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Daily Newsletter, Wednesday, 12/08/2004

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The Option Investor Newsletter                Wednesday 12-08-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: It's Snowing 
Futures Wrap: See Note
Index Trader Wrap: See Note 


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      12-08-2004           High     Low     Volume   Adv/Dcl
DJIA    10494.23 + 53.65 10506.85 10438.66 1.91 bln 1663/1145
NASDAQ   2126.11 + 11.45  2130.76  2110.57 2.38 bln 1711/1354
S&P 100   563.81 +  2.87   564.38   560.94   Totals 3374/2499
S&P 500  1182.81 +  5.74  1184.05  1176.80
SOX       431.91 -  5.60   437.22   429.84
RUS 2000  631.15 +  5.65   631.36   624.99
DJ TRANS 3723.93 + 54.27  3728.47  3669.88
VIX        13.19 -  0.48    13.68    13.18
VXO (VIX-O)13.72 -  0.46    14.55    13.65
VXN        20.01 -  0.27    20.39    19.93
Total Volume 4,302M
Total UpVol  1,946M
Total DnVol  2,320M
Total Adv  3374
Total Dcl  2499
52wk Highs  127 
52wk Lows    26
TRIN       1.24
PUT/CALL   0.89
******************************************************************

It's Snowing
Linda Piazza

Wednesday, President Bush asked U.S. Treasury Secretary John Snow
to stay on as a member of his cabinet.  With few economic
releases due Wednesday, focus had shifted early in the morning
onto the wild overnight moves in the currency markets and
developments in semiconductors, Merck, Wal-Mart, General
Electric, IBM and Texas Instruments.  Just ahead of the U.S.
open, the dollar began a retracement from its overnight highs
that lasted until about the time the announcement came out that
"Strong Dollar" Snow had been asked to stay.

With those wild currency moves and other developments, market
participants had much to consider.  One article advised that the
U.S. markets would likely get off to a cautious start due to that
mix of information, and the article's author was right.  The day
began cautiously, and choppy trading conditions prevailed all day
despite advancers beating decliners most of the day.  On the
Nasdaq, down volume bested up volume, however, perhaps capping
gains.  Indices performing strongly included the HMO, the Morgan
Stanley Healthcare Index, gaining 2.48 percent; the BTK, the
Biotechnology Index, gaining 2.34 percent; the DDX, the Disk
Drive Index, gaining 1.65 percent and the RLX, the S&P Retail
Index, gaining 1.26 percent.  Miners declined, with the XAU
falling 1.44 percent and the HUI, 1.61 percent.  Other decliners
included the SOX, falling 1.32 percent.

The major indices ended the day with gains, but with mixed chart
characteristics in some cases.

Annotated Daily Chart of the SPX:

 

Annotated Daily Chart of the Nasdaq:

 

Annotated Daily Chart of the Dow:

 

Annotated Daily Chart of the Russell 2000:

 

A disappointing Japanese GDP number may have helped prompt the
dollar's stunning overnight rise against the yen and euro, but
the dollar had been rising against the yen all week, preparing
the way for such a bounce.  Some termed that bounce a technical
bounce, one that was echoed in the dollar's move against the
euro.  The dollar's steep decline against the yen since mid-
September allows for an even steeper climb against the yen before
a 38.2 percent retracement is reached.  For a time during the
overnight session, traders seemed determined to drive the dollar
all the way through that 38.2 percent retracement in a single
day.  The higher dollar impacted metals and basic materials
negatively.  

News Wednesday included Goldman's downgrade of retailing giant
Wal-Mart to an inline rating due to concerns about same-store
sales.  The firm feels that WMT's decision to concentrate its
supercenters close together could dilute same-store sales. 
Despite that downgrade, WMT ended flat and the RLX, the S&P
Retail Index, posted that already-mentioned 1.26 percent gain. 
WMT, of course, has been pummeled enough lately that one more
downgrade might not have made much difference, but the stock's
performance might also have been helped because Banc of America
disputed Goldman's view to some degree, speaking in favor of the
company.

Banc of America had less favorable comments about some semi-
related stocks, however.  The firm downgraded several chip-
related stocks to sell ratings.  Actel (ACTL), Altera (ALTR),
Analog Devices (ADI), Intersil (ISIL), National Semiconductor
(NSM), Semtech (SMTC) and Xilinx (XLNX) garnered those
downgrades. By the close, all had posted hefty declines along
with the SOX. As Jim Brown noted after-hours in the Futures
Monitor, both ALTR and XLNX warned after the bell.  

Annotated Daily Chart of the SOX:

 

When downgrading the named semi-related stocks, Banc of America
mentioned valuations as well as concerns about revenues and
utilization rates.  Texas Instruments (TXN), of course, had
updated analysts on Q4 earnings Tuesday afternoon, news already
covered in last night's Market Wrap.  TXN declined 0.97 points or
3.88 percent in Wednesday's trading.

In addition to the news relating to semiconductors, other stocks
gathered attention.  Merck (MRK) narrowed its projections for
2005's earnings, with the narrowed $2.42-$2.52 per share range
below average predictions of $2.57.  The company cited weak sales
of key drugs.  MRK did reaffirm its Q4 and 2004 guidance,
however, and investors appeared to have been reassured, sending
the embattled stock $0.80 or 2.87 percent higher.

Countering those developments, not as uniformly bearish as they
might have been, was Lehman Brother's upgrade of General Electric
(GE) to an overweight rating and confirmation that IBM had sold
its PC business to Lenovo.  Lehman Brothers thought that GE's
possible earnings per share growth was not priced into the stock,
and the stock gained $0.40 or 1.13 percent.  CSFB upgraded
Federal Express (FDX) to an outperform rating, with the firm
mentioning likely strong growth in its international business and
margins.  FDX gained $2.77 or 2.88 percent.  In addition, the
disk drive index benefited from Seagate Technology's (STX)
raising of guidance Tuesday after the close.

Wednesday's economic reports included only the usual Mortgage
Bankers Association report on mortgage activity and the mid-
morning report on crude inventories, but the inventories number
sparked an initial flaring higher of crude prices.  Crude
inventories increased by 600,000 barrels last week, according the
Department of Energy.  Distillates rose 1.4 million barrels and
gasoline increased 2.4 million barrels.  Market watchers expected
an increase in crude inventories of 750,000 barrels and
distillates of 1.5 million.  

Although the reported numbers proved only slightly below
expectations, inventories have seen an upward trajectory over the
last weeks and that's beginning to be less of a dampening
pressure on crude prices than it once was.  That increase in
inventories leads some to speculate the OPEC ministers might cut
production when they meet Friday.  Crude futures initially
bounced after the numbers, although they could not hold onto all
the gains.  The bounce may also have been partially attributable
to the American Petroleum Institute's competing release of
inventories, with the API showing a decrease in distillate
inventories.  

Annotated Daily Chart of Crude Futures for January Delivery:

 

The only other economic release today occurred pre-market.  Last
week, the MBA had blamed the Thanksgiving holiday for the poor
showing in mortgage activity, and the week ending December 3 did
show a pickup in some measures. On a seasonally adjusted basis,
the Composite Index rose 3.4 percent over the previous week's,
and the Purchase Index increased 6.6 percent over the previous
week's and 22.7 percent from the same week a year ago.  The MBA
defines the Composite Index as a gauge of mortgage loan
application volume.  The Refinancing Index decreased 1.1 percent,
however, from the previous week's number, and the percentage of
refinancings to all mortgage activity fell to 45.6 percent
against the previous week's 46.4 percent.  Interest rates on
thirty-year fixed-rate mortgages fell to 5.09 percent, down from
the previous week's 5.17 percent.

When I scan these charts, I see a mixture of bullish and bearish 
characteristics, and that same mixture is seen when a search is
broadened to include other indices.  The BIX has come dangerously
close to confirming a double top on its daily chart, and for a
while today, refused to bounce along with other indices although
it eventually cooperated.  The ALTR and XLNX warnings may send
the SOX down to that 200-ema, with the outcome of this test not
known.  The broadening patterns seen on the Dow and the OEX are
notoriously difficult to trade because each breakout or breakdown
is soon reversed.  One index's action sometimes is juxtaposed
with that of another.  

All these various factors will coalesce soon and send the markets
one direction or the other, but trading conditions have been
particularly difficult recently.  Your main goal is to avoid
getting whipsawed so many times that you're trading capital is
depleted.  There will be another trade and perhaps a better one,
so preserve that capital.  I've listed some potential entry
points, both bullish and bearish, but enter with trepidation and
only if as many factors are going the direction of the trade as
possible.  

Jonathan Levinson will be discussing the impact of the dollar's
action and its interaction with equities, bonds and commodities
in his Futures Wrap.  The dollar spent much of the day retracing
some of the overnight gains, but it's uncertain as yet how it
will behave during tonight's overnight sessions and how that will
impact our markets.  Thursday's economic releases include only a
few more than Wednesday's, with the usual 8:30 release of jobless
claims and 10:30 figures on natural gas inventories joined by
October's Wholesale Inventories at 10:00 and the Money Supply
number at 4:30.  None of those should have the impact of Friday's
numbers, but fear of those numbers and the OPEC decision, and the
resultant impact on crude futures may be important to watch
tomorrow.


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

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


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

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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_120804_1.asp



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The Option Investor Newsletter                Wednesday 12-08-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Watch List: Oil to Trucking and more
Stop Loss Updates: ABK, ARLP, FLR, UTX
Dropped Calls: FDX
Dropped Puts: None
New Calls: BIIB
New Puts: ADI

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

Oil to Trucking 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.
___________________________________________________________________


EOG Resources - EOG - close: 70.62 change: +0.80

WHAT TO WATCH: Heads up!  This could be a new bullish entry point 
on EOG.  It does look a little aggressive here but shares just 
bounced from its combined 40 and 50-dma's that just happens to 
coincide with a trendline stretching from its descending highs in 
October.  We would watch for a move over $72.00 or $72.50 for 
confirmation.  The short-term technicals are already hinting at a 
possible reversal.  This would not be a bad spot to start looking 
for short-term plays in oil with crude ready to bounce from the 
$40.00 a barrel level.

Chart=


---

Landstar System - LSTR - close: 72.30 change: +2.85

WHAT TO WATCH: We considered adding LSTR to the OI play list 
tonight as a bullish momentum play.  The stock has shown a lot of 
relative strength so much so that it still looks overbought and 
extended.  Today's four percent rally was fueled by above average 
volume and LSTR broke out over resistance at $72.00 to hit new 
all-time highs.  

Chart=


---

Zimmer Holdings - ZMH - close: 82.61 change: +1.11

WHAT TO WATCH: ZMH may be done digesting its recent breakout.  
The stock is bouncing from the $81 level and looks poised to move 
higher.  More conservative traders could wait for a move back 
over $84 to confirm the move.  While there is some round-number 
resistance at $85 the next serious resistance level looks like 
the $89-90 range.  The P&F chart is bullish with a $110 target.


Chart=



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

R $51.73 -0.62 - This could be a bullish entry point.  R has been 
consistently bouncing from the simple 40-dma for weeks.  However, 
we would wait for the bounce.  Today's drop under $52 is 
discouraging.

NFI $51.00 +3.00 - NFI produced some very convincing follow 
through on its early gains and shares broke through resistance at 
$48 and $50.  Volume was above average.


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

ABK - call play -
  Ambac turned in a decent session up almost one percent 
  to close at a new all-time high.  This could be a new 
  bullish entry point.
 
 
ARLP - call play -
  Our speculative technical play is testing technical support
  at its rising simple 50-dma again.  This looks like a new bullish
  entry point but we'd prefer to see some follow through and
  ARLP trade up and through the $65 level again.
 
 
FLR - call play -
  Exit alert!  FLR soared 5.28 percent on very heavy volume
  on no news.  We've been expecting a breakout for days and
  this is it.  Our target has been the $55.00 region.  This looks
  close enough for us to exit and we suggested to our MarketMonitor
  readers this afternoon that it may be a good time to take profits.
  We are preparing to exit and will close the play if FLR trades at 
$55.00.
 
 
UTX - call play -
  Dow-component UTX bounced sharply with a 1.5 percent gain
  putting the stock back above the top of its old trading range
  at the $98.00 level.  This looks like a new bullish entry point
  but more conservative traders may want to wait for UTX to
  trade back above $100.00 again.


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

Fedex Corp - FDX - close: 99.03 change: +2.77 stop: 93.95     

Year-end target achieved!  We've been aiming for FDX to hit the 
$99-100 level for weeks and shares finally made it.  Bulls can 
thank CSFB for an upgrade to FDX from "neutral" to "out perform".  
The Wall Street firm also raised their price target on FDX from 
$85 to $130.  Investors responded positively to the news and FDX 
added 2.8 percent on very strong volume.  We would expect the 
stock to see some follow through tomorrow but the $100 level 
could be tough round-number, psychological resistance.  We're 
exiting at $99.00 per our trading plan.

Picked on October 21 at $89.45 
Change since picked:    + 9.58
Earnings Date         09/22/04 (confirmed)
Average Daily Volume =     1.5 million 
Chart =



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

None

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

Biogen Idec - BIIB - close: 64.53 change: +3.06 stop: 59.99

Company Description:
Biogen Idec creates new standards of care in oncology and 
immunology. As a global leader in the development, manufacturing, 
and commercialization of novel therapies, Biogen Idec transforms 
scientific discoveries into advances in human healthcare.
(source: company press release)

Why We Like It:
We have had our eye on BIIB for months.  The stock has been 
churning sideways in a trading range between $54 and $64 since 
last April until today.  The stock broke out through the top of 
its trading range on volume more than double the average.  The 
stock got a boost from a 2.3 percent rally in the BTK biotech 
index as well.  This is a technical breakout play.  The bullish 
P&F chart shows a new double-top breakout with an $83 target.  We 
think BIIB can trade to $70.00 or higher but we're going to wait 
and use a TRIGGER to open the play.  Our entry point will be 
$65.25.  We are starting with a wide stop loss but will quickly 
adjust it higher.  More aggressive traders can look for a dip 
back towards $62.50 as a potential entry point.

Suggested Options:
We are going to suggest the January and April calls.  Right
now our favorites would be the Aprils. 

BUY CALL JAN 60 IHD-AL OI=19108 current ask $6.00
BUY CALL JAN 65 IHD-AM OI=16648 current ask $  ** ask your broker
BUY CALL JAN 70 IHD-AO OI=10378 current ask $  ** ask your broker

BUY CALL APR 65 IHD-DM OI= 2694 current ask $  ** ask your broker
BUY CALL APR 70 IHD-DN OI=  961 current ask $  ** ask your broker

** The CBOE website is not providing data on these strikes today.

Annotated chart

 


Picked on December x at $ xx.xx <-- see TRIGGER
Change since picked:     + 0.00
Earnings Date          01/26/05 (unconfirmed)
Average Daily Volume =      3.5 million  
Chart =



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

Analog Devices - ADI - close: 36.14 chg: -1.56 stop: 39.11

Company Description:
Analog Devices, Inc. is a leading manufacturer of high-
performance integrated circuits used in analog and digital signal 
processing applications. ADI is headquartered in Norwood, 
Massachusetts, and employs approximately 8,900 people worldwide. 
It has manufacturing facilities in Massachusetts, California, 
North Carolina, Ireland, and the Philippines.
(source: company press release)

Why We Like It:
The semiconductor looks a bit vulnerable.  The SOX was the only 
tech-related sector index to close negative today.  A handful of 
downgrades from Bank of America for the semiconductor sector can 
do that.  Yet it just so happens that the SOX has been struggling 
with resistance with its 50-week and 200-week moving averages.  
Now it looks like the bears are going to win that struggle.  We 
like ADI as a way to play any weakness in the semi sector for a 
couple of reasons.  First and foremost is that BAC downgraded the 
stock to a "sell" this morning.  Shares lost 4 percent on above 
average volume.  Yet this is only the second downgrade in the 
last couple of weeks.  ADI is also suffering from news that the 
SEC is currently looking into the company's use of stock options 
for its management team.  ADI tried to soothe investors by saying 
it would not have any financial impact but traders do get nervous 
when the SEC starts poking around.  In addition to ADI's bearish 
technical picture the P&F chart has rolled over into a new sell 
signal with a $30.00 target.  Now before we finish let us state 
for the record that this is mostly a technical play.  We're only 
playing what the chart tells us.  Our own bias is for the market 
to trade higher between now and the end of the year and it could 
be tough for that to happen if the chips don't participate.  
However, a disciplined trader is always trying to trade without 
emotion and let's the market dictate direction.  Our initial 
target is $30.00 and we'll use a stop at $39.11. 

Suggested Options:
We're going to suggest the January and March puts.  Our favorites
would be the March strikes.

BUY PUT JAN 40 ADI-MH OI=4381 current ask $0.00*
BUY PUT JAN 35 ADI-MG OI=4008 current ask $0.00*
BUY PUT JAN 30 ADI-MF OI=3154 current ask $0.60

BUY PUT MAR 40 ADI-OH OI=1276 current ask $0.00*
BUY PUT MAR 35 ADI-OG OI=1762 current ask $0.00*
BUY PUT MAR 30 ADI-OF OI=1817 current ask $0.00*

*Please check current ask prices with your broker.  The CBOE
 website is not currently providing this information.

Annotated chart

 


Picked on December 8 at $ 36.14
Change since picked:     - 0.00
Earnings Date          11/23/04 (confirmed)
Average Daily Volume =      4.1 million  
Chart =



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**********

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