance out of business" risk was removed today.

Now... today, the VIX.X stayed very steady.  See where I point to 
VIX.X 16.35?  Other than yesterday and today, the most recent 
VIX.X reading at current levels was October 14, which equates to 
that SPX.X relative low.

As I see it, ONE concern exists.  That is OIL.  With the Dow 
Transports (TRAN) 3,435.61 +1.64% closing at an all-time high, I 
have to think the OIL concern remains psychological.

One UNCERTAINTY is Tuesday's election.  Will the equity MARKETS be 
nervous into the weekend, ahead of the election?

Answer:  No, not if the SPX can hold above 1,098.

December Crude Oil Futures (cl04z) - 30-minute intervals

 

There are two economic reports due out tomorrow morning, 
September durable goods at 08:30 AM EDT(consensus +0.5% versus 
August's -0.3%) and September new home sales at 10:00 AM EDT 
(1,150K versus August's 1,184K).  Then at 10:30 AM EDT is when 
weekly crude oil, distillate and gasoline inventories will be 
released.  I have not yet found an information resource to give 
an estimate of what traders are expecting.  I usually get that 
information when the data is released.

However, oil was lower at today's open, but with the above 
technicals, it was going to be hard to find any traders willing 
to go home short ahead of tomorrow morning's energy report and 
buyers snapped up oil under its WEEKLY Pivot.

In recent weeks, the PATTERN has been that if oil closes above 
Tuesday's close on Wednesday (tomorrow) then oil tends to trade 
higher into the Friday close.  

For me to think equities can make a further move higher, perhaps 
SPX.X WEEKLY R2, then oil is going to have to see a decline back 
near the $52.00 level into Friday's close.  

Based on today's trade, I'd at least need to see a 30-minute 
close below the WEEKLY Pivot, which is something oil didn't do 
today.

Some of last week's energy statistic headline numbers that can 
serve as a quick reference tomorrow.

For the week ended October 15....

Refinery inputs averaged 14.8 million barrels/day +280K bbls/day
Gasoline production rose to 8.7 million barrels/day
Distillate production up slightly to 3.7 million bbls/day

U.S. crude oil inventories +1.2 million barrels in week.
Gasoline inventories -0.7 million barrels in week.
Distillate inventories -1.9 million barrels in week.

Jeff Bailey

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

Is the rally here?
- J. Brown

There have been a lot of traders waiting and watching for the end 
of October rally in stocks.  You can bet that more than a few of 
them are hoping that today's 138-point gain in the Dow is the 
beginning.  There are probably a few more hoping or speculating 
that today could be the beginning of the widely-expected post-
election fourth quarter rebound higher.  It is certainly a 
possibility to consider. 

Most will point the finger at insurance stocks today if you're 
looking to blame someone for the bounce.  The entire insurance 
sector soared higher after news hit of NY Attorney General Eliott 
Spitzer's decision to not file criminal charges against Marsh and 
Mclennan (MMC).  The IUX insurance index added 5.3 percent and 
Dow-component AIG soared more than 7 percent and was the Dow's 
biggest gainer.  

The rally spread to the rest of the Big Board and soon almost the 
entire market was trading higher.  Only semiconductors, disk 
drives, and gold stocks closed lower as evidenced by their 
respective indices.  Bulls produced some big bounces in 
healthcare (HMO.X +5%), homebuilders (DJUSHB +3.4%), and airlines 
(XAL.X +4.3%).  Overall market internals were very bullish.  
Advancing stocks outnumbered decliners 20-to-7 on the NYSE and 3-
to-2 on the NASDAQ.  Up volume was about four times heavier than 
down volume on the NYSE and only about 25 percent heavier on the 
NASDAQ.  

I feel like I should mention crude oil again and its rebound back 
over the $55 a barrel level but does it really matter?  Oil 
didn't influence stocks today and it certainly didn't impact the 
transportation sector, which climbed right back toward five-year 
highs.  

On a different note there are probably some big-picture pundits 
out there pondering the implications, if any, of the SEC's vote 
on hedge funds today.  The hedge fund industry is rumored to 
control upwards of $1 trillion in assets.  The agency voted in 
approval of having hedge funds register as investment advisors.  
This would allow SEC examinations, force them to have and follow 
security compliance guidelines and provide more information in 
general.  

Tomorrow's economic reports are the durable goods orders and new 
home sales.  Plus, we'll get the latest oil and gas inventory 
supply data.  Wednesday is also another full day of Q3 earnings.  
Some of the oil/energy stocks reports are AHC, COP EOG, KMG, and 
POG.  A few of the tech stocks reporting are ASKJ, JDSU and SIRI.  
Plus, we have a handful of other big names like BUD, BDK, NEM, 
NOC, BA, PG and UL.  

Tuesday leaves us with just seven days and only five trading days 
before the Nov. 2nd election.  It wouldn't surprise me to see 
stocks rally into the election on the singular notion that the 
whole circus is almost behind us.  But then that's probably not 
true.  Such a razor-thin race probably guarantees the whole thing 
will be decided in court and we won't know the "winner" for days.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9497
Current     :  9888

Moving Averages:
(Simple)

 10-dma:  9883
 50-dma: 10110 
200-dma: 10264



S&P 500 ($SPX)

52-week High: 1163
52-week Low : 1018
Current     : 1111

Moving Averages:
(Simple)

 10-dma: 1105
 50-dma: 1112
200-dma: 1119



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1301
Current     : 1442

Moving Averages:
(Simple)

 10-dma: 1443
 50-dma: 1411
200-dma: 1439



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

CBOE Market Volatility Index (VIX) = 16.39 -0.19
CBOE Mkt Volatility old VIX  (VXO) = 16.48 -0.39
Nasdaq Volatility Index (VXN)      = 22.47 -0.23 


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.67        841,443       566,655
Equity Only    0.58        705,920       406,927
OEX            0.84         22,756        19,085
QQQ            1.40         14,958        21,023


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

Bullish Percent Data

           Current   Change   Status
NYSE          62.9    + 0.2   Bear Correction
NASDAQ-100    49.0    + 2     Bull Alert      
Dow Indust.   50.0    - 0     Bear Confirmed
S&P 500       60.2    + 0.6   Bear Correction
S&P 100       59.0    + 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: 1.03
10-dma: 1.04
21-dma: 1.02
55-dma: 1.07


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    2063      1793
Decliners     745      1197

New Highs     135        91
New Lows       25        63

Up Volume   1672M     1047M
Down Vol.    397M      728M

Total Vol.  2089M     1803M
M = millions


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

Commitments Of Traders Report: 10/19/04

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

Commercial traders continue to hedge their bets in the big
S&P contacts and are nearing a dead heat between longs and
shorts.  Small traders remain mostly net bullish but have
pared back their enthusiasm a bit.

Commercials   Long      Short      Net     % Of OI
09/28/04      404,773   434,441   (29,668)   (3.5%)
10/05/04      421,217   435,736   (14,519)   (1.7%)
10/12/04      423,472   436,780   (13,308)   (1.5%)
10/19/04      432,945   441,041   ( 8,096)   (0.1%)

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
09/28/04      135,317   107,173    28,144    11.6%
10/05/04      137,210   114,489    22,721     9.0%
10/12/04      139,175   113,903    25,272     9.9%
10/19/04      147,148   124,827    22,321     8.2%

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

We see a similar picture in the e-minis.  Commercial traders
aren't making any changes.  They remain net bearish and we
have the same reading as last week.  Meanwhile small traders
have slowly grown more net bullish, which of course is a
bearish contrarian indicator.

Commercials   Long      Short      Net     % Of OI 
09/28/04      226,020   420,714   (194,694)  (30.1%)
10/05/04      248,190   476,608   (228,418)  (31.5%)
10/12/04      258,457   517,805   (259,348)  (33.4%)
10/19/04      264,860   531,541   (266,681)  (33.4%)

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
09/28/04      262,501     68,255   194,246    58.7%
10/05/04      308,021     80,373   227,648    58.6%
10/12/04      309,720     62,502   247,218    66.4%
10/19/04      353,903     66,027   287,876    68.5%

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


NASDAQ-100

Commercial trades have not moved much.  They remain net 
bullish on the NASDAQ 100.  Small traders upped both their
longs and shorts and reduced their bearish posture a tad but
remain strongly net bearish.

Commercials   Long      Short      Net     % of OI 
09/28/04       55,045     32,319    22,726   26.0%
10/05/04       55,640     32,872    22,768   25.7%
10/12/04       52,572     32,775    19,797   23.2%
10/19/04       52,630     31,940    20,690   24.4%

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
09/28/04       10,078    22,917   (12,839)  (38.9%)
10/05/04       12,254    30,693   (18,439)  (42.9%)
10/12/04        8,756    24,400   (15,644)  (47.2%)
10/19/04       10,462    25,243   (14,781)  (41.3%)

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

Commercial traders seem content to sit on the sidelines with
out any big directional bets on the Industrials.  Longs and
shorts have remain pretty close to one another for a few weeks
now.  That's not so with the small traders.  The latest data
shows a big drop in short positions and the bias has turned
bullish for the first time in weeks.


Commercials   Long      Short      Net     % of OI
09/28/04       29,714    26,877    2,837       5.0%
10/05/04       27,498    25,772    1,726       3.2%
10/12/04       24,150    22,849    1,301       2.7%
10/19/04       25,385    24,213    1,172       2.3%
 
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
09/28/04        5,143     5,988   (  845)   ( 7.6%)
10/05/04        5,531     5,539   (    8)   ( 0.0%)
10/12/04        8,814     9,167   (  353)   ( 1.9%)
10/19/04        8,327     6,015    2,312     16.1% 

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                  Tuesday 10-26-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: GCI
Call Play Updates: APC, FDX, SBUX
New Calls Plays: LEH
Put Play Updates: APOL
New Put Plays: None


****************
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:
*****

None


PUTS:
*****

Gannett Co - GCI - close: 82.27 change: +1.62 stop: 82.01

Heads up!  GCI added another 2 percent on top of Monday's bounce 
to breakout over its simple 10-dma and close over the $82 level.  
The move has turned GCI's technicals strongly bullish again.  
Fueling the move higher was news that GCI's management had 
approved an additional $500 million stock buy back program.  
Combine that news with a sharp rebound in the markets and it's no 
surprise to see GCI trading higher. Fortunately, GCI never traded 
low enough to hit our trigger at $79.40.  That means we're still 
spectators and not players.  Today we're choosing to close the 
play unopened and look elsewhere. 

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked:    - 0.00
Earnings Date         10/12/04 (confirmed)
Average Daily Volume =     876 thousand
Chart =



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


Anadarko Petroleum - APC - close: 70.11 chg: +0.44 stop: 67.99*new*

Oil and energy stocks were on the move again Tuesday and shares 
of APC rose 1.5 percent to close at another new all-time high.  
Technical oscillators remain positive and its MACD is extremely 
close to another new buy signal albeit at an overbought level.  
Remember that we do not want to hold this play over APC's 
earnings report on Friday morning so we are planning to exit just 
before Thursday's closing bell.  We are going to raise our stop 
loss to $67.99.

Picked on October 22 at $70.40
Change since picked:    + 0.65
Earnings Date         10/29/04 (confirmed)
Average Daily Volume =     1.6 million 
Chart =


---

Fedex Corp - FDX - close: 88.61 change: +1.67 stop: 84.99

The Dow transports turned in a strong session with a 1.64 percent 
rally ending close to five-year highs on Tuesday.  The group has 
been exceptionally strong with traders stepping in to buy the dip 
on Monday.  FDX is performing its own rebound today with a 1.9 
percent gain and a close back over the $88.50 level.  Readers can 
choose to use this bounce as an entry point or wait for FDX to 
clear resistance at the $90 mark.

Picked on October 21 at $89.45 
Change since picked:    - 0.84
Earnings Date         09/22/04 (confirmed)
Average Daily Volume =     1.5 million 
Chart =


---

Starbucks - SBUX - close: 50.51 chg: +0.85 stop: 46.95     

The SBUX momentum machine continues.  Traders bought the dip 
$49.50 again with its simple 10-dma acting as technical support.  
Now that the major indices are starting to bounce we can look for 
SBUX to resume its leadership role again.  No change in strategy 
or stops at this time.

Picked on October 17 at $49.47 
Change since picked:    + 1.04
Earnings Date         11/10/04 (confirmed)
Average Daily Volume =     3.3 million 
Chart =


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

Lehman Brothers - LEH - close: 80.60 chg: +1.69 stop: 77.25

Company Description:
Lehman Brothers, an innovator in global finance, serves the 
financial needs of corporations, governments and municipalities, 
institutional clients, and high-net-worth individuals worldwide. 
Founded in 1850, Lehman Brothers maintains leadership positions 
in equity and fixed income sales, trading and research, 
investment banking, private equity and wealth and asset 
management services. The Firm is headquartered in New York, with 
regional headquarters in London and Tokyo and operates in a 
network of offices around the world.
(source: company press release)

Why We Like It:
The markets turned in a strong session on Tuesday and the broker-
dealers took advantage of the bullish environment.  The XBD 
broker-dealer index added 1.26 percent closed above technical 
resistance at its simple 200-dma for the first time since early 
May.  The XBD has been consolidating under this resistance level 
for a while and now that it looks ready to really breakout and 
start a new leg higher we want to add one of the leaders in the 
group.  LEH is one such leader.  The stock's relative strength 
over the last couple of months compared to most of its peers has 
been impressive.  Currently LEH is rebounding from the sharp dip 
a week ago with technical support at the simple 50 and 200-dma's 
below it.  Tuesday's 2.14 percent gain places LEH back above the 
$80 level and poised to hit new relative highs.  There is obvious 
short-term resistance at the $82 level but we don't think it will 
hold.  Our immediate target is the $85 region.  If you're really 
optimistic check out LEH's P&F chart, which points to a triple-
digit price target. 

Suggested Options:
Short-term traders can choose from Novembers, Decembers and 
January strikes.  We're going to suggest the Decembers.

BUY CALL DEC 75 LES-LO OI= 97 current ask $6.70
BUY CALL DEC 80 LES-LP OI=712 current ask $3.10
BUY CALL DEC 85 LES-LQ OI=481 current ask $1.10

Annotated chart:

 

Picked on October 26 at $80.60 
Change since picked:    + 0.00
Earnings Date         09/21/04 (confirmed)
Average Daily Volume =     2.0 million 
Chart =



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reveals his most recently disclosed, ACTUAL stock picks, Click HERE!


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


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

Apollo Group - APOL - close: 66.75 chg: -4.20 stop: 72.01*new*

All of the APOL bears can send a thank you-note to Piper Jaffray.  
The firm downgraded shares of APOL to "market perform" this 
morning and lowered their price target fro $90 to $65.  This 
prompted the stock to gap down and close under recent support 
near $68.  APOL is now trading at new lows for the year with 
volume twice the norm on today's decline.  Now if we can see some 
follow through we'll be in good shape.  Our target is the $60 
region. We're going to lower our stop loss to $72.01.

Picked on October 10 at $69.81
Change since picked:    - 3.06
Earnings Date         10/05/04 (confirmed)
Average Daily Volume =     3.3 million 
Chart =



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

None


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**********

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The Option Investor Newsletter                  Tuesday 10-26-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Digital Movies to Mining and more!
Spreads & Straddles: Insurance Shares Lead The Rally!
Premium Selling Plays: Naked Puts & Calls
Traders Corner: A basic look at Elliott Wave principles; part 1

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

Digital Movies to Mining 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.
___________________________________________________________________


Pixar - PIXR - close: 76.96 change: -1.66

WHAT TO WATCH: Uh-oh!  Three days ago shares of PIXR tried to 
breakout through the top of its trading range at the $82 level of 
resistance.  That rally failed and PIXR turned lower on the 
session.  Now PIXR has fallen three days in a row and broken 
through the bottom of its trading range on heavy volume.  This 
looks like bad news and a bearish entry point.  Traders need to 
be careful through as the $75 level could act as round-number 
support.  Bears may want to target the $72 region but be aware 
that the 50 percent retracement of the August to September rally 
would be about $73.65.  Earnings are expected on or near November 
11th.

Chart=


---

Bear Stearns - BSC - close: 92.48 change: +1.69

WHAT TO WATCH: The XBD broker-dealer index has been consolidating 
under resistance at the 130 level for weeks.  The XBD actually 
broke out over this level a few days ago but couldn't push 
through technical resistance at the simple 200-dma.  Tuesday's 
broad market rally changed that.  The XBD closed over the 200-dma 
for the first time since early May.  Now BSC is bouncing sharply 
and looking bullish with another close over the $92 level.  This 
could be a bullish entry point for a run toward $96 and probably 
the $100 region. 

Chart=


---

Intl Business Mach. - IBM - close: 89.00 change: +0.57

WHAT TO WATCH: IBM announced today that its management had 
approved an additional $4 billion (with a B) for its stock buy 
back program.  Shares tried to breakout over technical resistance 
at its simple 200-dma but failed.  This was the second failure at 
the 200-dma in six days, which looks bearish.  In contrast its 
P&F chart is bullish with a $97 target but it is noteworthy that 
the P&F chart is struggling with resistance at the $90 level as 
well.  We're going to watch IBM for a breakout over $90 and 
consider any such move a potential bullish entry point.

Chart=


---

Phelps Dodge - PD - close: 88.10 change: +3.50

WHAT TO WATCH: Shares of copper miner PD soared today with a four 
percent rally charging toward bottom of the gap resistance near 
$88.50.  While PD didn't actually break into the gap is closed 
near its highs and could do so tomorrow.  Traditionally both the 
bottom and the top of a gap can act as resistance.  That means PD 
has resistance at both $88.50 and again near $91.75.  Technical 
traders may want to use a move over the top of the gap as an 
entry point and target the $100 level.  More aggressive types can 
try and jump the gun with a higher-risk entry on a move over $90.

Chart=



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

GD $101.51 +2.05 - Defense giant GD continues to rebound from 
last week's lows and is now back over minor resistance at $101.  
This could be an entry point for a quick run toward $105.

MTB $99.50 +1.50 - MTB is bouncing again.  Short-term technicals 
are turning positive.  Watch for a move over $100 or $102.

MIDD $46.80 -1.37 - There are no options on MIDD and volume is 
very light but the stock continues to look like a bearish 
candidate.  

CME $165.70 -3.65 - CME reported earnings today and beat 
estimates by 5 cents.  The stock dipped toward the $160 level 
before bouncing.  We are watching to see if the $160 level will 
continue to hold as support.

AMZN $33.83 -0.14 - Hmm.. it's interesting to see AMZN not 
participate in today's market rally.

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Now you can follow the investment master's actual moves.

To get a FREE report that details Warren Buffett's strategy and 
reveals his most recently disclosed, ACTUAL stock picks, Click HERE!


http://www.bigmoneywatch.com/default.asp?aid=626

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

*******************
SPREADS & STRADDLES
*******************

Insurance Shares Lead The Rally!
By Ray Cummins

Stocks rebounded Tuesday with companies in the insurance sector
among the best performers after New York State Attorney General
Eliot Spitzer reported he wouldn't file criminal charges against
Marsh & McLennan (NYSE:MMC).

The Dow Jones Industrial Average closed up 138 points at 9,888
on strength in American International Group (NYSE:AIG), which
surged over 7% and outpaced all blue-chip components during the
session.  The NASDAQ Composite Index was up 14 points at 1,928,
despite losses in networking shares.  The S&P 500 Index jumped
16 points amid buying pressure in construction, retail, steel
and automobile stocks.  In the broader market, winners bested
losers nearly 3 to 1 on the New York Stock Exchange, where 1.7
billion shares traded.  NASDAQ breadth was 3 to 2 on volume of
1.8 billion.  In the U.S. bond market, the benchmark 10-year
treasury note slipped 5/32 to 102 1/32, to yield 3.99%.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF CURRENT POSITIONS - AS OF 10/24/04
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.


PUT-CREDIT SPREADS

Stock  Pick   Last   Mon  L/P   S/P  Credit   CB     G/L   Status

BSC    94.16  91.34  NOV  80.0  85.0  0.65   84.35   0.65   Open
PHS    37.23  33.99  NOV  30.0  32.5  0.35   32.15   0.35  Closed
BTU    60.07  65.77  NOV  50.0  55.0  0.60   54.40   0.60   Open
MRVL   28.84  28.09  NOV  22.5  25.0  0.35   24.65   0.35   Open
COST   44.69  45.73  NOV  40.0  42.5  0.30   42.20   0.30   Open
NEM    46.25  46.12  NOV  40.0  42.5  0.30   42.20   0.30   Open
INSP   47.25  51.89  NOV  35.0  40.0  0.85   39.15   0.85   Open
BG     41.96  43.72  NOV  35.0  40.0  0.50   39.50   0.50   Open
CELG   62.13  56.12  NOV  50.0  55.0  0.60   54.40   0.60  Closed
ADBE   53.57  53.74  NOV  45.0  50.0  0.50   49.50   0.50   Open
VRNT   37.73  38.37  NOV  30.0  35.0  0.55   34.45   0.55   Open

L/P = Long Put  S/P = Short Put  CB = Cost Basis  G/L = Gain/Loss

As noted Tuesday, Pacificare Health Systems (NYSE:PHS) became an
"early-exit" candidate after a sharp decline on reports of the
New York Attorney General's new probe into the health insurance
industry.  Celgene (NASDAQ:CELG) is also a candidate for early
exit after the recent slump in its share value.


CALL-CREDIT SPREADS

Stock  Pick   Last    Mon  L/C   S/C  Credit   CB    G/L   Status

AMZN   40.47  34.60   NOV  50.0  45.0  0.65   45.65  0.65   Open
PDX    55.00  54.38   NOV  65.0  60.0  0.60   60.60  0.60   Open
BZH   103.14 101.28   NOV 115.0 110.0  1.10  111.10  1.10   Open?
CHIR   37.98  31.31   NOV  45.0  42.5  0.30   42.80  0.30   Open
FLIR   54.52  54.61   NOV  65.0  60.0  0.70   60.70  0.70   Open
MERQ   37.97  40.18   NOV  45.0  42.5  0.35   42.85  0.35   Open
BIIB   59.82  56.78   NOV  70.0  65.0  0.65   65.65  0.65   Open
MCHP   27.56  28.80   NOV  35.0  30.0  0.60   30.60  0.60   Open
CB     66.75  65.46   NOV  75.0  70.0  0.60   70.60  0.60   Open?
HIG    56.30  55.03   NOV  65.0  60.0  0.80   60.80  0.80   Open?
AET    87.26  83.26   NOV 100.0  95.0  0.40   95.40  0.40   Open
CI     60.65  58.85   NOV  75.0  70.0  0.75   70.75  0.75   Open?

L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss

Special Tuesday Note: Our positions in the Insurance sector became
candidates for early exit after unexpected news from the New York
Attorney General sparked a rally in the group.  The issues include
Hartford Insurance (NYSE:HIG), Cigna (NYSE:CI) and Chubb (NYSE:CB).
Beazer Homes (NYSE:BZH) is also an exit candidate with the bullish
activity in home construction shares.


DEBIT STRADDLES

Stock   Pick   Last   Exp.   Long   Long  Initial   Max     Play
Symbol  Price  Price  Month  Call   Put    Debit   Value   Status

JCOM    29.93  29.78   NOV   30.0   30.0    3.75    3.50   Closed

The straddle on j2 Global Communications (NASDAQ:JCOM) has been
closed in the interest of capital preservation, as the quarterly
earnings report did not produce the expected volatility in the
issue.
  
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
NEW POSITIONS
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BULLISH PLAYS - CREDIT SPREADS

These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may also be higher than other plays in the same strategy, due to
small disparities in option pricing however, each play should be
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and trading style.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

MDC - M.D.C. Holdings  $76.00  *** Sector Rally! ***

M.D.C. Holdings (NYSE:MDC) is principally engaged in owning and
managing subsidiary companies that build and sell homes under the
name Richmond American Homes.  The company also owns and manages
HomeAmerican Mortgage Corporation, which originates mortgage loans
primarily for MDC's home buyers.  In addition, it provides title
agency services through American Home Title and Escrow Company to
MDC home buyers in Virginia, Maryland and Colorado and also offers
third-party insurance products through American Home Insurance
Agency, to the company's home buyers in all of its markets.

MDC - M.D.C. Holdings  $76.00

PLAY (conservative - bullish/credit spread):

BUY  PUT  NOV-65.00  MDC-WM  OI=953   ASK=$0.25
SELL PUT  NOV-70.00  MDC-WN  OI=1584  BID=$0.70
INITIAL NET-CREDIT TARGET=$0.50-$0.55
POTENTIAL PROFIT(max)=11% B/E=$69.50


__________________________________________________________________

SPF - Standard Pacific  $53.90  *** Next Leg Up? ***

Standard Pacific (NYSE:SPF) is a diversified builder of single
family homes.  The company constructs homes within a wide range
of prices and sizes targeting a variety of homebuyers.  Standard
Pacific has operations in major metropolitan areas in California,
Texas, Arizona, Colorado, Florida and the Carolinas and has built
homes for thousands of families during its history.  In addition
to its core homebuilding operations, the firm provides mortgage
financing and title services to its homebuyers through its many
subsidiaries and joint ventures: Family Lending Services, SPH
Mortgage, WRT Financial, Westfield Home Mortgage, Universal Land
Title of South Florida and SPH Title.

SPF - Standard Pacific  $53.90

PLAY (conservative - bullish/credit spread):

BUY  PUT  NOV-45.00  SPF-WI  OI=479   ASK=$0.25
SELL PUT  NOV-50.00  SPF-WJ  OI=5577  BID=$0.80
INITIAL NET-CREDIT TARGET=$0.60-$0.70
POTENTIAL PROFIT(max)=14% B/E=$49.40



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BEARISH PLAYS - CREDIT SPREADS

All of these positions are favorable candidates for "bear-call"
credit spreads, based on the current price or trading range of
the underlying issue and its recent technical history or trend.
The probability of profit from these positions may be higher
than other plays in the same strategy, due to disparities in
option pricing.  However, current news and market sentiment will
have an effect on these issues, so review each play individually
and make your own decision about its future outcome.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SPW - SPX Corporation  $37.40  *** Earnings Speculation ***

SPX Corporation (NYSE:SPW) is a global provider of technical
products and systems, industrial products and services, flow
technology and service solutions.  The firm offers a collection
of products, including scalable storage networking solutions,
fire detection and building life-safety products, television
and radio broadcast antennas and towers, life science products
and services, transformers, compaction equipment, high-tech die
castings, dock systems, cooling towers, air filtration products,
valves, back-flow prevention and fluid handling equipment and
metering and mixing solutions.  Its products and services also
include specialty service tools, diagnostic systems, service
equipment and technical information services.  SPX' products
are used by customers in various industries, including chemical
processing, pharmaceuticals, infrastructure, mineral processing,
petrochemical, telecommunications, transportation, power, and
financial services.  Quarterly earnings are due on 11/1/04.

SPW - SPX Corporation  $37.40

PLAY (conservative - bearish/credit spread):

BUY  CALL  NOV-42.50  SPW-KV  OI=13    ASK=$0.25
SELL CALL  NOV-40.00  SPW-KH  OI=1237  BID=$0.50
INITIAL NET-CREDIT TARGET=$0.30-$0.35
POTENTIAL PROFIT(max)=14% B/E=$40.30


__________________________________________________________________

QCOM - Qualcomm  $39.50  *** Downgrade = Sell-Off! ***

Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division
multiple access (CDMA)-based integrated circuits and system software
for wireless voice and data communications and global positioning
system (GPS) products.  Qualcomm offers complete system solutions,
including software and integrated circuits for wireless handsets and
infrastructure equipment.  This complete system solution approach
provides customers with advanced wireless technology and enhanced
component integration and interoperability, as well as reduced time
to market.

QCOM - Qualcomm  $39.50

PLAY (conservative - bearish/credit spread):

BUY  CALL  NOV-45.00  AAO-KI  OI=15793  ASK=$0.25
SELL CALL  NOV-42.50  AAO-KV  OI=17514  BID=$0.50
INITIAL NET-CREDIT TARGET=$0.30-$0.35
POTENTIAL PROFIT(max)=14% B/E=$42.80



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
STRADDLES AND STRANGLES
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Based on analysis of the historical option pricing and technical
background, these positions meet the fundamental criteria for
favorable volatility-based plays.
_________________________________________________________________

No straddles or strangles today...

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SEE DISCLAIMER - SECTION 1

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


*****************************************
PREMIUM-SELLING PLAYS: NAKED PUTS & CALLS
*****************************************

All of these issues have robust option premiums and favorable
technical indications.  However, current news and events, as
well as market sentiment, will have an effect on these stocks
so review each position thoroughly and make your own decision
about its outcome.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF CURRENT POSITIONS - AS OF 10/24/04
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.


MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE

The Maximum Yield (listed in the summary and with "naked" option
selling plays) is the greatest possible profit available in the
position.  This amount, expressed as a percentage, is based on
the initial margin requirement as determined by the Board of
Governors of the Federal Reserve, the U.S. options markets and
other self-regulatory organizations.  Although increased margin
requirements may be imposed either generally or in individual
cases by various brokerage firms, our calculations use the widely
accepted margin formulas from the Chicago Board Options Exchange.
The "Simple Yield" is based on the cost of the underlying issue
(in the event of assignment), including the premium from the sold
option, thus it reflects the maximum potential loss in the trade.
  
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
 
NAKED PUTS

Stock   Strike  Strike  Cost   Current   Gain    Max    Simple
Symbol  Month   Price   Basis   Price   (Loss)  Yield   Yield

WRLS     NOV     7.50    7.20    9.48    0.30   7.65%   4.17%
SIMG     NOV    12.50   12.10   12.68    0.40   5.95%   3.31%
NCRX     NOV    25.00   24.30   25.01    0.70   5.52%   2.88%
ANF      NOV    32.50   32.10   36.86    0.40   2.78%   1.25%
STTX     NOV    25.00   24.60   23.59   (1.01)  0.00%   0.00% *
SNDA     NOV    22.50   21.85   29.80    0.65   7.78%   2.97%
PMTI     NOV    20.00   19.15   22.57    0.85   9.23%   4.44%
IDBE     NOV    12.50   12.15   16.16    0.35   6.44%   2.88%
BVF      NOV    17.50   17.05   19.09    0.45   5.40%   2.64%
USG      NOV    17.50   16.90   23.06    0.60   6.84%   3.55%
SNDA     NOV    25.00   24.50   29.80    0.50   5.67%   2.04%
WEBX     NOV    20.00   19.60   21.28    0.40   5.75%   2.04% *
ENER     NOV    15.00   14.40   18.90    0.60   8.11%   4.17%
DRIV     NOV    25.00   24.35   34.62    0.65   6.81%   2.67%
PLMD     NOV    30.00   29.55   33.17    0.45   3.33%   1.52%
CNCT     NOV    22.50   22.10   27.60    0.40   4.68%   1.81%
CCBI     NOV    22.50   21.90   23.25    0.60   5.51%   2.74%
EYET     NOV    35.00   34.45   41.30    0.55   5.17%   1.60%
USG      NOV    17.50   17.15   23.06    0.35   6.12%   2.04%
RIGL     NOV    22.50   21.85   25.35    0.65   8.14%   2.97%
MCD      NOV    27.50   27.15   28.52    0.35   2.99%   1.29%
FARO     NOV    20.00   19.60   23.75    0.40   5.67%   2.04%
NOVN     NOV    20.00   19.60   22.30    0.40   4.88%   2.04%
VRSN     NOV    20.00   19.65   25.01    0.35   4.40%   1.78%
ENER     NOV    17.50   17.05   18.90    0.45   6.60%   2.64%
SSNC     NOV    20.00   19.55   22.37    0.45   5.71%   2.30%
CKFR     NOV    30.00   29.40   30.30    0.60   4.91%   2.04%
OSTK     NOV    35.00   34.60   52.63    0.40   4.10%   1.16%
GBBK     NOV    30.00   29.40   29.71    0.31   2.59%   2.04%
KRON     NOV    45.00   44.50   50.25    0.50   3.10%   1.12%
DITC     NOV    20.00   19.70   24.44    0.30   5.29%   1.52%
MRVL     NOV    23.75   23.35   28.09    0.40   5.59%   1.71%
AGIX     NOV    20.00   19.70   29.37    0.30   4.50%   1.52%

As noted Tuesday, Steel Technologies (NASDAQ:STTX) became an
"early-exit" candidate after a steep decline in the stock on
news of a CIBC downgrade of the Steel sector.  The position
in Webex (NASDAQ:WEBX) has been closed due to the (bearish)
post-earnings activity in the issue.  A number of issues are
on the "watch" list after the recent broad decline in stocks.


NAKED CALLS

Stock   Strike  Strike  Break  Current   Gain    Max    Simple
Symbol  Month   Price   Even    Price   (Loss)  Yield   Yield

BRCM     NOV    35.00   35.35   26.41    0.35   4.44%   0.99%
LLTC     NOV    40.00   40.60   36.48    0.60   3.74%   1.48%
SINA     NOV    35.00   35.35   26.65    0.35   4.56%   0.99%
LRCX     NOV    25.00   25.40   23.89    0.40   5.37%   1.57% *
IVX      NOV    20.00   20.75   18.90    0.75   9.51%   3.61%
PLMO     NOV    40.00   40.45   28.20    0.45   5.62%   1.11%
SLXP     NOV    20.00   20.65   15.00    0.65   8.83%   3.15%
AOC      NOV    25.00   25.25   19.80    0.25   3.93%   0.99%
CVH      NOV    50.00   50.60   39.39    0.60   4.46%   1.19%
ACF      NOV    20.00   20.70   18.15    0.70   8.31%   3.38%
DSPG     NOV    22.50   22.85   20.07    0.35   6.23%   1.53%
HYSL     NOV    40.00   40.85   39.20    0.85   6.24%   2.08% *
RNR      NOV    50.00   50.65   48.04    0.65   3.51%   1.28%
X        NOV    40.00   40.25   33.61    0.25   3.49%   0.62%

Special Tuesday Note: Our positions in the Insurance sector
became candidates for early exit after unexpected news from
the New York Attorney General sparked a rally in the group.
The issues include RenaissanceRe Holdings (NYSE:RNR) and UCI
(NASDAQ:UICI).
  
Positions in Hyperion Solutions (NASDAQ:HYSL) and Lam Research
(NASDAQ:LRCX) are on the "watch" list.


~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
NEW POSITIONS
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered puts entails considerable financial risk,
far more than the initial margin or collateral required to open
a position.  The maximum financial obligation for the sale of a
naked put is the strike price (of the underlying stock) that is
sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of puts should have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  In addition, there is one very important rule when using
this strategy: Don't sell puts on stocks that you don't want to
own!  Why?  Because stocks occasionally experience catastrophic
declines, exponentially increasing the margin maintenance and
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock's price falls.
Many professional traders suggest closing the position when the
underlying share value moves below the sold strike, or using a
"buy-to-close" stop order at a price that is no more than twice
the original premium received from the sold option.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

NEW NAKED-PUT CANDIDATES

Stock  Last    Option    Option Last Open Cost  Days Simple  Max
Symbol Price   Series    Symbol Bid  Int. Basis Exp. Yield  Yield

EPIQ   16.73  NOV 15.00  FQU-WC 0.45   19 14.55  25   3.8%  10.1%
MANT   20.46  NOV 17.50  UUN-WW 0.45  225 17.05  25   3.2%   9.6%
NTMD   23.61  NOV 17.50  QNR-WW 0.25   88 17.25  25   1.8%   6.1%
A      24.33  NOV 22.50  A-WX   0.40 5670 22.10  25   2.2%   5.9%
SCHN   29.38  NOV 26.60  SNQ-WU 0.45  340 26.15  25   2.1%   5.8%
EDS    20.99  NOV 20.00  EDS-WD 0.35 3971 19.65  25   2.2%   5.5%
CYTC   26.93  NOV 25.00  YQK-WE 0.40 2177 24.60  25   2.0%   5.3%

Abbreviations:

LB-Last Bid price, OI-Open Interest, CB-Cost Basis (or break-even
point), DE-Days to Expiry, SY-Simple Yield (monthly basis without
margin), MY-Maximum Yield (monthly basis with margin), TS-Target
Shoot.
_________________________________________________________________

EPIQ - EPIQ Systems  $16.73  *** Entry Point? ***

EPIQ Systems (NASDAQ:EPIC) provides technology-based case
management solutions to attorneys, law firms, trustees and
debtor companies that administer cases in the federal
bankruptcy system.  Customers implement its solutions to
administer personal and corporate bankruptcy cases of all
sizes and configurations.  The company's product and service
offerings automate various administrative tasks pertaining
to bankruptcy claims, assets, financial records and other
data associated with liquidations and reorganizations and
assist customers in organizing and managing their databases
of case information, preparing notices and mailings and in
fulfilling their additional responsibilities.

EPIQ - EPIQ Systems  $16.73

NOV 15.00 FQU-WC LB=0.45 OI=19 CB=14.55 DE=25 TY=3.8% MY=10.1%


_________________________________________________________________

MANT - Mantech  $20.46  *** Earnings Speculation ***

ManTech International (NASDAQ:MANT) is a provider of unique
technologies and solutions for mission-critical national
security programs for the intelligence community, the DOD,
and other United States federal government customers.  The
company provides software development, enterprise security
architecture, information assurance, intelligence operations
support, network and critical infrastructure protection,
information technology, communications integration and
engineering support. It delivers these through three major
areas of service solutions, Secure Systems and Infrastructure
Solutions, Information Technology Solutions and Systems
Engineering Solutions, which are offered separately or in
combination to the Company's customers.  Earnings are due
after the bell on 10/27/04.

MANT - Mantech  $20.46

NOV 17.50 UUN-WW LB=0.45 OI=225 CB=17.05 DE=25 TY=3.2% MY=9.6%


_________________________________________________________________

NTMD - NitroMed  $23.61  *** Premium-Selling Only! ***

NitroMed (NASDAQ:NTMD) is an emerging pharmaceutical company
with substantial expertise and intellectual property in nitric
oxide-based drug development.  The firm is applying its nitric
oxide technology to develop new pharmaceuticals, as well as
safer and more effective versions of existing pharmaceuticals
to target diseases and commercial markets.  Its lead nitric
oxide-enhancing medicine, BiDil, which is being developed to
reduce mortality and hospitalization and to improve quality of
life for African Americans diagnosed with heart failure is the
subject of a Phase III confirmatory clinical trial.

NTMD - NitroMed  $23.61

NOV 17.50 QNR-WW LB=0.25 OI=88 CB=17.25 DE=25 TY=1.8% MY=6.1%


_________________________________________________________________

A - Agilent Technologies  $24.33  *** Bottom-Fishing!  ***

Agilent Technologies (NYSE:A) is a global diversified technology
company that provides enabling solutions to markets within the
communications, electronics, life sciences and chemical analysis
industries.  The company has four primary businesses.  The test
and measurement business provides solutions for the operation of
electronic equipment and systems and communications networks and
services.  The automated test business provides system testing
solutions for semiconductors and printed circuit systems.  The
semiconductor products business is a supplier of semiconductor
components, modules and assemblies for communications systems.
The life sciences and chemical analysis segment offers solutions
that help customers identify, quantify and analyze the physical
and biological properties of substances and products.

A - Agilent Technologies  $24.33
  
NOV 22.50 A-WX LB=0.40 OI=5670 CB=22.10 DE=25 TY=2.2% MY=5.9%


_________________________________________________________________

SCHN - Schnitzer Steel  $29.38  *** In A Trading Range? ***

Schnitzer Steel Industries (NASDAQ:SCHN) collects, processes and
recycles metals by operating a metals recycling business in the
United States.  The company also owns a chain of self-service
auto parts stores in the United States, operating under the name
of Pick-N-Pull, and is also a maker of finished steel products at
its technologically advanced steel mini-mill.  As a result of its
vertically integrated business, Schnitzer is able to transform
obsolete or wrecked auto bodies and other unprocessed metals into
finished steel products.  In addition, it is a partner in joint
ventures that are either in the metals recycling business or are
suppliers of unprocessed metals.  The company owns interests in
five joint ventures that are engaged in buying, processing and
selling primarily ferrous metal.  Another joint venture is an
industrial plant demolition contractor that dismantles industrial
plants, performs environmental remediation and sells recovered
metals and machinery.

SCHN - Schnitzer Steel  $29.38

NOV 26.60 SNQ-WU LB=0.45 OI=340 CB=26.15 DE=25 TY=2.1% MY=5.8%


_________________________________________________________________

EDS - Electronic Data Systems  $20.99  *** Own This One! ***

Electronic Data Systems Corporation (NYSE:EDS) is a provider
of IT (information technology) and business process outsourcing
services.  EDS has delivered infrastructure, application and
business process outsourcing services to a variety of clients
in the manufacturing, financial services, healthcare, consumer,
communications, energy, transportation, and retail industries,
as well as governments around the world.  The company has one
subsidiary, A.T. Kearney, a high-value management consultancy.

EDS - Electronic Data Systems  $20.99

NOV 20.00 EDS-WD LB=0.35 OI=3971 CB=19.65 DE=25 TY=2.2% MY=5.5%


_________________________________________________________________

CYTC - Cytyc  $26.93  *** Pre-Earnings Rally! ***

Cytyc (NASDAQ:CYTC) designs, develops, manufactures and markets
sample preparation and imaging systems for medical diagnostic
applications.  The company's principal products are the ThinPrep
System and ThinPrep Imaging System.  The ThinPrep System is an
automated system for the preparation of cervical specimens and
non-gynecological samples on microscope slides.  In addition,
the company manufactures and markets the FirstCyte Breast Test,
a risk assessment tool for women who are at high risk for breast
cancer.  Earnings are due on 10/28/04.

CYTC - Cytyc  $26.93

NOV 25.00 YQK-WE LB=0.40 OI=2177 CB=24.60 DE=25 TY=2.0% MY=5.3%



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BEARISH PLAYS - NAKED CALLS

Based on analysis of option pricing and the underlying stock's
technical background, these positions meet our fundamental
criteria for bearish "premium-selling" strategies.  Each issue
has robust option premiums, a well-defined resistance area and
a high probability of remaining below the target strike prices.
As with any recommendations, these positions should be carefully
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and personal trading style.

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered calls entails considerable financial risk,
far more than the initial margin or collateral required to open
the position.  The maximum financial obligation for the sale of a
naked option is the strike price (of the underlying stock) that
is sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of options must have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  The simple fact is: stocks often experience large price
swings, exponentially increasing the margin maintenance and very
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock price moves in
a volatile manner.  Many professional traders suggest closing the
position when the underlying share value moves beyond the sold
strike, or using a "buy-to-close" stop order at a price that is
no more than twice the original premium received from the sold
option.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ARW - Arrow Electronics  $23.54  *** Short-Lived Rally? ***

Arrow Electronics (NYSE:ARW) is a global provider of products,
services and solutions to industrial and commercial users of
electronic components and computer products.  The firm offers
products, services and solutions including materials planning,
programming and assembly services, inventory management, online
supply chain tools and design services.  The company's global
customer base consists of original equipment manufacturers,
contract manufacturers and commercial customers.

ARW - Arrow Electronics  $23.54

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  NOV 25    ARW-KE     19    0.40  25.40   5.8%   1.6%


_________________________________________________________________

TACT - TransAct Technologies  $25.35  *** Next Leg Down? ***

TransAct Technologies (NASDAQ:TACT) designs, develops, makes
and markets transaction-based printers under the Ithaca and
Magnetec brand names.  In addition, the firm markets related
consumables, spare parts and service.  Its printers are used
worldwide to provide transaction records, such as receipts,
tickets, coupons, register journals and other documents.  The
company focuses on two markets: point-of-sale and banking and
gaming and lottery.  TransAct offers an array of products
utilizing inkjet, thermal and impact printing technology for
applications requiring up to 60 character columns.

TACT - TransAct Technologies  $25.35

"SPECULATIVE" PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  NOV 30    TUF-KF     62    0.50  30.50  10.2%   1.6%


_________________________________________________________________

USPI - United Surgical  $32.24  *** Downtrend Intact! ***

United Surgical Partners (NASDAQ:USPI) owns and operates a
number of short-stay surgical facilities including surgery
centers and private surgical hospitals in the United States,
Spain and the United Kingdom.  The firm focuses on providing
surgical facilities that meet the combined needs of patients,
physicians and payors better than hospital-based and other
outpatient surgical facilities.  USPI acquires and develops
its facilities through the formation of relationships with
physicians and healthcare systems to better access and serve
the communities in its markets.

USPI - United Surgical Partners  $32.24

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  NOV 35    QPJ-KG     57    0.45  35.45   5.2%   1.3%



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SEE DISCLAIMER - SECTION 1

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


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

A basic look at Elliott Wave principles; part 1
By Leigh Stevens
lstevens@OptionInvestor.com

Since I've noticed a second set of down-up-down price swings in 
the market of late, in what can also be called "a-b-c" 
corrections or "waves" (see the last chart below), it has me 
thinking some about Elliott Wave patterns.  Describing this 
theory of how price moves unfold can be helpful in making trading 
decisions.

This kind of an article tends to also get me some e-mails on the 
subject, especially given my non-standard, non-orthodox wave 
"counts".  I tend to use trading techniques the way they work for 
me, which is not always by the book. 

Describing index, stock or commodity moves by the wave method 
doesn't get a lot of media time cause its a bit hard to explain 
in short sound bites. Figuring out the twists and turns of price 
trends this way is mostly done by "practitioners" of the method 
I'm going to describe (Elliott Wave) and this language of 
describing the way price trends unfold is hard to fathom without 
some study - but it's not all that complicated either, but does 
involve a particular way of seeing how trends develop.   

I tend to use anything that works in predicting an unfolding 
market trend, even if that indicator, pattern or theory can't be 
shown to "work" all the all the time or at least obviously so.  
Stochastics don’t work all the time (i.e., they lack predictive 
value), nor does seeing an apparent double top always signal a 
downside trend reversal – however, such tools and ideas work very 
well enough often enough as an aid to trading the trend that they 
are part of my checklist in trading and trend analysis; for 
example, what, if anything is the chart pattern, indicators or 
wave analysis, in this case, suggesting about the strength of the 
current trend or the likelihood that it will reverse?
 
I’ve been struck over the years by the tendency to make market 
analysis more complex than is necessary, perhaps due to the 
tendency to make some specialized analysis techniques an ideology 
out of methodology. This is especially true of Elliott wave 
theory and analysis. 

The Elliott Wave market theory - 
As explained in my book (Essential Technical Analysis), Ralph 
Nelson Elliott - referred to as R.N. Elliott (1871-1948) - was  
not quite a contemporary of Charles Dow, who was born 1851 and 
died 1902, but Dow's ideas on market behavior were well-known in 
Elliott's day. R.N. Elliott was not well known during his 
lifetime as a major league stock investor and speculator.  

His Elliott wave principles are better known today than during 
Elliott's lifetime, which is not to say that he didn’t attract 
significant notice among some important market advisors and 
professional money managers at the time he wrote on the market. 

R.N. Elliott had an accounting background and worked with 
the railroads, including in Central America where he contracted a 
severe illness in the late-20s. Due to this he spent his next 
several years bed-ridden and which gave his active mind much time 
for an in-depth study of the stock market.

The build up and crash of the U.S. market over the 1920’s was 
something that Elliott knew well as he was an avid amateur 
follower of the stock market. By 1934 and after, Elliott’s own 
comprehensive theory of market behavior got defined and his 
predictions at times began to amaze certain market professionals 
in terms of their forecasting accuracy.  By 1945 Elliott was 
operating an investment advisory and forecasting service from a 
Wall Street office – "The Wave Principle", a book based on his 
ideas and still very much in print, was also written.  

Distilling the basics of Elliott wave analysis is the idea (as 
with Dow) of there being three components to a trend.  You will 
hear about FIVE waves, but that is because a bull market is said 
to consist of 3 UP waves or movements, interspaced by 2 
corrective downswings.  The waves up Elliott called the 3 
"impulse" waves - the three big rallies that are typical of a 
bull trend.  

In a bear market, according to Elliott, there are 3 parts to a 
bear market trend: an initial decline, a rally back retracing 
some of the first decline, and a final downswing; the bear 
market pattern is composed of down-up-down price swings. 
 
An important thing to remember is that frequently, but not all 
the time, the wave pattern is clearly and easily seen – when it 
IS clearly and easily seen, it allows a better forecast of how 
the trend may unfold.  

The first impulse wave (wave 1) in a bull market trend tends to 
be the weakest, but after a corrective decline following this 
upswing ("wave 2"), the next impulse wave ("wave 3") is a strong 
move. After up wave 3, follows again a decline (corrective "wave 
4), followed by the final or third rally (wave 5). In Elliott's 
way of thinking, a bull market is composed of 3 rally phases, 
interspaced by 2 declines/pullbacks. 

As to trading advice, it's very useful for example to know that 
the middle or SECOND rally in a bull trend/market is often the 
most powerful. This insight can suggest going in more heavily 
into index calls on this second rally phase. 

An example of a strong “3-wave” is the 1998-1999 Nasdaq advance 
which was the strongest part of the 1990’s tech stock bull market 
– this of course is also an example of a mega-bull market, but 
within even a moderate bull market there will tend to be one 
stronger/longer advance carrying farther than the other rallies.   

The duration and intensity of this second advance (wave 3) will 
often be the period of the biggest gains, in the most compressed 
time frame, of the entire bull market. In a downtrend also, it is 
the second downswing that tends to carry the farthest.  

Accurate depiction of where one is in an unfolding price pattern 
that is cyclical in nature – having distinct components that 
comprise a beginning, middle and END – is extremely valuable as 
you can see more accurately what phase we’re in.

Robert Prechter is the best-known of the market advisors and 
analysts that have made wave analysis popular from the 1980’s 
until now. As Bob has pointed out about the wave theory, like the 
other principles of technical analysis, it is not always 
necessary to understand WHY a technique works, as long as you can 
employ the technique to a profitable end. Hey, it works for me!

In a major bull trend, 3 up waves and 2 corrective down waves 
(for a total of 5 waves) are often apparent.  Waves 1, 3 
and 5 will be advances (the "impulse" waves), with waves 
2 and 4 being counter-trend moves or "corrective waves".  The 
totality of the component moves of a bull market can be referred 
to as 5 waves up. From my book, a good example - 


 

After the 5 waves of a major bull trend, a major bear trend will 
typically follow and consist of a 3-part "down" structure or 3 
component waves – not ALL of these price swings or waves are  
down, only that they are part of the overall down or bear 
cycle.  

The 3 component waves of this bear market trend "corrects" and 
are counter to the up trend of the bull market that preceded 
it.  These waves are given the letters A, B and C (sometimes 
small a-b-c), to distinguish between the advancing waves 1-5 that 
came before. 

The "A" and "C" waves are the declines, with the intervening "B" 
wave being a corrective (countertrend) upswing. Note that the 
number or letter designation is put at the end or completion of 
that wave; i.e., at the top for an upswing, at the bottom for a 
decline, as in the chart above.   
  
My first example is a stock, but it could as easily be 
an index and the whole market. The entire bull market/bear market 
sequence is a 5-wave advance, followed by an A-B-C decline.  

Elliott talked about alternation in wave duration and strength.  
Wave three is typically longer and stronger than wave 1. If waves 
1 and 3 are about equal length, wave 5 will tend to be the more 
prolonged advance.  Conversely, major bear market down wave A is 
usually of shorter duration and wave C the longest.  However, if 
wave A is prolonged, look for the down move C to be relatively 
shorter.  

As with other technical analysis techniques, a surge in average 
volume will help identify the strongest part of an overall move.   
Longer-term charts, such as weekly are favored over daily charts 
in terms of seeing and defining the MAJOR wave pattern -  


  
   
The above charts are examples of MAJOR bull and bear market 
trends that unfold with the "classic" (Elliott) wave structure of 
a 5 up-wave bull market and a 3 down-wave bear trend.  There are 
countertrend moves always. By the way, in the example above, it's 
not typical for the down move 4 to exceed the low end of the 
downswing 2 but it does fit the alternation rule. 

I will get into a discussion of countertrend price moves, but 
since it adds another layer of complexity, I will save this for 
another article. 

In a further article, I'll discuss Elliott Wave patterns in 
shorter-term price swings, such as would be seen in recent hourly 
and daily charts. These shorter time frames show how unfolding 
wave pattern are useful for option traders. 

In the past few months (March - October, 2004), there have a 
couple of down-up-down, a-b-c type corrections, making for a 
great trading market on both the call and put sides -  


 

What I have described so far should be viewed as an introduction 
only, quite likely to something you haven't run into before or 
don't think of using in analyzing what's happening with stocks. 

More on tips to making effective use of wave analysis - meaning, 
help in spotting trend reversals and making trading decisions 
(i.e., making money)  - will follow next week.  For now, the 
Mediterranean waves are lapping on the shore outside.  There’ll 
be a quiz later (kidding!) on this, but not now/yet - for now, 
just enjoy the idea of waves lapping outside.


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