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Daily Newsletter, Thursday, 12/09/2004

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The Option Investor Newsletter                Thursday 12-09-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Ho, Ho, Ho!
Futures Wrap: See Note
Index Wrap: See Note
Market Sentiment: Buying The Dip


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      12-09-2004           High     Low     Volume   Adv/Dcl
DJIA    10552.82 + 58.60 10562.51 10418.63 2.03 bln 1636/1438
NASDAQ   2129.01 +  2.90  2134.23  2097.86 2.27 bln 1375/1722
S&P 100   566.37 +  2.56   567.11   559.87   Totals 3011/3160
S&P 500  1189.24 +  6.43  1190.51  1173.76 
SOX       425.46 -  6.50   428.48   414.02
RUS 2000  629.19 -  1.96   631.15   621.74
DJ TRANS 3709.21 - 14.70  3723.09  3680.11
VIX        12.88 -  0.31    13.71    12.77
VXO (VIX-O)13.23 -  0.49    14.59    13.23
VXN        19.84 -  0.17    20.94    19.63 
Total Volume 4,591M
Total UpVol  2,482M
Total DnVol  2,038M
Total Adv  3433
Total Dcl  3573
52wk Highs  207
52wk Lows    54
TRIN       0.86
NAZTRIN    0.78
PUT/CALL   0.80
************************************************************

Ho, Ho, Ho!
by Jim Brown

While the chip sector may be getting coal in their 
stocking this year there were some stocks receiving 
votes of confidence from Santa's elves today. The
housing sector proved to be the golden child and the
sector most likely to be blessed with holiday dollars.
It was a mixed market but one that closed at the highs
and returned hopes to traders that a Santa rally may
still appear. 

Dow Chart

 
Nasdaq Chart

 


The day did not start off well with the Jobless Claims
rising to 357,000 for the week and well above estimates.
This is the second week in the 350K range and rising.
Analysts were quick to suggest the jump was due to 
seasonal factors but it was still disconcerting. They
claimed the Thanksgiving week prevented many from filing
claims and they ended up filing the week after. Since 
the Thanksgiving week was also high at 349,000 I don't
really buy this but it makes a good sound bite. We have
seen multiple reports on jobs that have failed to show
meaningful gains over the last two weeks as well as an
upsurge in planned layoffs. Starting to look a lot like
trouble ahead. 

Import Prices jumped +0.2%, less than the prior month
at +1.5% but more than consensus at -0.1%. The main
factor for the drop was a -2.6% fall in energy prices.
Non-petroleum imports rose +0.7% to hold the index in
positive territory. Non-petroleum prices are up +3.4%
for the year. Export prices also rose at +0.3% despite
a decline in agricultural prices. With crude oil prices
up +60% over the same period last year it is amazing 
the total index is not much higher. 

Wholesale Inventories rose +1.1% and more than twice 
consensus estimates. Wholesale Sales rose +1.6% and 
the prior month was revised upward to +0.8%. The very
sharp increase in inventories came after a four-month
low in September. It appears that inventory replenishment
is underway across all sectors in anticipation of a
continued rise in sales. The inventory/sales ratio has
remained flat at 1.15 for five months despite the jump
in both inventories and sales. This suggests further 
gains are ahead. 

Investors were not interested in the economic news today
but focused instead on the multiple warnings in the chip
sector. CYMI, ALTR and XLNX all warned on revenue last
night and the impact to the SOX was immediate at today's
open. The SOX dropped to 414 at the open and a drop of
more than -4%. That drop stretched the losses from the 
Tuesday high over 450 to more than -8% in three days. 
This was a serious drop out of the recent range and 
below support at 430. 

While the news was bad we need to keep in focus that
50% of the income for ALTR and XLNX comes from chips
needed by the communications sector. We know that the
cell phone sector is currently buried in inventory but
they are selling new phones. The rapid change in models
requires a constant supply of new chips and a constant
dwindling of demand for old ones. Those old ones may
only be several months old. The current demand is a
moving target compared to more stable chip applications.
Weakness in XLNX and ALTR is not necessarily weakness in
the broader chip sector. 

One problem with ALTR is broad based and could be a
serious challenge. Cisco is a major customer of Altera
for communication chips used in their routers and switches.
Altera is seen as a leading indicator for Cisco's health.
This caused a little more concern than normal and pushed
CSCO lower. However, Cisco just affirmed growth estimates
of +13% earlier this week and I doubt they would have been
so public if business was bad. 

After the monster chip drop at the open that pushed the
SOX to 414, Nasdaq to 2100 and Dow back to the gap fill
from last Wednesday at 10425 a miracle appeared. NSM
announced earnings about 12:15 and did not warn. While
that may seem like an generic event it turned the tide
for the chip bears and they were forced to cover those
large short positions they had just entered. NSM matched
lowered earnings estimates and guided inline for the
current quarter. No excitement there but they went on 
to say that the inventory correction was almost over.
Specifically they said customers felt inventory levels
were where they needed to be and the correction was now
behind them. They said orders for portable power management
products had risen more than 25% over last year. This sudden
reversal of fortunes for chips sent the indexes soaring on
short covering and the gains lasted into the close. 

Adding fuel to the fire was an IDC report that said PC
sales are now expected to rise +10% in 2005 to more than
$200 billion. They said commercial shipments were rising
and the outlook was improving. 

Housing builder Toll Brothers blew out earnings with a
+93% surge in profit for the last quarter and the entire
housing sector celebrated. TOL said demand for homes was
soaring and it also raised its estimates again for 2005. 
Analysts were expecting $1.97 for the quarter and TOL
posted earnings of $2.22 per share. The company expects
earnings in 2005 to be 40% over 2004 and sales to climb
nearly +$2 billion to $5.35B. TOL jumped +6.88 on the
news. 

Stocks rose all afternoon despite rising oil prices and
comments from various OPEC states that they were all in
agreement on cutting production to increase prices. This
sudden change in commentary is removing the negative bias
we have seen for the last two weeks. Oil has rebounded to
$42.65 overnight and if the OPEC meeting in Egypt this
week follows through on these production cuts then $45
oil or higher is just around the corner again. I believe
it is only a matter of time before much higher prices are
a matter of life. 

I spent several months researching my "Coming Oil Crisis" 
report we are giving away with the year end renewal special.
I can guarantee you that gas prices as we know them will
be ancient history by the end of this decade. You will not
hear this in the mainstream press but production is already
falling in all but FOUR oil producing countries. Those four
are very close to their peak. Check out this chart of the
production levels for the non OPEC oil producing countries.
With the billions being spent on exploration the results
are clear. We are running out of oil and much higher prices
are ahead. Anyone concerned about how to profit from it or
just survive it needs to sign up for the special and get the
report. The number by each name is the year production began
to decline. 

Oil Depletion Chart for non OPEC Countries

 

After the bell today UTX said it expected growth of +10% 
to +15% in earnings in 2002. They also said they were
going to buyback $600 million in shares in 2005. The 
stock spiked to over $100 in after hours from a close
at $99.48.

Telecoms also helped push the markets higher after CIEN
beat estimates and news broke about Sprint and Nextel in
merger talks. CIEN jumped nearly 25% after posting sales
that were stronger than expected and forecasting stronger
growth ahead. CIEN back from the dead? I am not too excited
yet with a close at $2.86 and the high for the year at $8.14.
FON jumped +7.9% and NXTL gained +6.5% after the Wall Street
Journal speculated they were in merger talks to create the
3rd largest wireless company. 

For tomorrow there are no major economic reports and stocks
will be left to find their own level. We are only a week
away from a quadruple witching Friday and recently we have
seen increased volatility on the Friday before expiration.
With a positive bias at the close today we could be looking
at some positions squared early and positioning in advance
for any end of year rally. 

The Dow dropped to 10418 at the open due to the negative
chip news and the higher than expected jobless claims. 
This exactly correlated with the 10417 low for this 
current range set back in November. Bears were drooling
at the chance for a collapse of this support but it did
not happen. Instead buyers bought the dip once again but
for 90 minutes there was extreme caution as the index
ticked slightly higher. The NSM news at 12:15 triggered
a couple buy programs that appeared to be short covering
programs and the rest as they say was history. If three
major chip warnings could not break support and one 
little positive statement from NSM was enough to erase
those warnings then the bears decided to run for cover.
The Dow closed +133 points off its lows and very near
the highs. Only four hours separated the Dow from an
impending crash and rebounding to less than 50 points
from 10600 resistance once again. Those end of year 
buyers who were waiting for a better entry have got to 
be thinking tonight the train could be leaving the station
without them. 

The Nasdaq cratered to 2097 on the semi news and held
at support at 2100 for the first two hours of trading.
The NSM news reversed the SOX and that sent the Nasdaq
back to 2130 and resistance from yesterday in the blink
of an eye. The Nasdaq fought that resistance and lost
but dip buyers again appeared at 2120 and sent the 
index back over 2130 for the last hour. Profit taking
appeared at the close but 2130 held as resistance
turned support. With 2100 support from the end of
November apparently holding firm it gave the tech 
buyers confidence and baring any negative news over
night we could easily see 2150 again soon. 

The weakest link was the Russell with a strong drop
back to 621 and just over the 620 support from early
November. Buyers reluctantly appeared on the NSM news
but it still lagged the other indexes the rest of the
day. It closed negative and failed to reach the highs
from yesterday at 631. The rebound failed twice at
630 and tonight the Russell futures are much weaker
than the other contracts. The Russell, more so than
the Nasdaq, is very influenced by chip stocks. The
Russell has more chip stocks by weighting than any 
other index with tech stocks in general the third
largest group in the index. Technology problems and
especially chip sector problems are very damaging to
the index. The Russell has led the markets down for
three consecutive days and we need to see a break 
over 632 to confirm a break in that trend. 

Russell Chart

 

For Friday the market may still be confused. I have
repeatedly told you to buy the dip above SPX 1175 and
we saw the dip to that level bought strongly this 
morning. The SPX closed right at 1190 and 1192-1195 
is strong resistance. A break over that level should 
setup the end of year outlook and could attract a lot
of short covering. This will be the key for Friday. 
With the expiration week ahead anything is possible 
and while I would be surprised to see a breakout on 
Friday it is definitely possible. I would expect more
uncertainty instead of more bullishness but after 
today's rebound that uncertainty may be fading. 
Continue to buy the dips over 1175 and add to 
positions over 1195. 
  
Time is slipping away for the end of year renewal 
special. The potential profits from the Coming Oil 
Crisis report could pay your subscription for years
to come. Don't wait, do it now.
https://secure.sungrp.com/05renewal/

Jim Brown
Editor


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


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_120904_1.asp


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

Buying The Dip
- J. Brown

Wall Street is still showing a little holiday cheer as stock 
rebound from support and traders show they are still willing to 
buy the dip.  The Industrials bounced from the bottom of their 
trading range at 10,400.  The NASDAQ Composite bounced from the 
2100 level and the S&P 500 put in a new higher low.  The two-day 
bounce has erased concerns that the potential top last week has 
been postponed.  Even a rebound in crude oil of 1.5 percent as it 
bounces from round-number support at $40 a barrel failed to 
impact stocks today.

Overall investor sentiment remains cautiously positive.  
Technically stocks remain overbought but they may be stuck there 
until next year.  We're impressed that the market is doing so 
well in spite of all the negative news (downgrades/earnings 
warnings) in the semiconductor sector this week.  Market 
internals were mixed today.  Advancers beat decliners 5-to-4 on 
the NYSE but lost 13-to-17 on the NASDAQ.  Up volume was 
significantly over down volume on the NYSE but it was a tie-game 
on the NASDAQ.  Total market volume remained heavy.

Tomorrow brings the Producer Price Index (PPI), the Michigan 
Consumer Sentiment numbers and an OPEC meeting in Cairo.  Not any 
one event is expected to weigh on stocks too much unless the PPI 
or sentiment figures are extremely out of sync.  



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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9585
Current     : 10552

Moving Averages:
(Simple)

 10-dma: 10522
 50-dma: 10251 
200-dma: 10237 



S&P 500 ($SPX)

52-week High: 1188
52-week Low : 1031
Current     : 1189

Moving Averages:
(Simple)

 10-dma: 1184
 50-dma: 1149
200-dma: 1123



Nasdaq-100 ($NDX)

52-week High: 1581
52-week Low : 1301
Current     : 1609

Moving Averages:
(Simple)

 10-dma: 1598
 50-dma: 1512
200-dma: 1446



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

CBOE Market Volatility Index (VIX) = 12.88 -0.31
CBOE Mkt Volatility old VIX  (VXO) = 13.23 -0.49
Nasdaq Volatility Index (VXN)      = 19.84 -0.17 


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.83        874,753       723,012
Equity Only    0.76        641,624       489,330
OEX            0.92         46,438        42,571
QQQQ           6.38         24,607       157,069


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

Bullish Percent Data

           Current   Change   Status
NYSE          74.7    - 1     Bear Correction
NASDAQ-100    80.0    + 2     Bull Confirmed
Dow Indust.   66.6    + 0     Bull Confirmed
S&P 500       73.2    - 1.4   Bull Confirmed
S&P 100       75.0    + 0     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: 1.19
10-dma: 1.03 
21-dma: 1.00
55-dma: 1.07


Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.


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

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1534      1333
Decliners    1255      1701

New Highs     115        63
New Lows       16        18

Up Volume   1224M     1123M
Down Vol.    800M     1125M

Total Vol.  2051M     2280M
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                 Thursday 12-09-2004
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, BIIB, EBAY, FLR, IBM, LEH, OSK, UTX
New Calls Plays: None
Put Play Updates: ADI
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


************************Advertisement*************************

Get the most from your online options broker
 * fully-integrated trading tools for options or stock  
 * Easy screens for spreads, collars, or covered calls
 * Free streaming quotes and Dow Jones news
 * Rated "Best" by Barron's, SmartMoney and Forbes

Go to http://www.optionsxpress.com/marketing.asp?source=oinvest31

Note: Options involve risk. Risk disclosure: 
http://www.optionsxpress.com/welcome_risk_index.htm

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


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

Alliance Resource - ARLP - cls: 66.04 chg: +2.54 stop: 61.85*new*

Traders can find encouragement in ARLP's bounce from rising 
technical support at its simple 50-dma.  We suggested the bounce 
looked like a possible entry point in the MarketMonitor 
yesterday.  Today's move over $65 and the $66 level is definitely 
bullish and its short-term technicals are improving. Shares still 
have a short-term trend of lower highs but the trend is up.  We 
are raising our stop loss to $61.85 still under the 50-dma.

Picked on December 5 at $ 65.82
Change since picked:     + 0.22
Earnings Date          10/22/04 (confirmed)
Average Daily Volume =      101 thousand
Chart =


---


Ambac Fincl Group - ABK - cls: 83.23 chg: +0.36 stop: 78.99*new*

Strength in the IUX insurance index is helping ABK keep its 
momentum alive.  While the stock is out performing its peers it 
doesn't hurt to have support from a positive sector.  The IUX is 
bouncing from the 310 level and looks ready to breakout over its 
simple 200-dma.  Meanwhile ABK is inching higher to hit new all-
time highs.  We are raising our stop loss to $78.99.

Picked on December 01 at $82.26
Change since picked:     + 0.97
Earnings Date          10/20/04 (confirmed)
Average Daily Volume =      490 thousand
Chart =


---

Biogen Idec - BIIB - close: 66.12 change: +1.59 stop: 60.99*new*

BIIB turned in another strong day adding 2.4 percent compared to 
a 1.2 percent gain in the BTK biotech index.  We are encouraged 
by BIIB's follow through on yesterday's breakout through the top 
of its trading range.  Volume was once again above average.  We 
were triggered in this play when BIIB traded at $65.25.  Our 
short-term target remains $70 and we're going to raise our stop 
loss to $60.99.

Picked on December 9 at $ 65.25
Change since picked:     + 0.87
Earnings Date          01/26/05 (unconfirmed)
Average Daily Volume =      3.5 million  
Chart =



---

eBay Inc. - EBAY - close: 116.22 chg: +1.61 stop: 112.49*new*

A bounce in the major indices spelled an opportunity to buy the 
dip in EBAY.  Shares are continuing to run higher without much 
sign of weakness.  We continue to target a move to $120.00 and 
won't hesitate to exit if EBAY trades at that level.  However, 
we're adjusting our strategy a bit and tightening our stop loss 
to $112.49, just under Wednesday's low.  

Picked on November 08 at $103.69 
Change since picked:      +12.53
Earnings Date           10/20/04 (confirmed)
Average Daily Volume =      10.4 million 
Chart =


---

Fluor Corp - FLR - close: 54.20 change: -0.27 stop: 51.49*new*

Following yesterday's strong rally on very strong volume we 
continue to suggest to readers that this looks like a good spot 
to do some profit taking.  However, our target is the $55 level 
and we still plan to exit at $55.00 if FLR trades there.  
Hopefully, given the action in FLR today, we'll see shares hit 
our target before the weekend.  We are not suggesting new bullish 
positions but we are raising our stop loss to $51.49.

Picked on November 22 at $48.51
Change since picked:     + 5.69
Earnings Date          10/27/04 (confirmed)
Average Daily Volume =      521 thousand   
Chart =



---

Intl Business Mach. - IBM - close: 97.51 chg: +0.86 stop: 93.95  

IBM has bounced from the $95.70 level for two days in a row.  
Hopefully the bounce on Thursday is a precursor to another step 
higher.  Technicals are mixed but the trend is still positive and 
we plan to exit in the $99-100 range.  If you feel that 
resistance at $98 is too much consider exiting now for a profit.  
We are going to raise our stop loss to $95.49.  In the news IBM 
said it would not offer its pension plan to new hires and instead 
provide a 401K program.  
   
Picked on October 27 at $90.00
Change since picked:    + 7.51
Earnings Date         10/18/04 (confirmed)
Average Daily Volume =     4.7 million 
Chart =


---

Lehman Brothers - LEH - close: 85.80 change: +0.25 stop: 82.49

The XBD index continues to coil under resistance at the 150 level 
but it looks ready to breakout to new highs.  Meanwhile LEH has 
already broken out over the $85 level and still looks ready to 
move after two days of rest and sideways movement. No change in 
strategy or stop but remember we're planning to exit before its 
Dec. 15th earnings report.  Keep an eye on Merrill Lynch (MER), 
which just broke out over the $58 level.  MER could be an 
alternative to LEH without the earnings deadline.  

Picked on December 6 at $ 85.51
Change since picked:     + 0.29
Earnings Date          12/15/04 (confirmed)
Average Daily Volume =      2.0 million  
Chart =



---

Oshkosh Truck - OSK - close: 64.39 change: +0.88 stop: 59.00 

No new news for OSK but the stock is showing strength today.  OSK 
is back above the $64 level and challenging resistance from late 
November.  Short-term technicals are turning positive and we 
continue to target a move into the $67.50 region.

Picked on November 07 at $ 62.16
Change since picked:      + 2.23
Earnings Date           10/28/04 (confirmed)
Average Daily Volume =       205 thousand   
Chart =


---

United Tech. - UTX - close: 99.45 change: +1.26 stop: 95.99

Dow-component UTX has helped lead the rebound with a bounce back 
from $96.65 toward the $100 level.  Volume has been rising on the 
rally and short-term technicals have turned positive again.  
After the bell UTX held its analyst meeting.  The company said it 
expect to hit 10-15 percent EPS growth in 2005.  According to one 
Reuters report the CEO said UTX was in the best shape in a "long 
time".  Analysts were forecasting earnings of $6.11 in 2005 
compared to UTX guidance tonight in the $6.05 to $6.30 range.  
The stock responded positively in after hours with a jump to 
$100.50.  The company also said it plans to spend $600 million in 
stock buybacks in 2005.  

Picked on December 1 at $100.15
Change since picked:     - 0.70
Earnings Date          10/20/04 (confirmed)
Average Daily Volume =      1.8 million  
Chart =



**************
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Analog Devices - ADI - close: 36.25 chg: +0.11 stop: 39.11

It was a very interesting day for semiconductor stocks.  ADI 
started the day trading lower after semiconductor companies XLNX 
and ALTR issued sales warnings.  Then the semiconductors reversed 
and ADI rallied to $37.65 after Natl Semiconductor (NSM) came out 
with a positive earnings surprise midday.  Unfortunately for the 
bulls the momentum didn't last.  Shares of ADI reversed by the 
afternoon closing for a minor gain.  This looks like another 
failed rally to us and we remain bearish.

Picked on December 8 at $ 36.14
Change since picked:     + 0.11
Earnings Date          11/23/04 (confirmed)
Average Daily Volume =      4.1 million  
Chart =



*************
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The Option Investor Newsletter                 Thursday 12-09-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Brokers to Footwear and more 
Traders Corner: When your indicators stop working 
Combos/Straddles: Lookin' For A Little Action?   

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

Brokers to Footwear 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.
___________________________________________________________________


Merrill Lynch - MER - close: 58.37 change: +0.81

WHAT TO WATCH: The XBD broker-dealer index has been very strong 
the last several weeks.  Yet now it's currently coiling under 
major resistance at the 150 level.  We suspect that MER, one of 
the biggest firms on Wall Street, could finally be catching up to 
its peers like GS and BSC (compare these charts to MER) and thus 
help push the XBD through resistance.  Today's breakout over 
$58.00 in MER looks like a new bullish entry point.  The MACD 
indicator is extremely close to a new buy signal and its P&F 
chart points to a $75 target.  We suggested this as an 
alternative play to the LEH candidate currently on the OI play 
list.

Chart=


---

Timberland - TBL - close: 67.13 change: +1.97

WHAT TO WATCH: TBL is almost there!  The stock added three 
percent today on decent volume pushing the stock through the top 
of its four-week trading range and resistance at $67.  Now if TBL 
can continue to run and trade above the $67.50 mark it will have 
cleared resistance dating back to April.  Bulls can pick their 
entry point - here or above $67.50.  Keep in mind that the P&F 
chart only points to $69 but these targets can be surpassed.  
Technicals for TBL are positive and its MACD is very close to a 
new buy signal.

Chart=


---

Beazer Homes - BZH - close: 132.51 change: +4.19

WHAT TO WATCH: Yes, we're highlighting BZH again because the 
stock has been a real momentum candidate.  Strong earnings 
results from rival Toll Brothers (TOL) today helped push the 
DJUSHB home builders index up 5.5 percent.  Meanwhile BZH added 
3.2 percent and gapped above resistance in the $130-131 region.  
The stock does look very overbought so carefully monitor your 
stops.

Chart=


---

Golden West Financial - GDW - close: 120.87 change: +1.64

WHAT TO WATCH: GDW continues to build a pattern of higher lows as 
the stock coils for a breakout over resistance at the $122 level.  
The question now is whether or not GDW will see any post-split 
depression or will traders jump on GDW after it splits 2-for-1 
next Monday.  The P&F chart points to a $129 target or $64.50 
post-split.

Chart=




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

EOG $71.31 +0.69 - We are still watching EOG.  The stock is still 
bouncing and this looks like a new bullish entry point for more 
aggressive traders.

IVGN $65.50 +3.21 - IVGN broke out of its five-week trading range 
and its simple 200-dma on big volume.  The stock has now filled 
the gap from July.

OSG $58.73 -2.03 - The trend may have changed for OSG.  The stock 
is sliding on heavy volume and shares just closed under the 
$60.00 level on Thursday.


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

When your indicators stop working
By Leigh Stevens
lstevens@OptionInvestor.com

Indicators are like cars – once in a while they stop working. When 
the key indicators I use suggest a correction to the trend is 
likely, but it doesn't happen, there are some things that I've 
learned about these occurrences.  

The first thing I've learned is that the market trend is right but 
just based on some dynamic I may not understand fully or 
appreciate, but there's logic to it. Price patterns are the primary 
indicator! If the market goes up a lot, then goes up some more and 
corrections are shallow only, there is some shift that is keeping 
money flowing into the market even though the fundamentals related 
to earnings trends don't seem to support or fully justify the 
increase in price in the current environment.  

Market/Index indicators dealing with volume, sentiment, 
overbought/oversold, advance-decline, TRIN, volatility, etc. are 
always SECONDARY indicators. Moreover, indicators flashing 
divergences and warnings on overbought/oversold conditions can also 
LAG what eventually happens to the trend by a longer than usual 
time. Hey, if everything worked like clockwork all the time, it 
wouldn't be human and the market is a human institution. 

Take for example the recent market, which seems due for a 
correction by the various measures I use and that suggest that this 
is imminent.  Next is a rather L-O-N-G chart, but I will break out 
and highlight each indicator further on for a close up view – 


 

PATTERN comments – 
The S&P 500 (SPX) chart/price pattern is bullish in the series of 
higher relative highs and reaction lows.  If this latest advance is 
a valid breakout to a new 12-month high then we can also anticipate 
that the prior peak at the dashed (level) line should now "become" 
support just under 1160, at 1157 on a closing basis. 

Price/RSI Divergence – 
The Relative Strength Index (RSI) is a type of technical indicator 
measuring price momentum and that oscillates between zero and 100 – 
Stochastics is another and both are also called oscillators. (MACD 
is another type of momentum indicator, but has values that range 
above 100, so is not an oscillator.)

RSI has two useful purposes: 1.) this indicator attempts to measure 
"overbought" and "oversold" extremes and 2.) it will occasionally 
diverge from price action and suggest a possible upcoming reversal 
(in the trend).

In the chart below, we see a divergent pattern of a recent higher 
price peak in SPX not matched or "confirmed" by a similar new high 
in the RSI.  This divergent pattern is highlighted by the rising 
and falling lines across the recent price and RSI tops -   


   

This kind of divergence seen above is considered to be bearish, 
based on the theory that indicators that are derived from price, 
should be consistent with price action itself.  If there is a new 
price low or new price peak, the RSI should also go to a new low or 
new high and price and RSI in this way "confirm" price action.  If 
they don't, the resulting divergence is indicative of a possible 
trend reversal.  

Price/RSI divergences highlight a lot of trend reversals BEFORE 
they happen, so you are forewarned.  Do such divergences work all 
the time?  Nothing "works" all the time in predicting markets, but 
this diverging pattern has a high forecast rate to pick upcoming 
reversals. Since there are exceptions, you need account for this 
possibility in your trading strategy.  Accounting for the exception 
might be to take profits on half, not all, of long call positions 
in the S&P Indices; e.g., including OEX. 

It also involves being prepared; i.e., in the above example, by 
following month and put strikes that are attractive and being ready 
to take action based on an outlook for a substantial (e.g., 2% or 
greater off the high, especially 3-4%) correction starting in the 
coming 1-2 weeks. If a trend reversal does not begin within 5-10 
trading days of the beginning of such a divergence as seen in the 
chart above (dating from the 12/1/04 highest closing high), the 
divergence will become one of the occasional ones NOT predictive 
for a trend reversal.  

VOLUME Indicator – 
My principal volume indicator for the Indices is very simple: track 
a 10-day moving average of daily total UP volume – one for the NYSE 
and one for the Nasdaq. This indicator is primarily an indicator 
for BOTTOMS. When the line turns up from a "baseline", it tends to 
precede an actual rally by anywhere from a day to a few days.  

The "baseline" is a level of volume that has been associated with 
bottoms for at least the prior 6 months.  In recent months, when a 
10-day average of total daily up volume for the NYSE, has declined 
to approximately 510 million shares, the market has been made a 
significant low in and around that time frame.  

You can see in the chart below, that the lion's share of the most 
recent market rebound occurred just after such a (volume) low as I 
describe.  When the 10-day moving average turned DOWN (dark purple 
line), the market turned more choppy and has had more two-sided 
trading swings -  


 

The volume average turning DOWN was not a "sell signal", but does 
suggest a couple of possibilities.  The market is consolidating on 
lower volume after such a big run up. If the 10-average again falls 
to my suggested baseline (level green line), without much of a 
price correction, the S&P indexes would likely offer another call 
buying opportunity in another up "leg" or a substantial further 
rally.  

On the other hand, the falling volume line shown above could also 
be suggesting a bearish divergence from price action; e.g., like 
the RSI.  This situation would be suggestive of distribution – when 
stock is being sold or "distributed", mostly by large institutional 
players, while prices stay up for a time. This is like the Coyote 
in the Road Runner cartoons who is still running and seems to still 
have forward motion, but the laws of gravity are about to catch up 
and a fall is coming.  

On balance I don't entirely trust a market that continues to 
advance when this key measure of volume is not also advancing, in 
terms of the 10-day average (measures 2 trading weeks). Up volume 
is stock volume where buying purchases is done on up ticks. It is 
the willingness to "pay up" for stocks and is associated with  
sustained and substantial rallies.        

SENTIMENT Indicator – 
Last but not least of my key indicators useful for spotting 
upcoming trend turning points is my "sentiment" indicator.  Another 
very simple but effective indicator. This particular one requires 
custom creation. What we get in the public option put/call readings 
is a daily ratio of total call volume to total put volume. These 
figures include index options. Index options are used widely for 
hedging purposes; e.g., OEX put purchases to protect some portion 
of a portfolio from a downturn.

To get a more pure read on speculative activity and trader opinion 
or sentiment regarding the likelihood of an up or down trend 
continuing, it's useful to use index options only and using the 
CBOE daily figures is enough for this purpose.  Moreover, I divide 
calls by puts to get a whole number – a convenience.  Also, many 
other indicators go UP when getting to bullish extremes and DOWN 
when market opinion is getting more and more bearish and so does 
this indicator.  

The theory of "contrary opinion" and as borne out by my experience 
over the years, is that extremes of bullishness (a lot of call 
volume relative to puts) becomes a bearish market indication at 
some point – and vice versa; i.e., heavy put trading relative to 
calls, is a bullish indication at some point.  Typical of tops and 
bottoms, since ever in the markets, are bullish and bearish 
extremes in an outlook for the market to continue only to go up or 
go down.

I mentioned that "at some point" such extremes highlight the 
possibility of market reversals.  Those threshold points are noted 
by the use of the green and red level lines on the Call/Put 
indicator under the SPX chart below and any one-day reading is 
enough to put this indicator into a bullish or bearish zone.  
However, use of the 5-day moving average also highlights when there 
is a cluster of such readings -        


 

This indicator, like the aforementioned volume model, also tends to 
PRECEDE market turning points as it will often reach at least a 1-
day bullish or bearish extreme ahead of important market turning 
points by 1-5 (trading) days - these junctures are often  
outstanding entry points for entry into index options. 

The last bearish call/put extreme reading on the chart above was 
followed instead by a move to a slightly higher high. This 
indicator has had a steady decline since then.  When this indicator 
is effective and its extremes line up consistent with 1-2 others of 
my indicators (as well as with a confirming price pattern), it is 
almost always within 1-5 days of a top or bottom. Not so, on this 
last occasion!  As should be kept ever in mind, "rules" are made to 
be broken.

However, there is something valuable in this pattern of a market 
going up along with declining bullish sentiment – it can suggest 
that there is disbelief in the staying power of the current trend. 
Some of the longest and most prolonged price trends tend to occur 
when there is precisely this kind of disbelief.  This occasional 
tendency is what's behind the old market saying that the market 
"climbs a wall of worry"!

NASDAQ Composite -      
The Nasdaq Composite (COMP) is showing the same price/RSI 
divergence as is shown with the S&P 500 (SPX) above and I use the 
same CBOE Call/Put figures and therefore the same sentiment 
indicator for Nasdaq.  

However, the daily UP Volume total must come from the Nasdaq daily 
figures, as can be seen on the next and final chart – 


    

Daily volume figures vary more for COMP and therefore the 10-day 
average will bounce around more and shows greater volatility.  
However, the average has the same tendency to come down to a 
"baseline" figure at bottoms, although this basing area tends to be 
a range - as can be seen above in the use of TWO level lines, on 
the low end of the 10-day average of daily up volume.

The Nasdaq Up volume average has risen substantially since late-
September and has stayed relatively high for some weeks now.  
Meanwhile, COMP is up near the top end of a possible uptrend 
channel. The safest conclusion to be made based on this indicator 
right now is that the next "safe" major buy in Nasdaq index calls 
such as in the Nas 100 (NDX) will be when this line comes down to 
at or near its baseline again.    

Good Trading Success!  


****************
Combos/Straddles
****************

Lookin' For A Little Action? 

By Mike Parnos

Are you in the mood for a quickie?  I am, too.  We didn't have any 
action last month, so we've been experiencing withdrawal.   Let's 
see what we can do to try and satisfy those urges -- and make some 
money at the same time.

Remember, as exciting as these quickies can be, you'll still have 
to use protection -- in the form of self-discipline.   In each 
instance, you have to know when to stop before you get into 
trouble.  If you don't pay close attention to these trades, you can 
get your _ _ _ (you fill in the blank) in a ringer.  So, for the 
sake of all that you hold dear, physically or financially, stay on 
top of these "hypothetical" positions.  Normally we would do 
quickies in the Sunday column, but I thought we might take in some 
nice extra premium in exchange for an additional day of exposure to 
the market.  

The market may have settled down a bit.  It's making some sizable 
up and down moves, but it seems to be running in place -- for the 
moment.  If this continues, we may be able to take in a few quickie 
dollars.  If it doesn't continue, beware -- and be ready!  

The prices below are based on today's (Thursday) closing prices.  I 
calculated on the basis of being able to negotiate a dime on each 
of the bid/ask spreads.  With these being at-the-money options, 
even the Scrooges at the RUT might give a little.  Do you think 
market makers get the holiday spirit?  We'll find out.  I realize 
that on Friday the prices will be different and you may not get the 
same amount of premium.  Even, if you get 10% less premium, you'll 
be doing just fine.

December Quickie #1 - RUT Siamese Condor - 629.19
Sell 10 RUT Dec. 630 puts 
Sell 10 RUT Dec. 630 calls 
Premium credit of about: $13.10 ($13,100)

Buy 10 RUT Dec. 610 puts 
Buy 10 RUT Dec. 650 calls 
Premium debit of about: $1.45 ($1,450)

Our total net premium is about $11.65 ($11,650).  That's a nice 
chunk of dough and a potential huge profit.  It's going to create a 
nice large trading range and profit parameters of 618.35 on the 
bottom to 641.65.  Our exit points are the same as the profit 
parameters.  Maiantenance: $20,000 ($2,000 per contract).

December Quickie #2 - SPX Iron Condor - 1189.24
Sell 10 Dec. SPX 1210 calls
Buy 10 Dec. SPX 1220 calls
Credit of about: $.90 ($900)

Sell 10 Dec. SPX 1170 puts
Buy 10 Dec. SPX 1160 puts
Credit of about: $.90 ($900)

Total net credit and profit potential of about $1.80 ($1,800).  
Maintenance of $10,000 ($1,000 per contract).  Maximum profit range 
of 1170 to 1210.  There's pretty good resistance below 1200 and 
some support at about 1170.  The chances for success are pretty 
good.  Rotsa' Ruck!
_________________________________________________________________

Did You Hear The One About . . .
Did you hear about the new sushi bar that caters exclusively to 
lawyers?   It's called, Sosumi.

The Moral Of The Story . . .
After eating an entire bull, a mountain lion felt so good he 
started roaring. He kept roaring and roaring until a hunter came 
along and shot him....
The moral: When you're full of bull, keep your mouth shut.
____________________________________________________________

DECEMBER CPTI POSITIONS
December Position #1 -- SPX Iron Condor (Part 1) - 1189.24
This bull-put spread still gives us about a 45-point cushion on the 
downside with the short strike near a support level.  

We sold 20 December SPX 1125 puts and bought 20 December SPX 1120 
puts for a credit of $.50 ($1,000).   Maintenance: $10,000.  When 
you're looking for your new position, the concept of getting much 
your profit from negotiating the bid/ask spread still applies. (see 
the Thursday, Nov. 18 column).

This position is just the bull-put portion of a potential Iron 
Condor.  We're going to wait until the smoke clears a little before 
looking for bear-call spread possibilities.  When the time comes to 
put on the bear call spread, as long as we create a 5-point spread, 
there will be no additional maintenance requirement.

December Position #2 -- SPX Sure Thing (Almost) Credit Spread – 
1189.24

We sold two SPX December 1165 puts and bought two SPX December 1140 
puts for a $6.90 credit ($1,380).

Here we go again.  We saw an opportunity to sell the 1165 puts and 
buy the 1140 puts for a credit of $6.90.  We're still in a bullish 
trend and want to position ourselves to take advantage of it.  A 
quick reminder -- only do this strategy if you have a LOT of 
maintenance available.  You might need it.

December/January Position #3 -- SPX Iron Condor  (Part 1) - 1189.24
I've become very conservative -- even more so after our unpleasant 
experience in the November cycle.  With the SPX at 1179, I noticed 
the January 1100/1090 bull put spread would yield about $.70.  
Being still somewhat bullish for the next few months, I was willing 
to go out to January.  I like that almost 80-point cushion and I'm 
willing to wait the eight weeks.  When the opportunity presents 
itself, we can always add the other side of the condor.

We sold 15 SPX January 1100 puts and bought 15 SPX January 1090 
puts for a credit of about $.70 ($1,050).  Maintenance: $15,000

December Position #4 - SPX Iron Condor (Part I) - 1189.24
We would 20 SPX December 1135 puts and bought 20 SPX December 1130 
puts for a credit of about $.35 ($700).  Maintenance: $10,000.  
Compared to the profit we're used to making, this doesn't seem like 
a lot.  But, we're going to work our way back into the black a 
little at a time -- with a large degree of safety.  
___________________________________________________________
ONGOING POSITIONS
QQQ ITM Strangle - Ongoing Long Term -- $40.05
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of 
the 2005 QQQ $29 calls for a total debit of $14,300. We make money 
by selling near term puts and calls every month. Here's what we've 
done so far: Oct. $33 puts and Oct. $34 calls - credit of $1,900. 
Nov. $34 puts and calls - credit of $1,150. Dec. $34 puts and calls 
- credit of $1,500. Jan. $34 puts and calls - credit of $850. Feb. 
$34 calls and $36 puts - credit of $750. Mar. $34 calls and $37 
puts - credit of $1,150. Apr. $34 calls and $37 puts - credit of 
$750. May $34 calls and $37 puts - credit of $800. June $34 calls 
and $37 puts -- total net credit of $750. We rolled out to the July 
$34 calls ($.20 credit) and $37 puts ($.60 credit) and took in a 
credit of $.80 ($800). We rolled to the August $34 calls and $37 
puts, taking in a credit of $900. We rolled to the Sept. $34 calls 
and $37 puts, yielding $.45 or $450 for the cycle. For October we 
took in $.45 ($450) rollout. We rolled to the November. $34 calls 
and $37 puts for $.70 ($700).  Last week we rolled in the December 
$34 calls and $37 puts for a total of $.50 ($500).  New total: 
$13,400.
Note: We haven't included the proceeds from this long term QQQ ITM 
Strangle in our profit calculations. It's a bonus! And it's a great 
conservative cash flow generating strategy. 
ZERO-PLUS Strategy. OEX - 566.37
In my Feb. 8th column, I outlined a strategy based on an initial 
investment of $100,000. $74,000 was spent on zero coupon bonds 
maturing in about seven years at a value of $100,000. The principal 
$100,000 investment is guaranteed. We're trading the remaining 
$26,000 to generate a "risk free" return on the original 
investment. We own 3 OEX December 2006 540 calls @ $81 (x 300 = 
$24,300). Our cash position as of August expiration was $8,390. In 
September we added another $975 for a total of $9,365. In October 
we added $650 for a new total of $10,675. 
Zero-Plus Position For December
Prior to expiration, we bought back our Nov. 555 calls and rolled 
it to six contracts of the January 580 calls for a credit of about 
$100.  We also put on five contracts of a December 540/530 bull-put 
spread for an $.80 credit ($400). 
 
Happy Trading! 
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In 
trading, as in life, it's not the cards we're dealt. It's how we 
play them. 
Mike Parnos, Your Options Therapist and CPTI Master Strategist 
 
Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the 
numbers represented here may have been achieved or beaten by our 
readers, we make no representation that any individual investor 
achieved these exact results. The tracking for the plays listed in 
this section uses closing prices for the day the newsletter is 
published and it is not meant to imply that any reader actually 
received those prices or participated in these recommendations. The 
portfolio represented here is hypothetical and for investment 
education purposes only. It is only an illustration of what type of 
gains a knowledgeable investor might receive utilizing these 
strategies. 
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