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Daily Newsletter, Monday, 11/15/2004

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The Option Investor Newsletter                   Monday 11-15-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Bionic Bulls  
Futures Wrap: See Note
Index Trader Wrap: Semiconductors achieve "bull confirmed" status  


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      11-15-2004           High     Low     Volume   Adv/Dcl
DJIA    10550.24 + 11.23 10563.02 10517.13 1.84 bln 1498/1321
NASDAQ   2094.09 +  8.75  2094.13  2078.84 1.87 bln 1705/1350
S&P 100   566.09 -  0.13   566.64   564.40   Totals 3203/2671
S&P 500  1183.81 -  0.36  1184.48  1179.85
SOX       429.57 +  5.76   432.63   420.53
RUS 2000  623.86 +  1.88   623.86   618.97
DJ TRANS 3611.51 - 16.69  3626.99  3594.12
VIX        13.38 +  0.05    14.06    13.25
VXO (VIX-O)14.21 +  0.16    14.80    14.00
VXN        18.50 -  0.32    19.73    18.42
Total Volume 3,717M
Total UpVol  2,359M
Total DnVol  1,317M
Total Adv  3203
Total Dcl  2671
52wk Highs  419 
52wk Lows    16
TRIN       0.69
PUT/CALL   0.56 
*******************************************************************

Bionic Bulls
Jonathan Levinson

Bulls and bears alike were on the alert for an overdue pullback 
in the indices as option expiration week kicked off.  A premarket 
dip was bought, however, as was every other dip that followed for 
the rest of the day as the indices held their gains, closing 
mixed to positive by session's end.



Daily Dow Chart


The daily Dow chart contains one year's worth of daily data to 
provide some longer range perspective at the expense of short 
term detail. Today's 46 point range broke Friday's high in the 
morning and managed to trade both sides of unchanged for the rest 
of the day.  Once again, there was no pullback, which has been 
the case for nearly all of the move off the October lows.  This 
move is comparable to the December 2003 rally, only it has been 
generally steeper, more like an upside crash than a rally.  The 
move for the past two weeks has resulted in a trending daily 
cycle upphase, with the 10 day stochastic currently buried in 
overbought territory.  This would be the logical spot for at 
least a corrective downphase to kick off, but the bids have been 
relentless.  Bears will want to see a move below 10480-10500 
before thinking about trying to catch the rising knife.  
Resistance going back to February-March 2004 is from 10560-10600.

Daily S&P 500 Chart


Unlike the Dow, the SPX has reached new highs for the year on 
this rally, not because it traveled further but because it 
launched from a much higher relative low of 1089.  It too has 
maxxed out its daily cycle and is due for some downside.  It was 
a slow day, however, with the SPX respecting a less than 5 point 
range.  Today's CBOE total put to call ratio never made it 
above .54, with a low of .44.  While the CBOE put to call ratio 
is a secondary indicator only, due to the multitude of bearish 
and bullish strategies using puts or calls or both, extreme lows 
in put volume over call volume tend to coincide with market tops.  
Today's intraday p/c ratio readings are in that neighbourhood, 
reiterating the message of the trending 10-day stochastics, but 
without cooperation from the price, bearish traders will be left 
holding a great set of arguments and a great big loss.  Better to 
let a new trend at least suggest itself before trying to 
anticipate a decline, however likely.  In this case, we'd want to 
see a close below 1170 at minimum, better yet below 1162 support, 
which should produce preliminary sell signals in the daily cycle 
oscillators.  Until then, the trend will remain clearly up, 
regardless of what the indicators may be cautioning. 


Daily Nasdaq Chart


The Nasdaq traversed all of 16 points for the session, finishing 
8.75 in the green despite intraday bearish divergences galore.  
Volume was moderate and the price held up.  Like the Dow,
 the COMPQ has failed to touch, let alone exceed the year highs, 
but the descending channel breakout is full of bullish promise if 
the price can be driven above 2160.  A quick look at a 3 year 
weekly chart holds up the possibility that this year's decline 
was in fact a corrective bull flag within the rally from the 2002 
lows.  In that case, there's the potential for a move of a 
similar magnitude of the 2003 rally having just commenced on the 
breakout above 1950.  On the other hand, a failure at or below 
2160 would set up a bearish double top.  Given the overbought 
readings on the daily cycle oscillators, I'm more inclined toward 
at least a correction from here.  But until such commences (which 
it clearly has not), the powerful rise from October has to be 
respected.  Bears need to see a close below 2045, confirmed with 
a break below 2035-2025 support, to suggest that a new daily 
cycle downphase (and not just a whipsaw) is underway.


Weekly TNX Chart


Bonds traded a narrow range today around unchanged, finishing 
slightly higher, with ten year note yields (TNX) losing 1 bp to 
finish at 4.19%.  The weekly cycle upphase that launched on the 
successful test of lower rising wedge support confirmed with a 
bullish Macd cross last week.  On this basis, the 3.96%-4.0% 
support level should not be broken on any pullback from here, and 
above 4.26%, 4.38%-4.4% is next resistance for the TNX.


Weekly chart of Crude oil


Crude oil fell below 46 to a 9 week low of 45.30 on the Nymex as 
the financial press reported that rising US reserves had eased 
fears of a Winter supply squeeze.  There was also talk of the 
absence of any weekend supply disruptions that helped move the 
market lower.  The Nigerian labor dispute has yet to be resolved, 
though the government offered to reduce pump prices by 10% which 
the Nigeria Labor Congress was considering today.  Other 
potentially bullish factors cited in support of the price of oil 
were ongoing supply uncertainties, the risk of a colder than 
usual winter, and the threat of sabotage arising from the 
conflict in Iraq.  Crude oil futures recovered part of their 
losses to close -1.16% at 46.775.

Whatever the external factors attributed to the decline, the 
weekly chart's bearish stochastic divergence was sounding the 
alarm from the time of the initial move to 46.  The sharp break 
from the record highs fits well with that divergence, and with a 
downphase now in progress, traders should be looking for a 
pattern of lower highs and lower lows until the next weekly cycle 
upphase gets underway.  45-46 is confluence support on this 
chart, but given the ongoing downphase, we should see that level 
broken and a retest of stronger support at 42.  A bounce at or 
above that level would be clearly bullish for the price of oil, 
given the strong rally of the past 3 years.


In corporate news, meat processor TSN reported a drop of 66M or 
19 cents per share from Q3 to Q4 on rising sales of 7.1B from 
6.6B.  Estimates were for 19 cents per share.  The company 
projects 2005 earnings to come in between $1.15 - $1.45 per 
share.  Analysts are expecting the company to $1.30 per share in 
2005.    TSN closed higher by 1.18% at 17.08.

Insurer/asset manager AIG is reportedly close to reaching a 
settlement with the SEC in the PNC affair, in which AIG has been 
under investigation for allegedly helping PNC to commit 
accounting fraud.  Sources claim that the settlement will cost 
AIG more than 10M, but would help it avoid prosecution by the 
Department of Justice.  AIG added 2.97% to close at 62.84.

GLBC reported a wider loss for Q3 2004 of 102M, up from 80M in Q3 
2003 on revenue of 617M, down from 696M one year ago.  The 
company attributed the declines to its ongoing financing and 
business tweaks, and noted that its gross margins are improving.  
The stock closed lower by 3.05% at 14.60.

Home improvement supplier LOW beat estimates by a penny, 
reporting earnings of 66 cents per share or 522M.  Q3 2003's 
earnings were 452M or 56 cents per share.  Sales were higher by 
16.2% at 9.1B for the quarter, with same-store sales up 5.2%.  
The company estimates Q4 earnings of 58-60 cents.  Analysts are 
estimating 60 cents for the next quarter.  LOW dropped 1.66% to 
close at 59.25.

Gold miner KGC announced the revision of its previously reported 
Q3 earnings of 9.4M to a loss of 133.6M on the basis of a 143M 
reduction in goodwill attributed to its Paracatu mine in Brazil.  
The company noted that its cashflow of 62.5M was unaffected by 
the revision.  KGC got clocked for 5.26% to close at 7.93.

Foodmaker KFT announced that it is in an agreement to sell is 
candy business, including Life Savers, Altoids, Creme Savers, 
Trolli and Sugus, to WWY in a deal worth approximately 1.48B. KFT 
closed lower by .57% at 34.68, while WWY gained 1.07% to close at 
68.08.

DJ announced that it is in a deal to purchase MKTW for 519M or 18 
per fully diluted share, which, including MKTW's 56M cash on hand 
amounts to a net price of 4563M.  According to MKTW, the price 
represents a 46.5% premium on the average trading price over the 
past 60 days.  DJ, which owns the Wall Street Journal, expects 
that the deal will extend its reach and deliver a larger and 
broader audience for online financial news.  After the bell, 
ratings agency Standard & Poors placed DJ on credit watch, with 
the negative implications that such carries, pending a review of 
the company's financial strategies.  S&P stated that any 
downgrade would likely be limited to "one notch".  DJ rose .2% to 
close at 45.10, while MKTW gained 7.92% to close at 18.12.

Reuters reported on the "60 minutes" story last night to the 
effect that MRK had evidence as early as 2000 that Vioxx was 
unsafe.  Two studies, the "Vigor" study of 1999 and the "Topol" 
study of 1998 demonstrated that users of the drug were 
respectively 5 and 6 times more likely to suffer serious 
cardiovascular events than those who did not.  As of the end of 
last month, MRK had been named as a defendant in approximately 
375 lawsuits associated with Vioxx.   The company disputed the 
Topol study, but the 2000 "Approve" study established that 
patients taking Vioxx were exposed to twice the normal risk of 
heart attacks and strokes.  It was on the basis of this study 
that MRK recalled Vioxx on September 30, 2004.  MRK gained 2.42% 
to close at 27.09.

Software provider MUSE reported Q4 earnings of 7 cents or 5.4M, 
beating estimates for 1 cent per share.  On a GAAP basis, the 
company's profit was 4.2M or 5 cents, up from a loss of 2 cents 
per share or 1.8M in Q4 2003, with revenues rising 8% over last 
year's Q3.  MUSE rose 20.87% to close at 5.56.

Cigar and consumer products producer SYBR reduced its loss from 
627K or 34 cents per share to 170K or 8 cents per share, with 
revenue up from 10.3M in Q3 2003 to 13.8M in the current quarter, 
a 34% y-o-y increase.  SYBR added 41.89% to close at 5.25.

In economic news, the lone report for the day was a minor one, 
the New York Empire State Index for November, which came in a 
19.76 compared with estimates of 20.6.  The number was up from 
its October reading of 17.4.  The New Orders component was down
from 21.2 in October to 18.5 in the current month, while 
shipments rose from 19.1 to 21.8.

Associated Press reported that John Snow was staying the course, 
saying that the US supports "the strong dollar" but adding that 
the international forex markets should determine its value.  Snow 
was in Ireland when he stated, "Our policy on the dollar is well 
known. We support a strong dollar. A strong dollar is in 
America's interests...  Our basic policy, of course, is to let 
open, competitive markets set the values. Markets are driven by 
fundamentals and towards fundamentals."   The comments to the 12-
nation eurozone members were in response to the expression of 
concern that the dollar's decline will price European exports out 
of the US market.  The article reported that currency traders 
have a dim view of the "fundamentals" to which Mr. Snow 
ostensibly referred, citing the expanding budget and trade 
deficits under the current administration, the latter of which 
has risen from 496B to 592B over the past year. 

There were 4 resignations announced by the White House, with 
Secretary of State Colin Powell, Energy Secretary Spencer 
Abraham, Agriculture Secretary Ann Veneman and Education 
Secretary Rodney Paige leaving.  No replacements had been 
announced as of this writing.  With respect to Powell, who, as 
Reuters reported, "... was often seen representing more moderate 
views on foreign policy in the Bush administration," an unnamed 
State Department official said that Powell would be staying on 
until his replacement had been named.  Later in the day, there 
were rumors circulated that Condoleezza Rice might succeed him.

In other news, Federal Reserve Governor Mark Olson delivered a 
speech today in which he said that the Fed should continue to 
seek a policy stance that is "more appropriate for sustained 
economic expansion."  By this, he was referring to the ongoing 
rate hikes, which he said need to continue at a measured pace.

For tomorrow, the Producers Price Index and Core PPI will be 
released at 8:30AM, the first half of the monthly story that gets 
completed on Wednesday by the Consumer Price Index release.  The 
October PPI is estimated at +.6% after last month's .1% gain, 
with the core PPI estimated at .1%, down from .3%.  After today's 
slow drift, traders are hoping that the release of this data will 
spur a clear directional move.   With today's action tense but 
narrow, it's not at all clear what the market has in store for 
the next 4 days' worth of op-ex week trading.  On the one hand, 
the heaviest front-month option strikes or "maximum pain" strikes 
are generally far south of current prices.  This would generally 
favor a strong downside move as large option writers push the 
underlying price to a level of maximum profitability for their 
expiring short contracts.  On the other hand, the strong rally of 
recent weeks has likely caused many of these participants to 
hedge by, among other things, buying the underlying securities 
which they may have been short via naked call writes.  In that 
event, the rally may have been fueled by option-relating hedging 
in a bullish feedback loop-  that would certainly explain the 
relentless grind higher across the indices.

While "maximum pain" related bearishness lines up well enough 
with the overbought daily and intraday oscillators across the 
indices, it's important to note that option writers who are 
sufficiently margined to move the indices are equally capable of 
dynamically hedging so as to defy the max-pain objectives.  This 
is the reason we've seen so many op-ex week max-pain misses this 
year.  While many traders and their indicators feel that a 
corrective (or impulsive) pullback is overdue, the price is the 
bottom line.  Traders will want to see that pullback begin and 
break some support levels before yielding to their guts-  as 
we've seen over the past weeks, the market is not subject to 
gravity in the short or even medium terms, and until the price 
reverses, it's safest to stay with the trend. 


************
FUTURES WRAP
************

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


********************
INDEX TRADER SUMMARY
********************

Semiconductors achieve "bull confirmed" status

The Philadelphia Semiconductor Index (SOX.X) 429.57 +1.35% was 
among today's sector winners, where on Friday, the SOX.X broke 
above its downward trend.  While a brief violation of that 
downward trend was broken for a day on June 30, and quickly 
reversed lower, today's gains has the SOX.X extending itself 
above downward trend, as buyers look to be gaining control in the 
sector.

Friday's action also had the institutionally watched 
Semiconductor Bullish % (BPSEMI) from Dorsey/Wright and 
Associates achieving "bull confirmed" status, where internals 
confirm the external price action.

Semiconductor Index (SOX.X) Chart - Daily Internals

 

After last week's earnings and cautious guidance from networking 
giant Cisco Systems (NASDAQ:CSCO) $19.55 +1.5%, a plethora of 
downgrades in the chip-equipment stocks had the SOX.X posting a 
modest gain, while broader technology advanced.  Despite broker 
negativity, market participants have the SOX.X breaking above 
downward trend from its January 12 high of 560.68 with Applied 
Materials (NASDAQ:AMAT) $16.78 +3.7% closing above its rounding 
flat 50-day SMA ($16.45) for the first time since falling below 
on October 8.  

Analysts currently see AMAT earning $0.26 per share when it 
reports earnings after the closing bell on Wednesday, which would 
be flat on versus third-quarters earnings of $0.26, but up from 
year-ago earnings of $0.06 per share.  

Shares of Intel (NASDAQ:INTC) $23.77 +0.33% edged up 8 cents in 
Monday's trade, and currently battle a very long-term downward 
trend from their August 2000 highs, but have started to work 
their way above the shorter-term downward trend similar to the 
SOX.X chart for a third-straight session.  Intel's 200-day SMA is 
trending lower at $25.21.

I'd be looking for bears to step up their short covering in the 
sector with the bullish % reversing up to "bull confirmed" 
status, where more than likely, the Semiconductor HOLDRs 
(AMEX:SMH) $33.63 +1.79% having achieved their bearish vertical 
count of $28.00 will bears more aggressive with their covering on 
any weakness.

U.S. Market Watch - 11/15/04 Close

 

Consistent with recent week's trade, the major indices refused to 
succumb to profit taking, where further declines in energy prices 
kept sellers outside of energy at bay.  While I noted just a few 
of Monday's merger announcements, brisk volumes at both the NYSE 
and NASDAQ along with some renewed merger activity, which will 
revive some of the big brokers/investment banks should carry 
further bullish momentum toward the Broker/Dealer Index (XBD.X) 
145.60 +0.09% in the weeks to come.

The Russell 2000 Growth iShares (AMEX:IWO) $64.75 +0.85% found a 
nice round of last-hour buying and now near "level #4" of our 
November-May seasonally bullish retracement.  The $65.00 level, 
if breached would have the IWO trading a new 52-week high.

While I made a decision to trade the small-cap "growth" portion 
of the Russell-2000 bullish, the Russell 2000 Value iShares 
(AMEX:IWN) $185.30 +0.24% have closed at all-time highs, 7 of the 
last 9 sessions as overhead supply is non-existent.  The IWN 
would currently trade just below its "level #3" ($185.44) of our 
November-May seasonally bullish retracement.

As noted in Friday evening's Market Monitor, I'm keeping tabs on 
the relative strength readings for "growth" and "value" versus 
the Russell 2000 Index (RUT.X) 623.86 +0.3%.  

S&P 500 Index (SPX.X) - Daily Intervals

 

With new WEEKLY Pivot retracement overlaid, I couldn't help but 
notice the SPX's WEEKLY 80.9% retracement of 1,163.38 marking 
last week's "pullback support" at the SPX's prior March 52-week 
high.  Most likely, that's a BIG support level for bearish buying 
after the MASSIVE short-squeeze developed on the break above the 
failed reverse head and shoulder.  While bears give plenty of 
reason to be sellers at extended technicals, nobody likes to be 
short when overhead supply is nonexistent.  Not even 
institutional computers!

Market Snapshot / Internals - 11/15/04 Close

 

Despite a coup'e of last-hour buy program premiums, we didn't see 
a ramp up in new highs at both the NYSE and NASDAQ like that 
found on Thursday and Friday, and this might suggest that 
institutional buying is starting to focus on "mid-tier" stocks 
that are just breaking out of bases, but have been gaining favor 
among buyers nonetheless.  

As the month of November reaches its mid-point, NYSE volume has 
been averaging 1.55 billion shares traded per day, up 3% from 
October's 1.50 billion, while NASDAQ has been churning 1.81 
billion per day, up 6% from October's 1.72 billion share per day 
average.

Pivot Matrix -

 

If we're going to see any type of "expiration" related trade this 
week, then I would use the SOX.X levels in the pivot matrix (and 
some daily monitoring of the SMH that I've been following) for 
the setup.  Suffice it to say, the equity indices in the pivot 
matrix are all WELL ABOVE November "Max Pain" levels, but there's 
a chance to still inflict some pain on near-tern calls.

With the Semiconductor Bullish % (BPSEMI) now "bull confirmed" a 
trader/investors bias is now longer-term bullish, but with AMAT 
earnings just ahead, and likely an "in line" report coming, I've 
thought in recent weeks that the Semiconductor HOLDRs (SMH) might 
try and close around the $32.50 level.  After a decline to WEEKLY 
S1 last week, both the SOX.X and SMH get early trade this week at 
WEEKLY R1, where WEEKLY Pivot for the SMH is pretty close to 
$32.25 at $32.66.

In Friday's Market Monitor, I thought "they can't hold'm back" as 
the SMH broke above $32.78.  By "them" I would mean the options 
market maker (see 11/07/04 Ask the Analyst).  If we're going to 
get any type of abatement in recent bullishness into expiration, 
then the SOX.X and SMH are closest to their November "Max Pain" 
where the SMH in $2.50 increments is calculated at $32.50.

The Dow Industrials (INDU) couldn't quite seal the deal at 
MONTHLY R1 today, and with an eye on 3M (NYSE:MMM) $82.28 -0.48%, 
which traded in a 90-cent range for the bulk of the session, this 
#3 price weighted component in the Dow seemed rather content to 
hover just above its WEEKLY Pivot $81.93 today.

Should MMM and the Dow Industrials (INDU) erupt further, with the 
INDU above WEEKLY R1, its going to be even tougher to hold the 
Semiconductors back at these low levels of bullish risk, even 
with 4 sessions to go until SMH expiration.

The NASDAQ-100 Market Volatility Index (VXN.X) 18.50 -1.7% fell 
today, and the SMH Jan. $32.50 puts traded 8,541 contracts with 
just 13,719 open interest (I'm thinking put sellers) while the 
Dec. $32.50 calls traded 5,222 contract with open interest of 
26,633 (I'm thinking call buyers).  The SMH components saw 
positive breadth of 19 to 1 today, where 13 of its 20 components 
are NASDAQ-listed stocks.  Advanced Micro Devices (NYSE:AMD) 
$20.98 -0.19% was the lone decliner, edging down 4 cents, while 
Vitesse Semiconductor (NASDAQ:VTSS) $3.20 +12.28%, Atmel 
(NASDAQ:ATML) $3.50 +8.69% and LSI Logic (NYSE:LSI) $5.27 +7.99% 
had low priced names leading the SMH's percentage gainer list.

Jeff Bailey
 

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The Option Investor Newsletter                   Monday 11-15-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: MXIM  	
Dropped Calls: None
Dropped Puts:  None
Watch List: A mixed bag of bullish candidates 


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

MXIM - put play -
  Heads up!  The SOX added 1.35 percent to out perform
  most of the market on Monday.  It could be a delayed
  reaction to last week's market rally.  This helped push
  MXIM over minor resistance at $43.00 and its simple 50-dma.
  Conservative traders may want to exit now to avoid
  further losses.  
 


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DROPPED CALLS
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**********
Watch List
**********

Electronic Arts - ERTS - close: 49.28 change: +1.69

WHAT TO WATCH: ERTS appears to be in the process of turning 
things around.  The stock was in jeopardy of producing a major 
breakdown in October but instead bounced from the $44 region.  
Now the stock is breaking out over technical resistance at its 
simple 200-dma and challenging round-number resistance at $50.00.  
A move over $50.00 would reverse its P&F chart into a new buy 
signal.  Watch for the break.

Chart=


---

KLA-Tencor - KLAC - close: 45.70 change: +1.28

WHAT TO WATCH: The semiconductor index is moving higher today in 
what appears to be a lagging rally behind the market's.  Now 
shares of KLAC are moving toward the top of its current trading 
range and breaking out over technical resistance at its 200-dma.  
The P&F chart is in a bullish pattern pointing to a $61 target.  
We would watch for a move over $46.00 or the recent high at 
$46.80 before considering bullish positions.  

Chart=


---

Patterson Companies - PDCO - close: 39.59 change: +0.23

WHAT TO WATCH: PDCO has been consolidating sideways between $35 
and $40 since last April.  It would appear that the consolidation 
may be ending as PDCO rallies toward resistance at $40.00.  The 
P&F chart is already in a buy signal with a $54 target but a move 
over $40 would produce a new triple-top breakout buy signal.  
Watch for the breakout and target $44-45 in the initial move.

Chart=


---

Toro Co - TTC - close: 71.50 change: +1.10

WHAT TO WATCH: We've had our eye on TTC for a while as it has 
been a watch list candidate before.  The consolidation appears to 
be ending as the pattern of higher lows has pushed TTC to 
breakout over resistance near $71.00.  Today's close marks a new 
all-time high yet TTC needs to trade over $72 to reverse the P&F 
sell signal into a buy signal.  Readers can choose to buy this 
breakout or watch for a move over $72 to confirm the move.  We 
would target $80 by year's end.

Chart=



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

AET $110.14 +2.83 - AET has been exceptionally strong the last 
three weeks.  We would not chase it here.  Watch for a decent 
multi-day pull back.

SUN $75.50 -0.86 - We're still watching for the mover over 
$77.00-78.00.

LMT $58.29 - We're still watching for a pull back in LMT.
 

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