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Daily Newsletter, Wednesday, 11/10/2004

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


In Section One:

Wrap: It Was a Setup  
Futures Wrap: See Note
Index Trader Wrap: Technology weak in mixed session 


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      11-10-2004           High     Low     Volume   Adv/Dcl
DJIA    10385.48 -  0.89 10439.40 10378.59 1.88 bln 1621/1204
NASDAQ   2034.56 -  8.77  2047.25  2032.37 1.84 bln 1614/1394
S&P 100   555.54 -  1.36   558.85   555.51   Totals 3235/2598
S&P 500  1162.91 -  1.17  1169.35  1162.51
SOX       405.76 - 10.04   415.80   404.90
RUS 2000  609.61 +  2.97   611.93   605.46
DJ TRANS 3574.36 - 13.35  3594.87  3568.18
VIX        13.80 -  0.53    13.51    12.79
VXO (VIX-O)13.63 -  0.01    14.08    13.18
VXN        19.41 +  0.22    19.91    19.16
Total Volume 3,729M
Total UpVol  1,685M
Total DnVol  1,966M
Total Adv  3235
Total Dcl  2598
52wk Highs  407 
52wk Lows    42
TRIN       1.47
PUT/CALL   0.70
******************************************************************

It Was a Setup 
Linda Piazza

Dictionary.com defines "setup" as "a contest prearranged to
result in an easy or faked victory," among other definitions.
 Both bulls and bears fear that the day's events set them up for
someone else's victory.  A study of daily charts shows how close
many indices are to breakdowns or breakouts.  

Annotated Daily Chart for the SPX:

 

Annotated Daily Chart for the Dow:

 

Annotated Daily Chart for the Nasdaq:

 

Annotated Daily Chart for the GHA:

 

Annotated Daily Chart for the SOX:

 

Annotated Daily Chart for the Russell 2000:

 

Cisco (CSCO) set techs up for a decline, but the company had help
from tech bulls.  Tuesday, Marc Eckelberry of the OptionInvestor
Futures Monitor had pointed out that CSCO's November 20 strike
had a put/call ratio of .11, indicating irrational optimism about
CSCO's earnings report.  The stock was set up for a decline on
any disappointment, and there was a disappointment.  CSCO closed
Wednesday at $18.44, down $1.31 or 6.63 percent. 

Despite disappointment over CSCO's Q1 results, network-related
stocks had performed well in Europe, but the NWX, the Networking
Index, gapped lower at the U.S. open and headed down throughout
the day.  The NWX closed down 1.14 percent.  

Early Wednesday, analysts had begun cutting ratings on tech-
related stocks or sectors.  UBS cut HPQ's rating to neutral,
citing valuation and its preference for IBM or Dell.  However,
the company also cut Dell's rating to neutral.  UBS was busy in
the tech sector, raising its price target for Lucent Technologies
(LU) in one bright spot for techs.  Morgan Stanley lowered its
outlook on the semiconductor capital equipment sector to a
cautious one from its previous in-line view.  The firm noted that
they were seeing a downturn rather than a mere correction in
capital spending.  The firm also lowered price targets for AMAT,
NVLS, CYMI, KLAC, and LRCX.  

More setups were to come, setups that might have helped the FOMC
formulate a decision and the accompanying statement later in the
day.  Because Thursday is Veteran's Day, government offices will
be closed, shaking up this week's usual schedule of government
releases.  In addition to the usual batch of economic releases
Wednesday morning, Initial Jobless Claims, October's Import Price
Index, and September's Trade Balance were all slotted into the
8:30 time period.  

Those numbers appeared to set markets up for an early-morning
rally, but futures dropped off their highs instead, perhaps on
worry over the Fed's interpretation of the numbers or perhaps
after a look at the underpinnings of some of those numbers.

Unemployment claims numbered slightly fewer than expected, up
only 2,000, with the four-week average down 5,500 to 336,000. 
That was touted as the lowest level since July, and sure to have
been factored into the Fed's decision.  

September's Trade Balance had been expected to remain flat at $54
billion. Instead, the number surprised by falling to $51.6
billion.  Import prices rose 1.5 percent, but fell 0.2 percent ex
oil. The average price of a barrel of oil increased to $37.62, a
record high. 

Market pundits noted that hurricanes and other factors disrupted
shipments of imported oil in September.  That capped import
prices, they concluded.  Otherwise, those prices might have risen
more.  With this in mind, some theorized that the deficit will
widen again in October as a result of resumed shipments, and this
month's deficit was no lightweight, still the third largest. 
Exports rose 0.8 percent to their highest-ever levels, but
imports from China also rose to a record high.  

Some experts believe that the dollar, already weakening to record
levels over the last week, may be weakened further by the
widening gap in the current account.  Many central banks, most
notably those in Asia, have been making efforts to shore up the
dollar against their currencies.  A weak dollar helps U.S.
exporters, but hurts Asian and European exporters, as well as
U.S. domestic companies paying for imported products,
particularly fuel.  Currency traders weren't fooled by the lower
deficit this month, looking forward to expectations for October. 
The dollar plummeted through the open, but then sprang up
afterwards, forming a neutral triangle at the top of the day's
range.

The Department of Energy's usual Wednesday release of crude,
distillate, and gasoline inventories followed.  DOE figures
showed crude inventories up 1.8 million barrels, slightly lower
than the expected 2.0 million increase.   Distillate and gasoline
inventories both fell, by 100,000 and 400,000 barrels,
respectively.  Estimates had been for a rise in distillate
inventories of 400,000 barrels, but the American Petroleum
Institute's figures disputed the DOE's.  The API stated that
distillate inventories rose by 2.21 million barrels.  

Distillates include heating oil, increasingly a focus as winter
approaches.  Some energy experts worry about heating oil supplies
this winter, but the International Energy Agency attempted to
calm those worries, lowering its estimate of global oil demand
through the end of this year by 100,000 barrels a day.  The high
energy costs proved a major factor in that decreased demand,
producing a global economic slowdown according to the IEA.  That
slowdown was also certainly be factored into the Fed's decision.

Crude prices initially rose after the release of the inventories
number, then dropped to a new recent low before rising again. 
Although many have been cheered by crude's fall from its plus-
$55.00 per barrel cost, it may be trying to bounce again from
support at its last swing high.  Like some indices and stocks,
it's set up for a bounce or a tumble through support. 

Annotated Daily Chart for Crude: 
 
 

At 2:00, October's Monthly Budget Statement was released, with
the FOMC Rate Decision following closely afterward at 2:15.  The
budget deficit was in-line with expectations, at $57.3 billion,
and the Fed's decision to raise rates a quarter point was also in
line with expectations.  

The accompanying statement to the FOMC decision mentioned the
improving labor market and asserted that output was still growing
despite those higher energy prices.  That statement read much as
the previous meeting's had, with the Fed feeling that risks to
price stability and sustainable growth were balanced.  The
statement also asserted that inflation remained muted, an
assertion that some economists dispute, but that energy costs and
uneven global growth must be watched.

Whether or not inflationary pressure are muted, the reaction to
the FOMC decision was muted, too. CNBC's cameras focused on pit
traders after the announcement, faces upturned as they looked up
at the boards.  While Ron Insana quoted from the Fed's statement,
they stood silent, still scanning the boards.  A few hands
raised, palms out, to sell; a few hands raised, palms up, to buy. 
Most stood as if paralyzed.  The markets appeared to be, too, and
that's where they ended the day, ready to rumble or ready to
tumble.  Another Dictionary.com definition for "setup" is "a play
or pass that creates a scoring opportunity."  Many markets are
set up for just that opportunity, but with the direction yet to
be determined. 

Be cautious with all entries.  Some measurements, including
bullish sentiment, 9-period daily RSI, daily CCI, and others
reveal worrisome overbought levels on some indices.  The climb on
some has been meteoric, but as the following chart displays,
prices can continue climbing long after indicators signal
overbought conditions, when indices or stocks seem to be defying
gravity.  Those who follow my posts in OptionInvestor's Market
Monitor have seen this chart already.  Due to space requirements,
it wasn't possible to capture the beginning the rally in mid-
December.

Annotated Daily Chart For the OEX:

 

This chart warns that it's as risky to catch soaring knives as it
is to reach for falling ones, even when all the signs are in
place for a retreat.  Watch the benchmarks listed on the charts
above, place cautious bets, and be willing to be wrong and change
sides if markets react differently than you expect.

Thursday, bond markets will close along with government offices. 
Some economic calendars still include the release of information
on natural gas inventories at 10:30, but that may be a mistake as
others listed it for today.  Other than that, markets will have
little to distract them from sorting through bullish and bearish
factors and deciding on a direction.

A day ahead of time, my thanks and those of the OIN staff to all
veterans who have served to protect us all.  


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

Technology weak in mixed session

The tech-heavy NASDAQ-100 Index (NDX.X) 1,517.06 -0.65% was a 
weak spot in Wednesday's session as cautious forward guidance 
from networking giant Cisco Systems (NASDAQ:CSCO) $18.44 -6.63% 
and analysts downgrades of PC makers Dell Computer (NASDAQ:DELL) 
$36.85 -1.54% and Hewlett Packard (NYSE:HPQ) $18.97 -3.7% had 
technology bulls taking profits.

The Semiconductor Index (SOX.X) 405.76 -2.41 rivaled the Airline 
Index (XAL.X) 53.15 -3.22% for today's sector loser, where the 
SOX was dealt a blow after Morgan Stanley downgraded the chip-
equipment space.

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

 

The U.S. Dollar Index (dx00y) 84.43 +0.16% edged higher, but saw 
a rather volatile session of trade.  The recent weakness in the 
dollar helped narrow the trade deficit in September, as exports 
rose to a record $97.5 billion.  After setting a record in 
August, imports fell to $149.0 billion from $150.2 billion, 
largely because oil imports were delayed due to recent hurricane 
activity in the Gulf of Mexico.

Financials held tough as the Federal Open Market Committee raised 
its target for fed funds by 25 basis points to 2.0%.  In a 
related action, the Board of Governors unanimously approved a 25 
basis point increase in the discount rate to 3%.

The Oil Service Index (OSX.X) 116.79 +2.62% recouped losses from 
Monday and Tuesday and looks set to test near-term simple moving 
average resistance.  

Oil Service Index (OSX.X) Chart - Daily Intervals

 

I've found that commodity-related equities will often times lead 
and advance or decline, as the MARKET is able to sniff out the 
future just ahead of the commodity it trades on.  While oil 
service stocks are a bit down the "food chain" is it relates to 
the commodity, where service stocks are more reliant on spending 
from the producers/explorers of fossil fuels, the OSX.X may be 
the "best" technical test for where oil prices are headed.

I went back and viewed the OSX.X daily intervals bar chart, and 
today's bounce from 113.00 has some significance to a then high 
found in May 2002.  Back in 2002, the OSX looked very bullish, 
just as it does today.  One "similarity" that I see, which 
provides an excellent technical test is the current 21-day and 
50-day SMA positioning.  

The PINK circles on the OSX.X chart mark very similar tests, 
where the OSX.X always managed to break back above the 21-day 
SMA.  Will the near-term test show SIMILARITY to the prior three 
circles?  If so, I'd have to think oil could be set for a 
rebound.  However, if the OSX.X shows DIVERGENCE from recent 
past, but SIMILARITY to May 2002, then I think oil prices should 
stay below $50, if not head lower.

Today, December Crude Oil futures (cl04z) $48.86 +3.15% still 
settled below their RISING 50-day SMA ($48.79) and starting to 
curl LOWER 21-day SMA ($51.69).

Market Snapshot / Internals - 

 

Stocks did trade their best levels of the session AFTER the FOMC 
announcement, but gave up those gains toward the close.  While 
Treasuries did see selling, it wasn't "euphoric" by any means.

I marked today's closing yield on the 10-year bond ($TNX.X) at 
4.254% as I wanted to check and see where this bond's yield was 
at the end of September, when the FOMC had raised rates 25 basis 
points.

In the October 17 "Ask the Analyst" column, the 10-year yield 
($TNX.X) was at 4.119%, so it has risen 13.5 basis points, while 
the FOMC has now raised it fed funds target 25 basis points to 
2.0%.  

My observation here is that some investors are "fearful" that the 
weaker dollar is finding, or will find mass dumping of Treasuries 
by foreign governments that hold them.  I don't see it.

I would also want to remind traders/investors that its not 
necessarily "bad" for Treasury yield to rise MODESTLY or 
GRADUALLY.  It those sharp, aggressive runs (up and down) that 
spook markets and create the near-term uncertainty.

The 10-year yield ($TNX.X) finished just under its flattening to 
slightly trending lower 200-day SMA (42.73, or 4.273%).  I still 
think equity bulls would like to see further selling, but at a 
MODERATE pace and have the benchmark bond's YIELD depict some 
"reflation" or some renewed growth characteristics.  A rising 10-
year and even 30-year yield also would need to be found as we see 
a greater amount of selling in the shorter-dated 5-year yield 
($FVX.X), which has the yield curve flattening out.  Equities 
tends to perform better with a steeper yield curve.

Pivot Matrix - 

 

The SOX.X sees trade at WEEKLY S1 and closes below that level, 
and we can perhaps see the impact it had on the QQQ as it got 
pulled lower to just kiss its WEEKLY Pivot.

I sure wish I had "Max Pain" levels for this month, but the 
vendor's data feed is broken and its still not fixed.  The bulk 
of open interest in the SOX.X was at 400 call (314 : 3,939), then 
450 call (90 : 2,194) and 420 call (434 : 1,649) as of Tuesday's 
close.  About the only remaining "Max Pain" I see for the month 
would be something back at 400.00, as the Nov. 420 calls still 
bid $10.00 per contract.  My suspicion is that November "Max 
Pain" is somewhere around 415.

In this weekend's Ask the Analyst column and discussion on the 
Semiconductor HOLDRs (AMEX:SMH) $31.92 -2.64% (closed right on 
their WEEKLY S1), I've got to think that Cisco's (CSCO) cautious 
guidance and broker downgrade of chip-equipment stocks had every 
SMH Nov. $32.50 call holder jumping ship today.

If I get any "Max Pain" theory values from computerized source, I 
certainly let traders/investors know in an intra-day update or 
Market Monitor.

Jeff Bailey


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


In Section Two:

Watch List: Overseas A.D.R's and A.D.S' on the NYSE
Stop Loss Updates: GDW
Dropped Calls: None
Dropped Puts: APOL
New Calls: None
New Puts: MXIM

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

Overseas A.D.R's and A.D.S' on the NYSE

___________________________________________________________________

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.
___________________________________________________________________


Total S.A. - TOT - close: 107.30 change: +1.08

WHAT TO WATCH: We recently closed TOT as a call play to avoid any 
earnings surprises.  The earnings news this morning looks 
positive and shares bounced from the $106 level.  This looks like 
another bullish entry point.  The P&F chart points to a $135 
target.  We would aim for a move toward $115-120 by year's end.

Chart=


---

Kyocera - KYO - close: 70.15 change: -1.55

WHAT TO WATCH: This specialty chip maker has been consolidating 
under resistance at the $75-76 level for the past couple of 
months.  It looks like shares are beginning to roll over again 
and the recent decline has been fueled by strong volume.  There 
aren't any options to play but traders may want to consider 
shorting the stock with an immediate target of $65.00.  

Chart=


---

PetroChina Co - PTR - close: 54.54 change: +0.32

WHAT TO WATCH: The up trend looks strong for this oil-related 
stock.  Shares have spent the last five weeks consolidating gains 
and the recent bounce from its 50-dma near $52.00 coincided with 
a new MACD buy signal.  The P&F chart looks bullish with a $61 
target.  Readers can watch for a move over $55.00-55.50 as an 
entry point.  

Chart=


---

Banco Itau S.A. - ITU - close: 61.98 change: +1.87

WHAT TO WATCH: Financials were positive again today but U.S. 
stocks couldn't keep up with this Italian bank.  Shares of ITU 
soared 3.11 percent on very strong volume to challenge resistance 
at the $62.00 level.  Considering ITU's consistent up trend this 
may be a bullish entry point.  Otherwise look for a pull back to 
$60 and buy the bounce with a target of $65-66.

Chart=



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

BA $53.40 +0.89 - So far so good.  BA continues to rally higher.

NBP $47.10 +0.20 - This natural gas stock has been consolidating 
under resistance at $47.50.  The stock looks ready to breakout 
and run higher.  Unfortunately, there are no options to trade.

KMI $65.71 +1.06 - This natural gas stock is nearing resistance 
at $66.00. 

FNF $39.18 +0.61 - FNF has broken out over six-month old 
resistance at the $39.00 level. 



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

GDW - call play -
  A bounce in the financials helped fuel a 1.5 percent
  rally in GDW.  Shares broke through resistance at 
  $118.00 and hit our trigger to go long at $118.15.


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

None


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

Apollo Group - APOL - close: 68.60 chg: +2.09 stop: 68.51     

A rebound in the education stocks helped push APOL up and over 
resistance at the $68.51 level.  Rivals like CECO added 5 
percent, EDMC added 3.4 percent and COCO rose 3.18 percent.  The 
breakout over $68.50 triggers out stop in APOL and closes the 
play.  Watch to see if the $70.00 level can hold as round-number 
resistance for the troubled education stock.

Picked on October 10 at $69.81
Change since picked:    - 1.21
Earnings Date         10/05/04 (confirmed)
Average Daily Volume =     3.3 million 
Chart =


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

None


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

Maxim Integrated - MXIM - close: 42.04 chg: -2.10 stop: 45.51

Company Description:
Maxim Integrated Products is a leading international supplier of 
quality analog and mixed-signal products for applications that 
require real world signal processing.
(source: company press release)

Why We Like It:
This is a technical play.  The SOX was the weakest technology-
related sector index on Wednesday with a 2.4 percent decline.  
Shares of MXIM helped lead the group lower with a 4.75 percent 
drop on volume that was 50 percent above average.  The decline in 
MXIM appears to have formed a bear-wedge breakdown.  Together 
with its daily oscillators in a sell signal and its MACD 
indicator in a new sell signal the stock looks vulnerable.  We're 
going to suggest short-term puts with an eye on the $35 level. 

Suggested Options:
We are going to suggest the December puts.  

BUY PUT DEC 45 XIQ-XI OI= 581 current ask $3.80
BUY PUT DEC 40 XIQ-XH OI= 884 current ask $1.15

Annotated chart:

 

Picked on November 10 at $42.04
Change since picked:     - 0.00
Earnings Date          10/05/04 (confirmed)
Average Daily Volume =      6.0 million 
Chart =



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