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Daily Newsletter, Tuesday, 12/07/2004

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The Option Investor Newsletter                 Tuesday 12-07-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Naughty Traders
Futures Markets: See Note
Index Trader Wrap: That didn't make sense!
Market Sentiment: Overdue


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      12-07-2004           High     Low     Volume   Adv/Dcl
DJIA    10440.58 -106.50 10567.16 10440.36 1.95 bln  773/2434
NASDAQ   2114.66 - 36.60  2161.30  2114.65 2.69 bln  796/2351
S&P 100   560.94 -  5.65   567.84   560.92   Totals 1569/4785
S&P 500  1177.07 - 13.18  1192.19  1177.07 
SOX       437.51 -  9.40   451.31   437.49
RUS 2000  625.50 - 13.53   639.78   625.46
DJ TRANS 3669.66 - 37.60  3730.12  3669.66
VIX        13.67 +  0.48    13.74    12.96
VXO (VIX-O)14.18 +  0.61    14.41    13.59
VXN        20.28 +  0.75    20.38    19.02 
Total Volume 4,908M
Total UpVol  1,267M
Total DnVol  3,577M
Total Adv  1877
Total Dcl  5415
52wk Highs  289
52wk Lows    43
TRIN       1.37
NAZTRIN    0.65
PUT/CALL   0.75
************************************************************

Naughty Traders
by Jim Brown

It appears Santa made a list of those who have been 
naughty and nice and traders ended up on the naughty
list. While we are still far away from the normal
Santa Claus rally it was mentioned many times today 
and not in a complementary fashion. Everybody with a
microphone or a keyboard was moaning about the failing
market and the prospects of the Santa rally being past
tense for 2004. Enough traders took them at heart and
the markets closed at the lows for the day with no
buyers in sight. 

Dow Chart

 
SPX Chart

 
Nasdaq Chart

 

The economic reports today left a lot to be desired and
they helped to weaken bullish sentiment. Chain Store Sales
fell again by -1.7% and the second consecutive week of
strong declines. The index fell to its lowest reading 
since the end of January and this at the beginning of
the strong holiday shopping season. A special ICSC
survey this week showed 32% of shoppers were already
half done with their holiday shopping and 9% had already
completed the task. Obviously some shoppers had too much
extra time on their hands. I am waiting for the "real" 
discounts to begin on Dec-20th. Quite a few people follow
my example, mostly male shoppers I presume because the 
same survey suggested a strong finish similar to last 
year's pattern.

October consumer credit rose by +$7.7 billion and last
months number was revised upward to +$13.6 billion from
+$9.8B. This rising credit is pushing the consumer debt
burden even higher and December is expected to continue 
this trend. High energy prices and low wages are forcing
consumers to depend more on credit to get through the
month.  

Jobs are still an issue with the Challenger report showing
a rise in announced layoffs to 104,530. This was the third
consecutive month over 100,000 and this is generally the
time of year when layoffs moderate. This rising trend in
a normally positive period suggests there is still trouble
under the hood in the economy. The Jobs report last Friday
was also lower than expected and this layoff report was
a confirmation of that weakness in labor. During the boom
years prior to 2000 the level of layoffs remained below
50,000 per month. However, layoffs in 2004 are 19% below
the 2003 level for the 12 months ending in November.

Q3 Productivity was revised down slightly to +1.8% but
costs were revised higher by that same +1.8% rate. On an
annual basis productivity in Q3 dropped to +3.1% from +4.9%
in the second quarter. The revision today was not a real 
problem but the rising costs continue to drag on profits.
Corporations are doing everything they can to keep from
adding to payrolls and taking on the added cost burden.

While economics were seen as only a slight depressant on
the market there were some other challenges traders had
to overcome. Lehman advised customers that the market
ahead could be disappointing with only single digit gains
in 2005. They said earnings would disappoint and not to 
expect big gains. 

Insider trading hit a four-year high with $6.6 billion 
in stock sales in November. Analysts point to this trend
as a lack of confidence by insiders that business conditions
are going to improve in the short term. If insiders were
optimistic then investors should be optimistic. This is
not a hard statistic given the massive selling by the
Google insiders and by Larry Ellison. Together they 
accounted for the majority of the sales.

Despite the triple digit Dow loss there was very little
negative news on stocks. In reality there was a flood of
positive news. Cisco said guidance for +13% growth was
reasonable and said many positive things about their
new product line. Cisco soared on the news to a three
month high over $20 and then sold off to close negative.
They did however make comments that suggested margins
were coming under increasing pressure on tougher
competition from overseas competitors. 

Intel CEO Craig Barrett said that Intel had recovered
from product missteps and the company was now firing on
all eight cylinders again. He said Intel had regained its
market share in memory after pricing themselves out of the
market in 2003. They will be shipping their new dual core
processors in 2005 and by 2006 they expect 70% of the
product line will be the faster dual core processors. 
The WSJ is reporting tonight that Intel expects a ten
fold increase in processor speed by 2008. That would
equate to a 30 ghz chip but since they are getting away
from that measurement no target was mentioned. Intel 
said within three years it would be delivering not
just dual core processors but multicore chips with 
multiple processors to catapult total processor speed 
to new highs. Intel dropped -50 cents on the good news. 

Corning announced that two of its customers had either
pushed out or cancelled existing orders of LCD glass.
Corning had already announced they were not going to 
try and increase production to corner the market. After
being killed on an excess of fiber optic cable when the
Internet bubble burst they are comfortable manufacturing
for a profit and not trying to hog the entire sector.
They expect LCD TVs to be 16% of the market in 2005.

The satellite radio wars continue to heat up with XMSR
announcing Toyota will offer the radios as a factory
option in 2006. Customers buying Toyota and Lexus cars
can order them with factory installed radios. Not to be
left out SIRI announced that Toyota will offer dealer 
installed radios on nine models beginning in Feb-2005. 
This blow for blow advertising war continues to push 
both stocks higher. There was a rumor today the Nasdaq 
would put SIRI in the QQQQ and that provided another 
boost for both companies. XMSR currently has more than
three times as many subscribers as SIRI and this David
and goliath battle is far from over. 

After the bell Texas Instruments gave their mid quarter
update and they narrowed guidance to the middle of their
previous range. They said the inventory correction that
began in Q3 was continuing and order trends remained soft.
TXN said its own inventory problem will be down by year
end but they declined to predict how long the sector
problem would last. The after hours impact to futures
from TXN was negligible.  

On a positive note Seagate Technology (STX) raised its
estimates on stronger than expected demand for its 
products. They said profits could be as high as 22 cents
and that was well above the prior 11 to 14 cent estimate.
Revenue was expected to jump to $1.76B from the $1.61B
prior estimate. Shares of STX jumped +$2 in after hours
to $18.50. The company said retailer inventories had
declined to 3-4 weeks. With the prices at nearly free
it is not surprising. I bought five 200GB Western Digital
enhanced IDE drives this week for $104 each. (no rebate
needed at www.dttechnology.com) 

The market drop today came only a few hours after Ralph
Acampora issued his new targets for all the indexes.
Ralph now believes that we are in a new cyclical bull
market that started in October 2002 and will last for
the next six months. His targets are Dow 13,264, SPX
1473, Nasdaq 2796, Russell 797. I am sure he was very
gratified by the market implosion the day after he went
on CNBC with his bullish comments. In reality he is about
the only high profile analyst expecting good things from
2005. The list is long and growing longer for those who
feel January will be the high for the year. 

That feeling may have helped put the market on the skids
today and once the drop began it took on a life of its
own. Volume was very high on the Nasdaq with 2.7 billion
shares trading. The broad market advance decline line
was more than 3:1 in favor of declines. The market
reporters were constantly feeding the public a dose of
the Santa rally blues and predicting it will not appear
this year. In reality we are just in the period I 
mentioned several times last month where tax loss selling
normally occurs. I have discussed in this column the 
potential for that selling to have moved to the week 
ahead of Thanksgiving in order to get in front of the 
Microsoft dividend and that could have been a factor in
the pre Thanksgiving weakness. However, the sharp drop 
today without any real news trigger was not simply a 
concentrated effort by some funds to adjust their 
portfolio. Why they chose today to accelerate the selling
we will never know exactly. This was the third consecutive
down day and the selling began at 1:PM and never stopped.
Various support levels provided short pauses but sellers
were still unloading in the after hours futures. Several
reporters mentioned that extreme selling volume in the 
S&P futures after 1:PM drove the majority of the drop.  

One theory I pondered today had to do with the Microsoft
dividend play. If you remember we saw a huge spike in
the market the day before the dividend payment. The Dow
soared +162 points and the SPX rallied to a high just
below 1195 on "strong buying in the S&P futures." Once
the dividend was paid NOTHING happened. After that
Wednesday rally the market has been flat to down. We
speculated that the funds who bought the futures were
hedging themselves in advance of the expected liquidity
bounce. The high volume for the next three days with
no gains or losses were thought to be funds unwinding
those futures positions (negative market pressure) and
moving into stocks with the Microsoft money. (positive
pressure) This unwinding was thought to be producing
the high volume and no relative movement. After watching
the market action today and reviewing the action after
the close I am speculating today was the real unwinding
of that Wednesday bounce. 

I am speculating that the strong futures led bounce was
in anticipation of that Microsoft liquidity causing a
monster market move. Hedge funds positioned themselves
for that move with futures just like the mutual funds.
When it did not appear they grew nervous and today they
bailed. The market retraced to almost EXACTLY where the
rally began last Wednesday. Last Wednesday the Dow opened
at 10425, SPX 1174, Nasdaq 2104. Of those three the Dow 
and SPX retraced to almost exactly those levels today. 
The Nasdaq held its gains slightly better with a close at 
2116 but I am betting the positive Cisco and Intel news
helped prevent further weakness. 

The Russell was the index that really broke the trend. 
The Russell began last Wednesday at 634 and closed today
at 626. However, the Russell had been the index of choice
for the prior five weeks. Funds normally buy the Russell
stocks going into year end and I suspect there was a lot
more posturing in small caps before last week's bounce. 
The Russell also led this week's drop with a very weak 
performance beginning on Monday. When the bottom fell
out today it began on the Russell and never let up. After
the close the Russell futures fell to 624 in after hours.
The Russell futures have been weaker than the cash index
and this agrees with my speculation about the pre dividend
futures speculation. They just unloaded them today and 
with the Russell futures a "thinner" market the damage
was more apparent.

All this speculation about the reason for the drop does
not tell us where the drop will stop. Personally my target
for the drop this week was SPX 1177. (1176 in the futures)
I talked about it all day in the futures monitor and that
has been exactly the low so far. No magic here but just
very obvious support. That equates to 10425-10440 on the
Dow. The Nasdaq equivalent would have been 2100 but the
techs are holding their gains better despite the -36 
point drop. The Nasdaq closed at 2116. 

For Wednesday I am looking for a potential rebound but
it may only come in the form of an oversold relief bounce.
Some damage has been done to the bullish sentiment and
it may take a couple days for that to be erased. We are
still in the period in December where weakness is common
so there is no reason to get too excited. I have to 
admit the sharpness of today's drop was out of character
for the current market and if it is not due to the futures
play by hedge funds then there are forces at work that
could continue to undermine support. 

I am still a dip buyer above SPX 1165 and would target
that level for a conservative entry in front of a Santa
Claus rally. Below 1165 I would be flat or short. If we
do get a relief bounce at the open on Wednesday then I
would want to see that bounce hold over 1177 for bullish
confirmation before going long. December is normally a 
bullish month but no trend is infallible. Choose your 
positions wisely and raise your stops to protect profits.
Don't get caught letting profits slip away just because
December is "normally" bullish. 

Time is slipping away for the end of year renewal 
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Buy the dips until the trend changes. 

Jim Brown
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FUTURES MARKETS
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Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.
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*****************
INDEX TRADER WRAP
*****************

That didn't make sense!

The major indices found a strong round of selling today, where 
only health providers, junk bonds, and longer-dated Treasuries 
found healthy gains.

In a sea of pre-Chanuka or holiday red, the Disk Drive Index 
(DDX.X) 117.59 -3.13%, AMEX Gold Bugs Index ($HUI.X) 218.62 
-2.67%, Biotech Index (BTK.X) 517.91 -2.42% and Natural Gas Index 
(XNG.X) -2.30% paced declines.

Volume at the NASDAQ showed major disagreement between buyer and 
seller, with sellers easily winning out as the NASDAQ Composite 
(COMPX) 2,114.66 -1.7% shed 36.5 points after flirting with its 
January highs the past four sessions, including today.  I say 
major disagreement as the NASDAQ churned a whopping 2.71 billion 
shares.  Easily its highest daily volume this year.

Today's trade "didn't make sense" to some traders that have been 
using the dollar's strength/weakness to try and predict broader 
equity weakness/strength as the U.S. Dollar Index (dx00y) edged 
down just 0.04 point to 81.24.

It "didn't make sense" that Prudential's Ralph Acompora would 
make a bullish call, with a 6-month Dow Industrials price 
projection of 13,264, to then see the Dow Industials (INDU) 
10,440 -1.00% shed 106-points within 24-hours.

What really "didn't make sense" is that oil prices would plunge 
another 3.3%, to settle below $42.00, and still find the major 
indices mired in red.

U.S. Market Watch - 12/07/04 Close

 

Today's trade was not a bump higher at the open and an immediate 
dump to the close.  Software, Internet, Brokers and Health 
Insurers all set fractional 52-week or all-time highs.  Brokers 
reached the highs of their session just after 12:00 PM EST.

When things "don't make sense," there are usually two things 
traders, investors and analysts will say in an attempt to explain 
things.  The first, where no argument will ever be won is that 
"valuations" were the reason (lows and highs).  The second.... is 
some pre-option-expiration maneuvering.

At the very end of last night's Index Trader Wrap, I squared 3-
boxes on the SPX.X pivot matrix, quickly a prior 11/23/04 Index 
Trader Wrap.

Today's trade obviously unfolded to a bear's liking, with TRIN 
moving higher and the VIX.X breaching its WEEKLY R1 (13.63) 
toward the close.

By session's end, the SPX.X fell a sharp 13.18 points, or 1.10% 
to 1,177.07.  Not too far from the downside correlations marked 
last night.

It isn't all that often that we see Treasury YIELDs perform like 
they did today.  I'm going to touch on this further, later in the 
wrap, but when we see this much flattening like we did today, 
stocks will struggle mightily.  The Treasury market spent the 
better-part of the day under pressure on what traders will call 
"rate-lock selling" ahead of supply and the upcoming auctions 
with $15 billion of 5-year on Tuesday, and another $9 billion 
re-opened 10-year scheduled for Thursday.  

One can perhaps see how the upcoming $15 billion auction tomorrow 
would have the 5-year yield rising (selling in the bond in 
anticipation of new supply) against the 10 and 30.

However, I think there may be more to this than upcoming supply.

This SHARP, and somewhat SUDDEN, decline in oil prices.  While I 
can NOT be CERTAIN, I don't think it unreasonable to think that 
there are some BOND TRADERS that were shocked by Friday's nonfarm 
payroll data (not as "inflative" as thought) combined with SHARP 
DECLINE in oil prices (not as "inflationary" as thought) are 
probably scrambling if they are overly SHORT the 10 and 30-year 
maturities.  

In this evening's Market Monitor, I made a "crazy" comment.  But 
it could just be, that BROADER EQUITY MARKET BULLS, want to see 
OIL PRICES RISE a bit, back near $43-$45.  If I'm CORRECT in my 
logic, that Treasury traders in the 10 and 30 are overly short, 
and were scrambling to cover (buying, creating lower yield in 10 
and 30), then perhaps, a slight rebound could have the flattening 
YIELD curve easing a bit.

Market Snapshot / Internals - 12/07/04 Close

 

(Shaking my head as I type).... It was a rather quiet session 
until about 01:00 (NOT 03:00 when consumer credit was reported).  
Interviews with floor traders at that time had 3-different 
"reasons," being mentioned.  Stocks were overbought, futures 
related selling, and "trouble in the Ukraine."  

I agree with a Briefing.com reporter.  "In short, we're still 
listening for a convincing explanation."  

However, I (Jeff Bailey) could argue for some futures selling 
being related to December (quarterly) expiration.

Let's quickly take a look at the Pivot Matrix, but I need to 
cover some thoughts on the YIELD curve/oil price, as well as the 
S&P futures.  

Pivot Matrix - 

 

If you believe that Prudential Ralph Acompora's bullish call 
yesterday is the "top call" on this market, then you will be 
taking note that the BIX.X is the FIRST equity-based index to 
trade its MONTHLY Pivot to the DOWNSIDE.  The SOX.X traded UP 
through its MONTHLY Pivot on December 1.

On the BIX.X, I make note of "Yld Crv."  What I'm touching on 
there is the previously discussed FUNDAMENTALS that can come into 
play for the BIX.X in NEGATIVE fashion.  Remember, the Fed has 
been slowly raising its Fed funds target rate.  Banks LEND MONEY 
at rates determined by the BOND MARKET.  If the Fed is raising 
its Fed funds target, and 10-year and 30-year YIELDS are falling, 
thus narrowing the spread, or lending margins for banks, then we 
have some rather "easy fundamental" concepts to grasp as it 
relates to the "yield curve."  

I am NOT a yield curve specialist.  You do NOT need to be one 
either.  But it is IMPORTANT for us to have a grasp of what may 
be going on near term, so traders can THINK THINGS THROUGH, and 
not jump the gun, should we see OIL PRICES RISE, which could then 
brink SELLING to the LONGER DATED TREASURY YIELDS, which might 
have an trader (or analyst) screaming "the sky is falling!"

I'm ONLY showing the 5, 10 and 30-year yield, along with our 
"junk bond."  Instead of showing the 5-day and 10-day PERCENTAGE 
change, I'm showing 5-day and 10-day POINT movement, with a FOCUS 
on the 5, 10 and 30-year YIELDS.  

This is the BEST way (in my opinion) to understand the yield 
curve, and FLATTENING and STEEPENING.  For an equity trader, FLAT 
is usually negative for stocks, while STEEPENING is usually 
positive for stocks.

U.S. Market Watch - 12/07/04 Close

 

Real quick.  The 5-year YIELD has falling 11.4 basis points the 
past 5-sessions (5DyNet).  The longest-dated 30-year YIELD has 
fallen 11.6 basis points the past 5 sessions (5DyNet).  One could 
say they have moved in tandem.

But now look at the past 20-days (20DyNet), with an 
UNDERSTANDING, based on OBSERVATION of what took place TODAY!  
For the past 20-days, the 5-year YIELD ($FVX.X) has RISEN 6.8 
basis points, while the 30-year YIELD ($TYX.X) has FALLEN 3.4 
basis points.  Do you see how the SPREAD has narrowed?  

I don't discuss the 10-year YIELD ($TNX.X), but its is what 
traders call the "belly of the curve."  Think of a "bell curve" 
where you've got two end (5 and 10), and the 10-year is in 
between at the "belly."  Just like your "belly" is in the middle 
of your body.  

Anyhow.... its can be the SHARP DECLINE in OIL PRICES, as well as 
Friday's nonfarm payroll data, that has the LONGER-DATED Treasury 
trader that was SHORT, scrambling to get things re-balanced that 
has the 30-year YIELD falling.  Meantime, some near-term SUPPLY 
of Treasury, as well as a Fed that is currently tightening, has 
the SHORTER dated 5-year YIELD moving up 6.8 basis points (not 
that much, but enough to have yield curve flattening) that 
pressured the Regional Banks (BIX.X).

Now, be aware of the POSSIBILITY tomorrow, with weekly energy 
inventory data coming out.  

My thoughts are this.  IF I were a trader, that had been SHORT 
the longer-dated 30-year Treasury, and got a surprise from the 
nonfarm payroll (not as strong, or "reflationary") as I had 
anticipated, and now I'm seeing OIL PRICES in a free fall, or 
MOVING SHARPLY LOWER, then I've got to be trying to get things 
squared up, and get my SHORT under control.  Regardless of new 
supply, or what the heck I think the Fed might do at Tuesday's 
FOMC meeting.

Now, I'm running way late, but I want trader's to QUICKLY look at 
my e-mini S&P futures (es04z) chart, where I've shown this chart 
before, with my FITTED retracement.  Get in the mindset, into 
next week, that we're also dealing with some triple witching 
expiration into next week.  

e-mini S&P futures (es04z) - Daily Intervals

 

The "fitted" retracement on the December e-mini S&P futures give 
us some LEVELS, away from the Pivot Matrix we use for the cash 
market, or the SPX.X.  Into next week's FUTURES expiration, I 
would have to be looking at SUPPORT (1,167-1,170) and 
RESISISTANCE (1,192-1,203).  

Go check your SPX.X Pivot Matrix.  

Now, this is where I once again go BACK to that 11/23/04 VIX.X 
and SPX option action we talked about.  At that time, I 
interpreted the FALLING VIX.X and the action in the 1,175 puts as 
the MARKET SELLING the 1,175 for $12.85 that day.  

Now time has passed.  If I take today's close in those 1,175 puts 
at $8.60, and subtract it from the STRIKE of 1,175, I still come 
pretty darned close to my thoughts of a trader selling this 
PREMIUM in view of 1,162 support.

I may have been INCORRECT in thinking that "smart money" was 
buying 1,200 calls.  That is, as long as the SPX stays below 
1,200.  

Simple thought/question.  If the SPX is going to get ABOVE 1,200, 
what MUST THE BANKS do?  If the BANKS are going to reverse back 
higher and get the SPX above 1,200, what MIGHT HAVE TO HAPPEN in 
the Treasury bond market?  I'm thinking the 10 or 30-year YIELD 
YIELDs have to RISE!  Get the YIELD curve steepening again.

For BEARISH equity trade, then the opposite would be true.

Jeff Bailey


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

Overdue
- J. Brown

Stocks have been overdue for a significant pull back for weeks so 
we shouldn't be surprise to see one this week.  This does seem to 
be somewhat of an empty week on Wall Street.  Last week there was 
a wave of economic news with the jobs report plus we had the 
Microsoft dividend and Intel mid-quarter update.  Today there was 
some news from various analysts conferences held by some tech 
bellwethers but nothing to keep the momentum alive.  Even a 3.3% 
drop in crude oil to $41.55 failed to spark any interest in 
buying stocks.  

Bulls probably shouldn't worry much.  Stocks look tired and need 
a break.  A pull back this week would set up for an end of your 
finale.  Normally we can look for small caps to out perform as 
they get a boost from an early January effect in mid-December.  I 
realize the Russell 2000 index just produced a new MACD sell 
signal but after a few days of declines the dip buying could 
begin again.   

Market internals were certainly bearish but that's what we would 
expect from a market-wide sell-off.  Declining stocks outnumbered 
advancers 11 to 3 on the NYSE and 23 to 7 on the NASDAQ.  Down 
volume overwhelmed up volume by 5 to 1 on the NYSE and 17 to 9 on 
the NASDAQ.  

The rest of the week is pretty quiet on the economic front until 
we get to Friday's PPI report. 



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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9585
Current     : 10440

Moving Averages:
(Simple)

 10-dma: 10519
 50-dma: 10234 
200-dma: 10237 



S&P 500 ($SPX)

52-week High: 1188
52-week Low : 1031
Current     : 1177

Moving Averages:
(Simple)

 10-dma: 1183
 50-dma: 1146
200-dma: 1123



Nasdaq-100 ($NDX)

52-week High: 1581
52-week Low : 1301
Current     : 1589

Moving Averages:
(Simple)

 10-dma: 1591
 50-dma: 1504
200-dma: 1445



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

CBOE Market Volatility Index (VIX) = 13.67 +0.48
CBOE Mkt Volatility old VIX  (VXO) = 14.18 +0.61
Nasdaq Volatility Index (VXN)      = 20.28 +0.75 


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.75        926,429       697,405
Equity Only    0.59        758,292       446,314
OEX            1.16         29,569        34,289
QQQQ           2.48         34,042        84,463


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

Bullish Percent Data

           Current   Change   Status
NYSE          75.7    + 0     Bear Correction
NASDAQ-100    78.0    + 0     Bull Confirmed
Dow Indust.   66.6    + 0     Bull Confirmed
S&P 500       74.6    + 0     Bull Confirmed
S&P 100       75.0    + 1     Bull Confirmed


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: 1.08
10-dma: 0.95 
21-dma: 0.99
55-dma: 1.09


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     590       771
Decliners    2227      2301

New Highs      61        56
New Lows       13        19

Up Volume    322M      890M
Down Vol.   1585M     1717M

Total Vol.  1924M     2630M
M = millions


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

Commitments Of Traders Report: 11/30/04


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
Commercials traders didn't budge from their slightly bearish
tone last week while small traders have increased their bullish
attitudes.

Commercials   Long      Short      Net     % Of OI
11/09/04      447,779   449,171   ( 1,392)   (0.1%)
11/16/04      452,149   468,048   (15,899)   (1.7%)
11/23/04      462,408   491,384   (28,976)   (3.0%)
11/30/04      462,394   491,813   (29,419)   (3.0%)

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
11/09/04      148,415   136,325    12,090     4.2%
11/16/04      166,862   156,751    10,111     3.1%
11/23/04      171,192   150,606    20,586     6.4%
11/30/04      176,031   148,876    27,155     8.3%

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

Commercial traders added to both longs and shorts while 
small traders reduced some longs to lower their bullishness
by a few percentage points.

Commercials   Long      Short      Net     % Of OI 
11/09/04      337,164   672,903   (335,739)  (33.2%)
11/16/04      371,282   796,279   (424,997)  (36.4%)
11/23/04      412,724   849,091   (436,367)  (34.6%)
11/30/04      439,074   855,440   (416,366)  (32.2%)

Most bearish reading of the year: (436,367)  - 11/23/04
Most bullish reading of the year:  133,299   - 09/02/03

Small Traders Long      Short      Net     % of OI
11/09/04      392,253     58,999   333,254    73.8%
11/16/04      445,737     70,169   375,568    72.8%
11/23/04      400,995     62,080   338,915    73.1%
11/30/04      386,665     67,926   318,739    70.1%

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


NASDAQ-100

Sentiment is hitting new one-year extremes on the NDX.
Commercials are becoming more bullish while small traders
are becoming more bearish!

Commercials   Long      Short      Net     % of OI 
11/09/04       54,509     33,016    21,493   24.5%
11/16/04       55,737     33,683    22,054   24.6%
11/23/04       58,159     34,104    24,055   26.0%
11/30/04       56,629     30,571    26,058   29.8%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  26,058   - 11/30/04

Small Traders  Long     Short      Net     % of OI
11/09/04       10,213    38,251   (28,038)  (57.8%)
11/16/04       10,533    37,660   (27,127)  (56.2%)
11/23/04       11,153    39,712   (28,559)  (56.1%)
11/30/04        9,902    44,779   (34,877)  (63.7%)

Most bearish reading of the year: (34,877) - 11/30/04
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

Both the commercial traders and the small traders have
grown more bearish on the Industrials.

Commercials   Long      Short      Net     % of OI
11/09/04       22,863    22,463      400       0.8%
11/16/04       22,004    23,744   (1,740)     (3.8%)
11/23/04       22,527    25,537   (3,010)     (6.2%)
11/30/04       22,622    25,411   (2,789)     (5.8%)
 
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
11/09/04        6,165     6,483    ( 318)   ( 2.5%)
11/16/04        5,937     6,533    ( 596)   ( 4.7%)
11/23/04        5,833     8,299   (2,466)   (17.4%)
11/30/04        5,739     8,536   (2,797)   (19.6%)

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 12-07-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: None
Call Play Updates: ARLP, ABK, DHR, EBAY, FDX, FLR, IBM, LEH, OSK, 
                   UTX
New Calls Plays: None
Put Play Updates: None
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:
*****

None


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

Alliance Resource - ARLP - cls: 63.30 chg: -1.75 stop: 61.35

Our speculative technical play is not off to the best start.  
Shares quickly traded higher on Monday morning only to reverse 
painting what could be called "dark cloud cover" by some 
candlestick fans.  Today's drop was likely due to market 
weakness.  Fortunately, we're happy to see bulls support the 
stock at the $63.00 level.  There was a steady buying at this 
level all day.  We would not consider new bullish positions until 
ARLP began to bounce.  Look for a move back over the $65 level.

Picked on December 5 at $ 65.82
Change since picked:     - 2.52
Earnings Date          10/22/04 (confirmed)
Average Daily Volume =      101 thousand
Chart =


---


Ambac Fincl Group - ABK - close: 82.09 chg: -0.24 stop: 77.99

ABK continues to show relative strength.  The stock lost just 24 
cents compared to the 106-point loss in the Industrials.  We 
remain bullish and traders can watch for a dip toward $81 or a 
move over $82.50 as an entry point. 

Picked on December 01 at $82.26
Change since picked:     - 0.17
Earnings Date          10/20/04 (confirmed)
Average Daily Volume =      490 thousand
Chart =


---

Danaher - DHR - close: 57.00 change: -0.68 stop: 56.75      

It could be time to exit.  DHR slipped throughout the entire 
session on Tuesday and closed right at $57 support.  We have our 
stop loss at $56.75 so we're ready to close this play should DHR 
break the $57 level.  Readers interested in following DHR for a 
future play can watch for a bounce from the $55 level.  No new 
news. 

Picked on October 27 at $54.99
Change since picked:    + 2.01
Earnings Date         10/21/04 (confirmed)
Average Daily Volume =     1.3 million 
Chart =


---

eBay Inc. - EBAY - close: 113.92 chg: -2.42 stop: 109.00     

EBAY has shown strength the last couple of days as it churned 
sideways above the $115 level resisting any selling pressure.  
The stock finally began to weaken today as Internet stocks were 
caught up in the market-wide sell-off.  Today's close is the 
first test for the dip buyers who have been jumping in at the 
simple 10-dma.  If the market continues to slip tomorrow we'd 
look for EBAY to slip toward the $112 level.  Watch for the 
bounce as the next entry point before any end-of-year rally into 
the holidays.

Picked on November 08 at $103.69 
Change since picked:      +10.23
Earnings Date           10/20/04 (confirmed)
Average Daily Volume =      10.4 million 
Chart =


---

Fedex Corp - FDX - close: 96.26 change: -1.17 stop: 93.95     

The very broad market sell-off on Tuesday hit the Transports for 
a one percent loss.  Shares of FDX under performed with a 1.2 
percent decline as the stock pulled back to minor support at $96.  
We are not suggesting bullish entry point at this time but we 
would look for FDX to bounce in the $95.50-96.00 range.  If you 
think FDX is looking vulnerable then it may be time to do some 
profit taking.  

Picked on October 21 at $89.45 
Change since picked:    + 6.81
Earnings Date         09/22/04 (confirmed)
Average Daily Volume =     1.5 million 
Chart =


---

Fluor Corp - FLR - close: 51.80 change: -0.21 stop: 49.95    

We remain impressed with FLR's relative strength.  Shares only 
lost 21 cents compared to the Dow's 106-point decline.  The 
question now is whether or not FLR will bounce from the bottom of 
its current trading range.  We did not see or hear any news 
regarding FLR's presentation at the First Albany conference 
today. 
 
Picked on November 22 at $48.51
Change since picked:     + 3.29
Earnings Date          10/27/04 (confirmed)
Average Daily Volume =      521 thousand   
Chart =



---

Intl Business Mach. - IBM - close: 96.10 chg: -1.57 stop: 93.95     

There has been a lot of positive press for IBM the last few days 
after news hit that the company was planning on selling off its 
PC unit.  Prudential decided to reiterate their "buy" rating on 
the stock today.  Yet in spite of all the good news it couldn't 
stop traders from doing some profit taking in IBM as the Dow 
slipped over 100 points.  Shares are testing very minor support 
near $96.  We'd like to see a bounce here but it wouldn't 
surprise us to see IBM dip toward $95 before rebounding. If you 
think IBM looks more vulnerable then it may be time for some 
profit taking of your own.

Picked on October 27 at $90.00
Change since picked:    + 6.10
Earnings Date         10/18/04 (confirmed)
Average Daily Volume =     4.7 million 
Chart =


---

Lehman Brothers - LEH - close: 85.01 change: -0.68 stop: 82.49

We didn't have to wait long for LEH to hit our trigger.  Shares 
broke out on Monday to trade through our entry point at $85.51 
and above the $86 mark intraday.  The move over $86 produced a 
new triple-top breakout buy signal on its P&F chart with a $97 
target.  Today's decline appears to be market related.  If the 
stock continues to dip watch for a bounce from the $84 level.  
Remember, we're planning to exit before its earnings report next 
week.

Picked on December 6 at $ 85.51
Change since picked:     - 0.50
Earnings Date          12/15/04 (confirmed)
Average Daily Volume =      2.0 million  
Chart =



---

Oshkosh Truck - OSK - close: 63.74 change: +0.39 stop: 59.00 

OSK continues to show relative strength.  The stock added 39 
cents compared to the market's pull back.  Unfortunately, OSK 
remains trapped in its four-week trading range.  In the news 
yesterday OSK reported that its Italian fire truck division 
received a $7 million order for 80 mini-rescue vehicles from 
Saudi Arabia.  

Picked on November 07 at $ 62.16
Change since picked:      + 1.58
Earnings Date           10/28/04 (confirmed)
Average Daily Volume =       205 thousand   
Chart =


---

United Tech. - UTX - close: 96.65 change: -1.35 stop: 95.99

Uh-oh!  This looks dangerous for UTX bulls.  We didn't worry 
about the recent pull back because UTX had new support at the $98 
level.  That's where shares closed on Monday.  Today's market 
pull back and sell-off in the Industrials pushed UTX to a 1.3 
percent decline and back into its previous trading range.  UTX 
still has support near $96 at the bottom of its trading range but 
that's awfully close to our stop loss.  Be on the alert and ready 
to exit. 

Picked on December 1 at $100.15
Change since picked:     - 3.50
Earnings Date          10/20/04 (confirmed)
Average Daily Volume =      1.8 million  
Chart =



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

None


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

None


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

None

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**********

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The Option Investor Newsletter                  Tuesday 12-07-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Internets to Biotech and more


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

Internets to Biotech 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.
___________________________________________________________________


Amazon.com - AMZN - close: 38.20 change: -1.29

WHAT TO WATCH: We strongly considered adding AMZN to the OI play 
list as a put candidate tonight.  The Internet sector was hit 
with profit taking today and AMZN has been under performing the 
group for months.  If you look at the daily chart you can see the 
steady trend of higher lows.  Its technicals are negative and its 
MACD just produced a new sell signal.  Plus, the P&F chart is 
bearish and points to a $15 target.  We would watch for a move 
under $37.70 as a potential entry point with a $32 target.  

Chart=


---

Chiron Corp - CHIR - close: 30.85 change: -0.96

WHAT TO WATCH: The three-week decline in CHIR is beginning to 
pick up speed.  Shares just broke support at the $31 level and 
are heading toward round-number, psychological support at $30.00.  
The technicals are naturally negative but its MACD indicator has 
just rolled over into a new sell signal.  Watch for a breakdown 
under $30.00 and target the $26-25 range.

Chart=


---

Ultra Petroleum Corp - UPL - close: 46.59 change: -2.11

WHAT TO WATCH: This is a pivotal spot for UPL.  The recent action 
shows two failed rallies at the $50.00 mark in the last two days.  
Today's 4.3 percent decline was fueled on stronger than average 
volume.  Combine this with the weakness in the oil and oil 
services sector and crude oil and it looks like a bearish entry 
point.  However, for the last year UPL has been consistently 
bouncing from technical support at its rising 100-dma.  Today's 
decline paused exactly at its 100-dma.  Readers can watch for the 
bounce or the breakdown to guide any possible trade here.

Chart=


---

Overstock.com - OSTK - close: 66.54 change: -9.51

WHAT TO WATCH: Ouch!  The profit taking in OSTK got pretty heavy 
today with a 12.5 percent decline on extremely heavy volume.  The 
move was sparked by a downgrade and OSTK broke down through the 
$70 level and its simple 10-dma.  We would watch for possible 
support at $63 or $60.  Technicals are turning negative.

Chart=



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

GYI $63.95 +2.21 - GYI experienced some very strong follow 
through on yesterday's breakout over resistance at $60.00.

QCOM $42.86 -0.48 - The action in QCOM is beginning to look like 
a potential double-top under $45.

RIMM $89.61 -0.21 - The action in RIMM also looks like a possible 
double-top forming.

APOL $83.12 -1.71 - APOL is struggling with resistance near $85 
after a long, sharp run up from its November lows.


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buying and why you should too. 
 
 
http://www.insidermoves.com/default.asp?aid=618
 
**************************************************************



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Hot Stix’ stock market report reveals simple, powerful strategies 
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**************************************************************


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**********

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