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Daily Newsletter, Wednesday, 01/05/2005

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The Option Investor Newsletter                Wednesday 01-05-2005
Copyright 2005, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Are the Wheels coming off? 
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)
******************************************************************
      01-05-2005           High     Low     Volume   Adv/Dcl
DJIA    10597.83 - 32.95 10684.43 10597.75 2.12 bln  708/2138
NASDAQ   2091.24 - 16.62  2116.75  2091.24 2.37 bln  877/2193
S&P 100   565.21 -  1.56   569.75   565.20   Totals 1585/4331
S&P 500  1183.74 -  4.31  1192.75  1183.72
SOX       404.25 -  6.11   412.86   402.59
RUS 2000  617.48 - 11.06   628.66   617.48
DJ TRANS 3653.29 - 25.04  3679.45  3649.72 
VIX        14.09 +  0.01    14.09    13.26
VXO (VIX-O)13.97 -  0.16    14.37    13.49
VXN        20.18 +  0.12    20.19    19.52
Total Volume 4,492M
Total UpVol  1,184M
Total DnVol  3,261M
Total Adv  1585
Total Dcl  4331
52wk Highs   70 
52wk Lows    29
TRIN       1.15
PUT/CALL   0.95
******************************************************************

Are the Wheels coming off?

Jane Fox

This morning stocks opened bearishly near yesterday's lows but 
appeared to grab a bid and started to rise. All the bulls gave a 
sigh of relief, "the selling was over for now." Unfortunately 
that sigh turned into a gasp of disbelief when yesterday's lows 
were breached. But alas, there was another sigh of relief when it 
was realized that the breach was hardly anything to worry about 
and stocks were headed back up again. Then those lows were 
breached again and this time there was no responding sigh of 
relief from the bulls because there was no heading back up again. 
Stocks closed at their daily lows. Not looking good so far. You 
know the saying "If Santa Claus should fail to call - the bears 
will come to Broad and Wall." Well here they are and the bulls 
may fall!

The DOW closed at 10597 for a -32.95 point loss. The DOW has lost 
1.7%, or 185.18 points, in the last three days and has now 
declined for six straight sessions -- the longest losing streak 
since July 2002. The Standard & Poor's 500-stock index fell 4.32 
to 1183.73 and the Nasdaq Composite Index slid 16.62 to 2091.24. 
On the Big Board, 1.7 billion shares traded, 930 stocks rose and 
2,411 fell. On the Nasdaq Stock Market, 2.4 billion shares 
changed hands, 910 issues advanced and 2,250 declined. 

It is still early in the month so this may be a little premature 
but heck who knows when I will get another chance to let you in 
on these little gems. One is called the Stock Market's Almanac 
Incredible January Barometer devised by Yale Hirsch in 1972. It 
states that however the S&P goes in January the rest of the year 
follows suit and has a 90.7% accuracy rate. Since 1950 this 
barometer has failed only five times. Now that's incredible. 

The other gem I would like to share with you is that if the DOW's 
December lows are breached in the first quarter of the New Year 
then you will have a bearish year. Of the 26 years (since 1952) 
when the DOW breached its December lows in the first quarter of 
the New Year, 13 times the DOW closed lower. Now I don't think 
this is such a great record but then of those 13 years if you 
have a negative First Five Days in January also 12 of those 13 
years have closed lower. Now that is a record I think is great. 

Larry Williams took this on step further and says if the November 
lows are breached in the first quarter there is an 80% chance 
that we will have a bearish year. Something to put in your hat 
and remember come March 31st. 

The economic reports started this morning at 7:00EST with the 
MBA's release of its refinancing Index and although many market 
watchers ignore this early-morning release, this morning's 
merited attention.  A 10.6 % decrease in mortgage applications 
was tagged as the largest decrease in more than a year, and that 
occurred despite a drop in mortgage rates.  Refinancing activity 
dropped 5.7 %.  Addition information reveals that this year may 
be the first since the recession when the number of house 
purchases does not set a new record.  Housing prices have been 
rising throughout the year, with that rise in cost being cited as 
a reason for the slowing of demand in the housing market.  

Next on the docket of economic reports was the 10:00EST Institute 
for Supply Management's (ISM) December's index of non- 
manufacturing companies. The number rose to 63.1 from 61.3 in 
November, the fastest pace in five months. Readings above 50 
means growth. The average of 62.5 for 2004 is the highest since 
the survey began in 1997. According to the survey of purchasing 
executives in industries including retail trade, banking and 
insurance, orders accelerated and more companies said they were 
adding to inventories. Economists were cited as saying the post-
Christmas surge in sales suggests consumers have the incomes and 
confidence to keep driving economic growth. 

Then at 10:30EST we got the Energy Department's weekly report of 
Crude Oil/Gasoline/Distillate inventories that showed heating oil 
and diesel inventories rose by two million barrels to 121.1 
million barrels. The build was higher than expected and moves 
distillates (heating oil and diesel) within their historic 
inventory range for this time of year. Crude oil inventories fell 
by 3.3 million barrels whereas analysts were expecting a 1.2 
million barrel decline. Gasoline inventories rose by 2.0 million 
versus analyst's forecast of a 1.0 million.

In December, U.S. car and light-truck sales rose 8% from a year 
earlier, for a seasonally adjusted annual sales pace of 18.4 
million vehicles, a record for the month. Although industry 
analysts agreed that the numbers were due largely to the heavily 
advertised end-of-the-year sales promotions, some think stock-
market wealth and improvements in personal income and consumer 
confidence will sustain demand and that 2005 sales will match 
last year's strong performance of about 17 million light vehicles 
sold.

The Airline index (XAL) was down -3.41 today amid announcements 
from Delta Air Lines (DAL) that they were slashing fares for 
domestic travel by as much as 50% and dropping restrictions such 
as Saturday night stays to win back customers from low-fare 
competitors. The whole index took a hit because of concerns that 
revenue may fall if all carriers adopt Delta's stance. One 
analyst said airlines may lose as much as $3 billion a year and 
cut forecasts on Delta, AMR Corp., Northwest Airlines Corp. and 
AirTran Holdings Inc. The hardest hit was the holding company for 
American airlines (AMR) falling 13%. Delta and Northwest Airlines 
(NWAC) were close behind, nose-diving 12% and 11%, respectively.

On to the charts.

SPX Daily Chart

 

This is not a healthy looking chart. The fact that since November 
15th SPX has continued to climb in the face of a falling MACD had 
to resolve itself at some point. I think that point has finally 
come. Why do I think that? First of all SPX has broken out of the 
regression channel when most would have thought (liked) SPX to 
have bounced back to the top of the channel. Next, for two days 
running now SPX has closed below its 20 EMA.  The last time the 
SPX closed below its 20 EMA was October 26th. Then you have the 
MACD probing the 0 line albeit not under it yet. The last time 
the MACD was under the 0 line was October 28th. 

DOW Daily chart.

 

The DOW has not been as strong as SPX during our little bull 
rally and it did close below the 20 EMA back on December 8th but 
it has not closed two days running under this MA since back in 
late October when the bull rally was just getting started.  

I have marked the December lows in red and the November lows in 
magenta. If you have a charting platform you may want to put 
these trendlines on your DOW chart as a reminder of the December 
low indicator (or November low if you decide to use that one 
instead) I mentioned earlier.  

COMPX Daily Chart.

 

This chart is very similar to the SPX chart but does not have the 
clear regression channel. However, it does have the very clear 
MACD divergence and two days running of closes under the 20 EMA 
something that not has happened since October 26th. 

RUT daily Chart.


 


The one thing that bothers me the most about the decline we have 
seen since the beginning of the year is that it is lead by the 
RUT, one of our strongest markets and it looks like the wheels 
are about to come off this steam roller. It has the negative MACD 
divergence just like the other markets and the closes under the 
20 EMA but look at where the MACD ended up today. The fast MACD 
line has hit a level today that it has not seen since last 
August. Yikes!

Now the market never goes straight up or straight down so 
tomorrow "should" bring a little relief to the bulls but 
unfortunately it may just be temporary. We have had some major 
damage done here and the bulls will need to call in some heavy 
hitters to fix the damage. Heavy hitters like the RUT and the 
Compq. 

Same-store sales figures began appearing after the close with 
AEOS and SBUX being among the stores reporting this afternoon.  
AEOS raised guidance and SBUX reported same store sales up 8%. 
Tomorrow morning sees other stores reporting, including ANN, ANF, 
DDS, FD, KSS, PIR and WMT, among others.  

Thursday's economic releases begin with the usual 8:30 release of 
jobless claims and also includes the 10:30 release of natural gas 
inventories and the 4:30 report on the money supply.  At 1:00 
EST, the Fed's Hoenig gives an outlook on the economic, speaking 
in Kansas City.

Until next time - keep your wheels on your wagon.

Jane Fox

 
***************
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_010505_1.asp


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The Option Investor Newsletter                Wednesday 01-05-2005
Copyright 2005, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Watch List: More Weakness Ahead
Stop Loss Updates: ADBE, CAI, BBOX, BDK, RAI
Dropped Calls: ETR, MHK, ZBRA
Dropped Puts: None
New Calls: None
New Puts: None

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

More Weakness Ahead

___________________________________________________________________

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.
___________________________________________________________________


Potash Corp - POT - close: 75.25 change: -3.58

WHAT TO WATCH: POT continues Tuesday's decline with a 4.5 percent 
drop on Wednesday through minor support at $76 and its 40 and 50-
dma's.  Volume was extremely high as investors rushed to lock in 
profits.  We don't think the selling is over and aggressive 
traders could target a pull back to $70 or even its 100-dma near 
$68.

Chart=


---

Landstar Systems - LSTR - close: 71.17 change: -1.19

WHAT TO WATCH: LSTR has been a consistent winner for months 
(actually years).  Now there is a huge bearish divergence in its 
MACD indicator and the stock looks vulnerable to some profit 
taking as volume mounts on the declines.  Look for a breakdown 
under the $70 level and its 50-dma and target a drop toward 
technical support at the 100-dma near $64. 

Chart=


---

Frontline Ltd - FRO - close: 43.10 change: +1.86

WHAT TO WATCH: The relative strength during today's market 
decline caught our attention in FRO, a shipping/oil tanker 
business.  The stock has been declining since the late November 
peak and is bouncing from round-number support at $40.00 
underpinned by its 200-dma.  This would be an aggressive play but 
bulls can look for a short-term follow through rebound, maybe 
back to $50.00.


Chart=



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

BA $50.81 +0.83 - We would keep an eye on BA.  Shares are 
bouncing from the $49.50-50.00 region bolstered by its 200-dma 
after a month of declines.  BA could be due for a multi-day 
rebound.

TONS $63.89 +3.21 - TONS continues to rally on increasing volume.  
The stock looks very overbought.  There are no options on TONS.

GRMN $53.56 -3.07 - GRMN is another stock seeing the rush to exit 
rise with its volume.  Shares have broken support at $55 and its 
50-dma.  


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

ADBE - put play -
  ADBE failed near the $61 level and shares look ready to drop and 
  hit our trigger point.
 
CAI - put play -
  CAI dipped to $61.31 this morning which was enough to hit our 
  bearish entry point at $61.95.  Unfortunately, traders bought the 
  dip so we would not suggest new plays until shares traded back
  under $62.00. 

 BBOX - call play -
  BBOX was hit for a 3.6 percent loss on Wednesday.  This was a lot
  worse than the NWX networking index, which fell less than one 
  percent.  We would not consider new bullish plays until we saw a 
  bounce from support at $45.00.
 
 
BDK - call play -
  BDK has pulled back to technical support at its rising 40-dma.  
  Bulls need to see a bounce here!

RAI - call play - 
  Today's hammer-candlestick in RAI could be be a bullish reversal. 
  Look for the follow through.


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

Entergy Corp - ETR - close: 64.88 chg: -1.06 stop: 64.95  

The market pull back was not good news for shares of ETR, which 
continued its own consolidation lower.  Yesterday we warned 
readers that the breakdown under $66.00 and its 50-dma looked 
like bad news and that readers may want to strongly exit to avoid 
further losses.  At this point we would expect ETR to retest the 
100-dma as support.  We have been stopped out at$64.95.

Picked on December 21 at $ 67.62
Change since picked:      - 2.74
Earnings Date           01/31/05 (unconfirmed)
Average Daily Volume =       1.1 million  
Chart =


---

Mohawk Industries - MHK - close: 87.80 chg: -0.95 stop: 87.95     

MHK is another casualty to the market's new year pull back.  This 
time MHK fell another one percent to break support near $88.00 and 
its 50-dma.  We have been stopped out at $87.95.

Picked on December 14 at $ 91.00
Change since picked:      - 3.20
Earnings Date           02/15/05 (confirmed)
Average Daily Volume =       319 thousand   
Chart =


---


Zebra Technologies - ZBRA - close: 52.57 chg: -1.90 stop: 52.99    

Wednesday was a bad day for ZBRA bulls.  The stock lost 3.48 
percent on above average volume to break support at several 
moving averages including the 200-dma.  We have been stopped out 
at $52.99.  If you check the news we see a press release from 
ZBRA about changing the "rules of the road" for accounting for 
route delivery drives and we wonder if cautious investors failed 
to read the whole article and only saw "changes" "in accounting" 
and hit the sell-button in a panic.  

Picked on December 15 at $ 55.21
Change since picked:      - 2.64
Earnings Date           02/09/05 (unconfirmed)
Average Daily Volume =       709 thousand 
Chart =




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

None


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

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

None


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

None


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

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would welcome you as a permanent subscriber.

The monthly subscription price is $49.95. The quarterly
price is $129.95 which is $20 off the monthly rate.

We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.

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and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

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