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Daily Newsletter, Thursday, 01/06/2005

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The Option Investor Newsletter                Thursday 01-06-2005
Copyright 2005, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Are We There Yet?
Futures Wrap: See Note
Index Wrap: Looking for a bounce, if not, then some trouble
Market Sentiment: See Note


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      01-06-2005           High     Low     Volume   Adv/Dcl
DJIA    10622.88 + 25.10 10667.58 10589.33 1.95 bln 1848/1364
NASDAQ   2090.00 -  1.20  2103.90  2088.03 2.20 bln 1536/1526
S&P 100   567.54 +  2.33   569.24   565.21   Totals 2384/2890
S&P 500  1187.89 +  4.15  1191.63  1183.23 
SOX       402.14 -  2.10   408.68   402.08
RUS 2000  619.82 +  2.34   624.29   616.96
DJ TRANS 3667.12 + 13.58  3680.69  3652.84
VIX        13.58 -  0.51    14.09    13.33
VXO (VIX-O)14.17 +  0.20    14.69    13.89
VXN        20.13 -  0.05    20.26    19.76  
Total Volume 4,435M
Total UpVol  2,259M
Total DnVol  2,107M
Total Adv  3872
Total Dcl  3327
52wk Highs   96
52wk Lows    39
TRIN       1.53
NAZTRIN    1.34
PUT/CALL   0.77
************************************************************

Are We There Yet?
by Jim Brown

How often have you been asked that question on a long 
road trip? My email was full of that same question today
as traders wanted to know if we had reached the rebound
point. Was today's weak rebound the start of the January
liquidity bounce? Are we there yet? Is it safe to go back
into the water? 

Dow Chart

 
Nasdaq Chart

 
SOX Chart

 

The short answer is maybe but I doubt that is what everyone
wants to hear. The sharp sell off into the close put the
fear back into the bulls and the market pundits were quick
to suggest it confirms a new negative market bias. I am
not yet ready to read the eulogy on the bull market and
hopefully after you finish this commentary you will feel
better about the rest of the week. 

The economics were mixed again with Chain Store Sales 
for December rising +2.7% and slightly better than the 
+2.4% analysts expected. Still nothing to brag about 
and the holiday season (Nov-Dec) rose only +2.3% and
far less than the 4% gain last year. The holiday season
only amounted to 22.2% of annual chain store sales and
was the lowest on record. Meanwhile sales for the entire
year rose +3.8% and nearly recovered to levels seen in
2000. The ICSC is projecting 2.5% to 3% growth for January.
Wal-Mart posted +3% gains in December and projected +2%
to +4% for January. Target, Zales and Pier 1 warned that
expectations would not be met. Target said relying too
heavily on special promotional discounts hurt profits. 
With the record online sales for the period it is not
surprising that chain stores were struggling to meet
their previous levels. 

There was a flurry of employment reports out today in
advance of tomorrows Jobs data. The Hudson Employment
Index dropped 1.3 points to 103.6 making the December
number the lowest level of the year. Hudson said private
firms were growing less confident in the recovery and
were lowering expectations for future hiring. Only 35%
of firms are now expecting to add employees, down -2
points from November. 

The Monster Employment Index fell to 113 and the lowest
level since August. However this index is not seasonally
adjusted and this could be a result of holiday layoffs.
The Monster Index is +33% higher than Dec-2003 and some
claim this shows a strong hiring cycle. I believe is
shows a stronger use of online job shops over print ads
and therefore a stronger index. I am sure hiring is 
higher than last year but I don't think the actual 
employment numbers support the higher Monster Index. 

Jobless Claims for last week surged to 364,000 and an
increase of +42,000 over the prior week. This was the
largest increase since March and the highest claims
level since the 372,000 on September 25th. Analysts
were quick to blame improper seasonal adjustments as
the culprit once again. This may be true as we saw 
the same problems around the Thanksgiving holiday but
all the employment reports are trending in the same 
direction. This could be a time for caution. 

The Challenger Layoff Report on Wednesday showed plans
for 109,045 layoffs and the highest level since January.
The planned layoffs have been over 100K for the last
four months. Auto and Consumer Products accounted for
the most of the cuts. Hiring plans also increased with
21,262 projected new jobs compared to only 18,740 in
November. You can do the math. If we are averaging 100K
in planned layoffs and 20K in planned hiring then the
there is a net drain of 80K in jobs per month. 

This leads up to tomorrows Jobs Report. The current
official forecast is for a gain of +200,000 jobs with
whisper numbers ranging from 150K to 300K. As usual
some of those analysts are on drugs with their far out
projections. It would be good for consumers if we did
blow away the official estimates with a 300K number but
it will be very negative for the market. A very strong
employment number would cause excessive rate fear and
the interest rates would rocket higher. This would put
pressure on stocks and pressure on the Fed to act quickly
to suppress growth that is too rapid to be sustained.
Personally I have not seen any of that growth but it
may exist somewhere. Every economic report we have seen
lately suggests the recovery is steadily moving higher 
but is still struggling.

I believe the end of day drop in the major indexes was
related to the flurry of negative employment indexes.
The market is expecting that +200K or better in the Jobs
Data tomorrow morning and there is a risk of a lesser
number. Possibly much less. This Jobs fear kept traders
from buying a weak bounce and probably pushed other
longs back to the sidelines. If you really want to see
the market move higher on Friday we need to see 150K
jobs. This is a number that will not cause a great 
disappointment and also a number that will keep the
Fed on its measured pace. 

Crude Oil Chart

 

Oil prices exploded once again with crude closing up
+$2 at $45.50 after the natural gas storage report
showed a significant drop in inventory. Also, OPEC
said its total daily production fell during December
to 29.5mbpd, down -260,000bpd from November. They 
cited oil disruptions in Iraq as well as other problems
in maintaining the flow. There is also another rumor
they are not satisfied with the price holding around
$42 for the last months and they may cut production
by another million barrels on Jan-30th. I believe 
this is a concerted effort to manage expectations 
while they wait for further global production declines
to raise the price and put them in a position of power.
Remember the OPEC stranglehold in 1973?

There is another shot being loaded in the coming oil
wars. China's 3rd largest oil company, CNOOC, is in
talks to acquire Unocal or at least the reserves owned
by Unocal in Asia. CNOOC as well as the other Chinese
oil companies are trying to acquire all the reserves
they can and there appears to be an increasing pressure
to do it quickly. CNOOC is rumored to be readying a bid
of $13 billion for UCL with a plan to sell the UCL assets
in the U.S. to somebody else for $5B. China is solidifying
its ties with Russia in an effort to lock up oil and gas
supplies for several decades in advance. China and Russia
are also planning some joint military exercises soon. 
Does anybody but me see the sides being formed for the
coming oil wars? 

Another interesting oil negotiation is underway between
OPEC, Saudi Arabia and India. India currently imports
2.2mbpd from OPEC. They expect that demand to increase
by 50% before 2010 but they have no storage or refinery
capacity to support the additional demand. CNBC reported
today that $800 billion, yes billion, would have to be
invested to handle that demand by constructing storage,
refinery and distribution locations in India. India
wants OPEC/Saudi to invest the money with an eye towards
locking in an OPEC/Saudi supply for the future. The idea
is an $800B investment would force OPEC to keep supplying
oil to recover the investment. Not surprisingly Saudi
wants India to invest that money in building the assets
in SAUDI ARABIA. They would then ship the refined fuel
to India. What is wrong with this picture? Obviously
it would be India out the money and the assets would be
under Saudi control. If they wanted to nationalize them 
in future times of oil stress then India would just be 
out of luck and out of oil. Do you see how everything 
is pointing to a future game of brinksmanship? Recent 
government documents released from the time of the 1973
oil embargo revealed administration plans to invade Saudi,
Kuwait and possibly Dubai in order to capture their oil
assets and insure future U.S. oil supplies. Nixon was 
prepared to do it but they were able to resolve it 
peacefully. Do you think maybe OPEC countries have read
those recent releases? Oil was $5 a barrel in 1973. 

Sorry, I got off the track there but I believe readers
need to be aware well in advance of the potential problem
ahead. Closer to our immediate future is the market
direction. The bounce today was more of a relief rally
than a rebound. The Dow managed to add +25 points but the
SOX dragged the Nasdaq back to negative territory at the
close. The Russell gave up nearly -5 points in its closing
drop but still finished slightly positive. As I stated
earlier I believe the majority of this afternoon selling
was due to the impending Jobs report. 

If the report is positive we could have a chance for
another bounce but the weak internals today suggest the
selling may not be over. Next week begins the liquidity
flow and funds may take Friday as their last chance to
balance positions before dealing with that cash. Trimtabs
is still expecting a large influx of cash and much of 
that cash is destined for ETFs, Exchange Traded Funds.
Cash flows into ETFs in 2004 were more than three times
the 2003 rate. This is not expected to change. Investors
have found they can pick their own sector/market funds
and jump in and out at will. With mutual funds having
holding periods as a result of the fund scandal it limits
exits. This suggests funds could see less cash than they
previously expected with the rest going to ETFs. The
market will benefit from either investment.

With the Dow hovering just over 10600 we have risk to
10450 if that 10600 level breaks. The Nasdaq normally
corrects about 5% in January and we are nearly there at
the 2089 close. With the SOX the weakest link today the
SOX support is critical for Nasdaq health. The SOX is
resting on three different support lines at 400 and a
break there could see a -20 point drop. Since it closed
at the low of the day there is still appears to be some
sellers leaning on that index. 

The Nasdaq has risk to 2050 and more than a minor dip in
the SOX could setup a sharp drop in the Nasdaq. I would
be a buyer at 2050 if it occurs. I would like to see a
sharp drop on Friday to punctuate this week and put an
end to the profit taking. Either way I am expecting next
week to be positive. Earnings will officially begin with
Alcoa, DNA and NT on Monday. Also check out GBX which
reports on Monday. I found them when I was doing the
research on the Oil Crisis Report. They make railcars
and they are two years behind because of the demand for
coal, oil/gas and commodity cars. 

One stock of note after the close was UTSI. The stock
had crashed from over $22.50 on Tuesday to 20.50 just
before the close. They warned that earnings would now
be a loss of 40-45 cents compared to expectations of
a penny profit. Last year they posted a Q4 profit of
52 cents. They said a slowing Chinese economy and a
drop in capex spending by major carriers had hurt sales
with revenue now expected to be $740-$775 million instead
of the $875-$885 million previously predicted. The stock
fell from 20.50 to 16.50 in after hours. 

For Friday I would watch the volume and the A/D line
for signs the weakness is over. If we get a sharp dip
I would be a buyer on expectations next week will see
the bulls return to the market. 

Are we there yet? Ask me again in a week. 

Jim Brown
Editor

"You cannot stop people from thinking. The tough job
is to get some people started."


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

Looking for a bounce, if not, then some trouble

I'm looking for equities to rebound tomorrow, and I'll give you 
some of my tests, where some of today's action, and some tests 
before stocks open for trading, if met, should find a nice 
rebound into Friday's close.

U.S. Market Watch - 01/06/05 Close

 

The past several days, I've been noting on my own at how the 
miners in the AMEX Gold Bugs Index ($HUI.X) and chip stocks in 
the Semiconductor Index ($SOX.X) seem to be mirroring each other.  
Both were among last years sector losers, and so far this year, 
neither group has the look that things have changed in early 
2005.  I'll just make note for now, but I have a feeling we'll be 
using this observation down the road.

Red arrows at the QQQQ, MSH.X, GSO.X and INX.X.  I'll mention 
four stocks that represented the bulk of "tech weakness" today.

Sometimes, marriages experience a smooth sail from day one, while 
others begin with a shotgun at the alter and eventually things 
are called off.  

A cursory glance of the QQQQ, the GSTI Software Index (GSO.X) 
163.46 -1.63% and the Morgan Stanley High Tech 35 Index (MSH.X) 
481.58 -1.09% would show either/or both Symantec (NASDAQ:SYMC) 
$23.18 -7.42%, or Veritas Software (NASDAQ:VRTS) $25.56 -6.91% 
atop the percentage loser list.  Since Symantec (SYMC) announced 
its courtship of Veritas (VRTS), the market's reaction has been 
negative toward SYMC, as it doesn't appear to see a match made in 
heaven.  CSFB and Marquis Investment Research chimed in with 
annulment papers in hand, downgrading Symantec (SYMC) as they 
don't see the synergies that Symantec and Veritas seem to have 
agreed upon.  

Note:  If a trader hold, or is thinking of establishing a bearish 
position on this marriage, I've found that the "best" play is to 
be more bearish on the company that is being acquired.  In this 
case, Veritas.  Why?  Veritas agreed to the marriage for a 
reason.  It might be that they saw some tough sledding ahead and 
felt it in their shareholders best interest to find a mate.  If 
the marriage gets annulled, the acquirer (in this case Symantec) 
may pay some alimony in the form of a breakup fee, but the 
divorcee (in this case Veritas) usually gets questioned as to why 
they wanted to get married in the first place.  Why couldn't they 
just go it alone?

For the Internet Index (INX.X) and again the QQQQ, shares of eBay 
(NASDAQ:EBAY) $106.18 -4.25%, which have been a major contributor 
to strength, provide the weakness.  After nearly doubling in 
2004, the first four days of "tax gain" selling may be taking its 
toll.  Speaking of acquisitions.... one of the better "it makes 
sense" was when eBay bought PayPal.  

In last night's Index Trader Wrap, I outlined some steepening 
yield curve action that I thought broader market equity bulls 
would want to see tomorrow, when the nonfarm payroll figures were 
released.  Today was perhaps an example of that action.  Buying 
in the shorter-dated 5-year note, which had yield falling 1.6 
basis points to 3.695%, while the longer-dated 10 and 30-year 
yields stayed relatively calm.

Homebuilders got a little bid.  Take some notes, whether you're 
long/call or put/short the homebuilders.

I'll touch on the 5-year bond's yield in a moment, and what it 
may tend to be saying not only about "inflation," but also the 
economy.

I still think CNBC's Rick Santelli is one of the better 
commentators, and analysts that the network has.  Traders will 
tell him why they're doing what they're doing on any given day, 
but since Mr. Santelli has actually TRADED and can tie that with 
experienced reason, then traders can't "BS" him.  

What Mr. Santelli said was taking place today, was pure 
positioning into tomorrow's nonfarm payroll data.  We should have 
thought that the seasonal holiday pattern might slow hiring.  As 
terrible as it is to get laid off during the holiday season, 
that's what happens too.  This past week's jobless figures, which 
were released today, had bond traders quickly buying shorter-
dated maturities, to compensate for a nonfarm payroll number that 
most likely WILL NOT BE TOO HOT.

MOST LIKELY WILL NOT BE TOO HOT.

MOST LIKELY WILL NOT BE TOO HOT.

And this is what traders want to be alert to.  I (Jeff Bailey) 
would think it an UNPLEASANT SURPRISE if the nonfarm payroll 
numbers are TOO HOT.

In last night's wrap, I talked about the "Goldie Locks" trade.  

Mr. Santelli hit the nail on the head today, or so I thought, 
when he said traders will be HAPPY with an inline 175,000 new 
jobs.

What would be a TOO COLD number?  I'm thinking it would take 
something below 125,000.  TOO HOT number?  I'll go 25,000 above 
and say 200,000.

Market Snapshot / Internals - 01/06/05 Close

 

Other than the a/d lines, internals look somewhat similar to 
yesterday's.  However, today's action, combined with recent 
sessions, has the NYSE NH/NL 10-day ratio falling to at least a 
90% reading, and I'll chart a 3-box reversal.

NYSE NH/NL Chart - 01/06/05

 

The "f"s are the more recent five-day NH/NL ratio charting, while 
the X's (demand) and O's (supply) are the measures of the 10-day 
NH/NL ratio.  I've marked dates at what I feel are three 
inflection points and important observations that a 
trader/investor would make as it relates to the bullish and lack 
of bullish leadership points.  Just like a roller coaster.

Today's 10-day NH/NL ratio is now marked with a "1" as this is 
the first entry we would make for the month of January, 2005.

I can currently make the statement that the five-day NH/NL ratio 
is roughly equivalent to that found on December 14.  I can also 
say that at today's close, the 10-day NH/NL ratio is roughly 
equivalent to that found in December (blue C).

The ratio's can only go as high as 100%, and as low as 0%.

I had some "fun" tonight.  In order for the current 5-day NH/NL 
ratio to NOT fall to 82%, and assuming a "bounce" tomorrow would 
have tomorrow's DAILY new lows still at 16, the NYSE would need 
to print right around 290 new highs.  I do not think that is 
achievable, but this is something I do from time to time, to get 
a feel for things.  Several weeks ago we entered this type of 
mindset after a pullback, when we asked ourselves... "for these 
internals to improve, what most likely needs to happen to price."  
Sure enough, stocks rallied.

NYSE Composite Index (NYA.X) Chart - Daily Intervals

 

Since the NYSE 10-day NH/NL ratio is first to reverse lower, and 
alert to some intermediate-term sign of bullish leadership down 
presenting itself, this internals weakness should become a focus 
of traders and investors.  Here's the same chart we reviewed 
Tuesday evening.  Things "make sense" as to where things trade.

I KNOW that the 5-day and 10-day NH/NL ratios, just like a simple 
moving average are determined by what HAPPENED in the past.  But 
I can only assume if they're to improve, then PRICE action is the 
eventual determiner.

5-year Treasury Yield ($FVX.X) - Daily Intervals

 

I marked the last two 5-year yield reactions to the nonfarm 
payroll figures.  While bond traders, stocks traders and 
investors alike don't just focus on labor trends, you can see how 
it can draw a reaction from the bond market itself.  Over on the 
left of the chart, when the 5-year yield was rocketing higher, 
that's when three nonfarm reports had the economy adding a total 
885 new jobs to the economy.  

Today's bond market action, while hardly visible on a daily bar 
chart, can perhaps represent what takes place in a single day for 
the yield curve, when the action comes from the shorter-dated 
maturities.

In this evening's Market Monitor, now archived so you can go read 
it, I outline what to look for from the bond market, when the 
nonfarm payroll figures are released.  It will take place an hour 
before the stock market opens for trade.  

Pivot Matrix - 

 

Since we covered the 5-year yield ($FVX.X) and have some idea of 
what its fluctuation can do to the yield curve, I look at the 
correlations in the 10-year yield ($TNX.X) and make some 
assumptions, or scenarios now.

TOO HOT on the nonfarm, and I'd think the 10-year yield jumps 
through the DAILY R1/WEEKLY R1 correlation.  This could be good 
for the yield curve (if 5-year stays put), but could be a 
negative for the homebuilders.  Watch those homebuilders!

Now, the PINK boxes with a left arrow at the 10-year yield 
($TNX.X) WEEKLY Pivot and DAILY S1.  My thoughts here are that 
TOO COLD a nonfarm, and the bond market reaction is "economic 
slowing" run to safety of these yields!

Now see the PINK boxes for the SPX.X at DAILY S1 and MONTHLY S1, 
which perhaps a steepening yield curve has the SPX closing back 
above?  That's right!  That's our support level for tomorrow, 
which the MARKET will decide if it likes or dislikes the nonfarm 
numbers in the greater scope of things.

Today's close on the QQQQ.  Coincidence?  I don't think so.

Jeff Bailey


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

Please look for the sentiment commentary to continue on Sunday.
The normal contributor to this column is ill.



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

Market Averages

DJIA ($INDU)

52-week High: 10868
52-week Low :  9708
Current     : 10622

Moving Averages:
(Simple)

 10-dma: 10745
 50-dma: 10521 
200-dma: 10269 



S&P 500 ($SPX)

52-week High: 1216
52-week Low : 1060
Current     : 1187

Moving Averages:
(Simple)

 10-dma: 1202
 50-dma: 1181
200-dma: 1130



Nasdaq-100 ($NDX)

52-week High: 1635
52-week Low : 1301
Current     : 1557

Moving Averages:
(Simple)

 10-dma: 1601
 50-dma: 1573
200-dma: 1463 



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

CBOE Market Volatility Index (VIX) = 13.58 -0.51 
CBOE Mkt Volatility old VIX  (VXO) = 14.17 +0.20
Nasdaq Volatility Index (VXN)      = 20.13 -0.05 


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.80        776,205       617,900
Equity Only    0.67        650,675       436,787
OEX            1.04         21,385        22,364
QQQQ           0.83         59,514        49,315


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

Bullish Percent Data

           Current   Change   Status
NYSE          74.3    - 1.9   Bear Correction
NASDAQ-100    75.0    - 5     Bull Confirmed
Dow Indust.   73.3    + 0     Bull Confirmed
S&P 500       75.6    - 1.4   Bull Confirmed
S&P 100       76.0    - 2     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: 1.41
10-dma: 1.04 
21-dma: 1.04
55-dma: 1.00


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    1608      1514
Decliners    1200      1507

New Highs      58        47
New Lows       22        26

Up Volume   1164M      922M
Down Vol.    742M     1239M

Total Vol.  1936M     2178M
M = millions


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

Commitments Of Traders Report: 12/21/04


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

Commercial traders are growing more bearish while small traders
are naturally moving the other direction and growing more 
bullish.

Commercials   Long      Short      Net     % Of OI
11/30/04      462,394   491,813   (29,419)   (3.0%)
12/07/04      450,072   498,057   (47,985)   (5.0%)
12/14/04      502,471   540,494   (38,023)   (3.6%)
12/21/04      455,238   502,538   (47,300)   (4.9%)

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
11/30/04      176,031   148,876    27,155     8.3%
12/07/04      187,707   135,776    51,931    16.0%
12/14/04      201,428   164,111    37,371    10.2%
12/21/04      157,015   106,205    50,810    19.2%

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

There has been a dramatic reduction in open positions for
both longs and shorts for both the commercial traders and
small traders.  The net result has produced an increase
in bearishness for professionals and an increase in bullishness
for small traders.

Commercials   Long      Short      Net     % Of OI 
11/30/04      439,074   855,440   (416,366)  (32.2%)
12/07/04      470,553   805,234   (334,681)  (26.2%)
12/14/04      556,980   899,616   (342,636)  (23.5%)
12/21/04      279,694   554,818   (275,124)  (32.9%)

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
11/30/04      386,665     67,926   318,739    70.1%
12/07/04      311,838     66,496   245,342    64.8%
12/14/04      398,915    137,598   261,317    48.7%
12/21/04      227,047     66,140   160,907    54.8%

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


NASDAQ-100

Hmm... we are seeing a dramatic reversal for both commercial
and small traders.  Commercials have significantly cut their
long positions reversing their bullishness into bearishness
for the NDX.  Small traders have drastically reduced their
short positions to flip-flop them from net bearish to net
bullish. 

Commercials   Long      Short      Net     % of OI 
11/30/04       56,629     30,571    26,058   29.8%
12/07/04       57,621     34,313    23,308   25.4%
12/14/04       73,554     50,286    23,268   18.7%
12/21/04       30,614     45,158   (14,544) (19.1%)

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
11/23/04       11,153    39,712   (28,559)  (56.1%)
11/30/04        9,902    44,779   (34,877)  (63.7%)
12/07/04       15,489    49,064   (33,575)  (52.0%)
12/14/04       26,781    58,159   (31,378)  (36.9%)
12/21/04       20,840     9,109    11,731    39.1%

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

Commercial traders have suddenly become a lot more bearish 
on the Dow Industrials.  Meanwhile small traders have
significantly cut their positions on both sides of the trade.


Commercials   Long      Short      Net     % of OI
11/30/04       22,622    25,411   (2,789)     (5.8%)
12/07/04       25,523    27,351   (1,828)     (3.4%)
12/14/04       36,960    38,566   (1,606)     (2.1%)
12/21/04       24,850    31,920   (7,070)    (12.4%)
 
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
11/30/04        5,739     8,536   (2,797)   (19.6%)
12/07/04        5,274     9,507   (4,233)   (28.6%)
12/14/04       13,445    19,089   (5,644)   (17.3%)
12/21/04        5,637     6,961   (1,324)   (10.5%)

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 01-06-2005
Copyright 2005, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: BDK
Dropped Puts: None
Call Play Updates: BBOX, COF, FRE, FSH, JCI, RAI, UTX, WFMI
New Calls Plays: None
Put Play Updates: ADBE, CAI, FDX
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:
*****

Black & Decker - BDK - close: 83.47 chg: -1.88 stop: 84.49     

Look out below!  BDK has broken major technical support at the 40 
& 50-dma.  Now that BDK has broken support we would look for 
shares to fall toward the 100-dma near $80.

Picked on December 22 at $ 87.01
Change since picked:      - 3.54
Earnings Date           01/24/05 (unconfirmed)
Average Daily Volume =       656 thousand 
Chart =



PUTS:
*****

None


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

*Note - The play editor is very ill this evening so the update
will be brief.

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

Black Box - BBOX - close: 46.40 change: +1.02 stop: 43.99     

Thursday saw shares of BBOX bounce from support near $45 with a 
2.2 percent gain.  We're encouraged because shares outperformed 
the tech sector and its peers in the NWX networking index.  This 
looks like a new bullish entry point but we would confirm market 
direction before committing new capital.

Picked on December 22 at $ 46.15 
Change since picked:      + 0.25
Earnings Date           02/01/05 (confirmed)
Average Daily Volume =       128 thousand
Chart =



---

Capital One Financial - COF - cls: 82.45 chg: +1.02 stop: 79.50     

COF managed a bounce with the banking indices today.  Better yet 
COF rallied from $80.91 (effectively $81) and its 40-dma.  This 
looks like a potential bullish entry point but we would confirm 
market direction first before committing new capital.

Picked on December 12 at $ 81.12
Change since picked:      + 1.33
Earnings Date           01/19/05 (unconfirmed)
Average Daily Volume =       1.4 million  
Chart =


---

Freddie Mac - FRE - close: 71.75 chg: +0.47 close: 69.49     

The technical picture has turned bearish but mainly because FRE 
was a bit overbought.  If FRE can bounce above the $70 level we'd 
evaluate it as a new bullish entry point.
 
Picked on December 21 at $ 71.80
Change since picked:      - 0.05
Earnings Date           00/00/05 (unconfirmed)
Average Daily Volume =       2.8 million  
Chart =


---

Fisher Scientific - FSH - cls: 60.57 chg: +0.28 stop: 57.95   

Technicals have turned bearish on FSH too but shares are holding 
at support near $60.00.  Yesterday Merrill Lynch reiterated their 
buy rating on the stock.  We would look for a bounce from $60 or 
a move through $62 as a new bullish entry point.  Conservative 
traders may want to tighten their stops under $60.

Picked on December 21 at $ 61.70
Change since picked:      - 1.13
Earnings Date           02/02/05 (unconfirmed)
Average Daily Volume =       1.3 million  
Chart =



---


Johnson Controls Inc - JCI - cls: 61.23 chg: -0.21 stop: 60.49

We are turning more cautious on JCI. The MACD indicator has 
rolled back over from a buy signal into a sell signal.  After 
five declines in a row one could argue that JCI is due for an 
oversold bounce.  However, we might use the bounce as a chance to 
exit.  We are not suggesting new positions at this time.

Picked on December 29 at $ 63.51
Change since picked:      - 2.28
Earnings Date           01/19/05 (unconfirmed)
Average Daily Volume =       669 thousand 
Chart =


---


Reynolds American - RAI - close: 77.65 change: +0.15 stop: 75.99

We have mixed feelings on RAI.  The stock has pull back sharply 
over the last week and is overdue for a bounce.  The MACD is in a 
sell signal but the stochastics are oversold and look ready to 
rebound.  Aggressive traders may want to consider buying a bounce 
over $79 but we are not suggesting new positions at this time.

Picked on December 22 at $ 80.11
Change since picked:      - 2.36
Earnings Date           01/24/05 (unconfirmed)
Average Daily Volume =       1.0 million  
Chart =



---

United Tech. - UTX - close: 101.11 change: +0.06 stop: 99.95  

The pull back in Dow-component UTX continues.  Shares seem set on 
hitting round-number support at the $100 mark.  The technical 
picture is mixed with the MACD in a sell signal but the 
stochastics oversold and ready to turn higher. We would not 
suggest new positions at this time but readers can look for a 
bounce from $100 as a potential entry point. 

Picked on December 1 at $100.15
Change since picked:     + 0.96
Earnings Date          10/20/04 (confirmed)
Average Daily Volume =      1.8 million  
Chart =


---

Whole Foods - WFMI - close: 93.07 chg: -0.18 stop: 91.49

We're going to be somewhat patient with WFMI.  We remain 
untriggered and wait for shares to hit our bullish entry point at 
$97.51.  A breakdown under $92.00 and we may close the play 
unopened.

Picked on January xx at $  xx.xx <-- see TRIGGER 
Change since picked:      +00.00
Earnings Date           02/09/05 (unconfirmed)
Average Daily Volume =       880 thousand
Chart =



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

None


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

Adobe Systems - ADBE - close: 58.74 change: -0.99 stop: 62.26

News that ADBE has launched Acrobat 7 failed to inspire any 
buying in the stock today.  Shares continued lower and broke 
support at the 50-dma and the $60 level.  ADBE hit our trigger to 
buy puts at $58.99 to open the play.  Our short-term target is 
the $55 region or the 100-dma. 

Picked on January 06 at $ 58.99
Change since picked:     - 0.25
Earnings Date          03/17/05 (unconfirmed)
Average Daily Volume =      2.3 million 
Chart =


---

CACI Intl - CAI - close: 63.31 change: +0.11 stop: 66.01

CAI can't seem to make up its mind on what direction it's 
heading.  The stock dipped lower on Wednesday to hit our entry 
point at $61.95 and open the play. Unfortunately, yesterday's dip 
saw a decent bounce by the closing bell.  That bounce continued 
this morning but CAI couldn't power through the $64 level and 
began to fade into the afternoon.  We would not suggest new 
positions at this time.  Wait for CAI to trade under $62.00 or 
$61.31 again.

Picked on January 05 at $ 61.95
Change since picked:     + 1.36
Earnings Date          01/19/05 (unconfirmed)
Average Daily Volume =      348 thousand
Chart =


---

Fedex Corp - FDX - close: 95.19 change: -0.35 stop: 97.51

We remain untriggered in FDX but the stock is slowly sinking 
toward our entry point.  Currently support at the $95 level is 
holding but the short-term trend of lower highs doesn't bode well 
for FDX.  Our trigger to buy puts is $94.95.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked:     - 0.00
Earnings Date          03/17/05 (unconfirmed)
Average Daily Volume =      1.6 million 
Chart =




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

None


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**********
DISCLAIMER
**********

Please read our disclaimer at:
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The Option Investor Newsletter                 Thursday 01-06-2005
Copyright 2005, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: A mixed list of bullish and bearish candidates
Traders Corner: Overbought and Oversold Concepts and Use
Combos/Straddles: A Light At The End Of The Tunnel?  Perhaps 

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

A mixed list of bullish and bearish candidates

___________________________________________________________________

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.
___________________________________________________________________


Bear Stearns - BSC - close: 103.09 change: +0.78 

WHAT TO WATCH: The brokerage stocks have suddenly started looking 
more bullish.  After three weeks of consolidating mostly sideways 
BSC is bouncing from the $100 level and its 40-dma.  This could 
be a new bullish entry point although more conservative traders 
may want to wait for a move over the $104 level. 

Chart=


---

Goldman Sachs - GS - close: 105.23 change: +1.43

WHAT TO WATCH: GS is another brokerage play that looks ready to 
breakout from its three-week trading range.  Look for a move over 
$106 as a new bullish entry point. 

Chart=


---

Station Casinos - STN - close: 56.88 change: +2.33

WHAT TO WATCH: An upgrade to "over weight" by Morgan Stanley was 
enough to push STN to a 4.2 percent rally on strong volume.  The 
breakout over the top of its recent trading range near $56 makes 
this look like a new entry point.  The MACD indicator is nearing 
a new buy signal. 

Chart=


---

eBay Inc - EBAY - close: 106.18 change: -4.72

WHAT TO WATCH: Uh-oh!  The recent pull back in EBAY has turned 
into a rout.  Shares lost 4.25 percent on very heavy volume to 
break support at the $110 level and its 50-dma.  The next level 
of support is probably the $100 mark bolstered by the 100-dma.

Chart=



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

CHIR $35.96 +1.16 CHIR has finally broken out over resistance at 
the $35.00 mark.  Watch the 100-dma overhead. 

AHC $80.02 +1.02 - Oil stock AHC is at a pivotal level with 
round-number support at $80 and its 200-dma.  A bounce from here 
could be a bullish entry point while a breakdown under $78 could 
be a bearish entry point.

LEH $88.18 +1.83 - LEH is bouncing from the $85 level and its 40-
dma.  We would watch it for a breakout over major resistance at 
$90.00.

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

Overbought and Oversold Concepts and Use
By Leigh Stevens
lstevens@OptionInvestor.com

FIRST – A QUESTION FROM A SUBSCRIBER...

SUBSCRIBER QUESTION: 
You talked in your last commentary (Index Trader – 1/2/04) about a 
bearish chart picture in the S&P and Dow. Now that the market has 
fallen pretty sharply for 3 days, is there also a prediction on a 
downside target? 

RESPONSE:
The chart pattern was the rising wedge, which is often a bearish 
precursor of a trend reversal - usually a sharp decline when a 
correction does occur. I wrote about wedge patterns in general in a 
recent Trader's Corner seen at - 
http://www.OptionInvestor.com/traderscorner/tc_122604_1.asp

The identification techniques for the rising wedge pattern are: 
1. Two trendlines, one along the minor highs and one along the 
minor lows, slope upward and eventually intersect. 
2. Well-formed wedges have multiple "touches" of the two 
trendlines.
3. A rising wedge has a minimum duration of 3 weeks (anything 
less is a flag or pennant).
4. Volume usually trends downward throughout the formation.
5. Volume on the breakout (the fall below the lower trendline) is 
usually below average.

THE S&P 500 – 
You can see that all (except volume) conditions are met in the 
S&P 500 (SPX) chart below for the bearish rising wedge pattern.    
Wedges are more often seen in individual stocks but are not too 
common, occurring often at the later stage of a prolonged trend, 
as buying and selling forces prices into a narrower and narrower 
daily range - preceding an eventual correction, often steep. 

Another possible development – it's not unusual to see a rally 
back to the lowermost trendline (currently around 1214 in SPX), 
followed by a deeper decline after that.   


   

I left my Call/Put indicator on the chart (above) as it was a 
further tip off, besides prices having reached the narrow apex of 
the pie-shaped wedge, in its final 1-day extreme reading.  The 
pattern of multiple extremes can be seen in an earlier '04 period 
– yellow circle.  Each had 4-5 days when the ratio of equities 
call to put options traded got to 2 and above.

VOLUME IN WEDGE PATTERNS – 
I mention earlier (point #4) that there tends to be a declining 
volume trend in the period of a rising wedge while it (the 
pattern) is forming.  In up trends in the S&P 500, 100 and Dow 30 
I place the greatest importance on what is happening to NYSE Up 
Volume in terms of its 10-day moving average.  Except for the 
green portion of the uptrend line tracking SPX higher below, the 
NYSE Up volume average was FALLING – 


 

Now that I've spent all this time in an explanation of the wedge 
pattern, maybe I should answer your QUESTION – what is the 
predicted fall, which is most interest to us option traders!

The traditional rule of thumb in stocks, in measuring how far 
prices might fall, is that a decline can take prices back to the 
bottom of the formation. This would be to as low as to around 
1100 in the case of the S&P 500 (SPX). This kind of objective, if 
realized, would simply bring prices back to the longer-term 
rising up trendline. 

The S&P 500, 100 and Dow had the best defined rising wedge 
pattern; the pattern could also be seen on the Nasdaq 100, (NDX) 
although it was not quite as well-defined as in the others.  

In the Indices I would take this measuring implication as a 
MAXIMUM downside objective.  In the S&P 100 (OEX), such a maximum 
objective would be to back to the 525 area and in the Dow (INDU) 
it would be back to around 9800; in NDX, such a maximum downside 
target would be to 1425. 

I hesitate to use the above figures as an objective as, even if 
such maximum downside targets were realized, it might take months 
to happen and this is of little use to option traders.  Better to 
look for possible 38 to 50% pullbacks of the last rally: to 1169 
or 1154 in SPX, to 557 or as low as 551 in the OEX and to 10424 
or as low as 10288 in the INDU; in NDX, a 38% correction, about 
as much as occurs in a strong trend, is to 1508 and a 50 percent 
pullback of the prior advance would be to the 1470 area. 

OVERBOUGHT and OVERSOLD CONCEPTS - 
An OIN Subscriber e-mailed me asking about the times I've written 
in recent weeks that the market was "overbought" - yet kept going 
up for some weeks. This person was hearing a similar (overbought) 
refrain from different talking heads on the market-related cable 
shows.  Finally the question was: "...of what use is this concept 
in trading?"  

Good question - in a market that is in a STRONG trend, an Index 
being at an overbought or oversold level (a very high or very low 
reading on the RSI or Stochastics, etc.), quite often by itself 
does not tell you when to get out of calls or into puts - only 
perhaps, that taking and holding new positions is higher risk due 
to the increased chance for of a sharp correction.  First, what 
these concepts mean and how using the related indicators of 
overbought/oversold can be useful in trading decisions.   

The concepts of "overbought" and "oversold" are ALWAYS RELATIVE. 
Over-bought or oversold is a way of saying that an Index, or a 
stock, is thought to be at an extreme because it has been 
trending strongly in one direction for some period of time 
without much of a countertrend move. However, a stock or an index 
is only "over"-bought or "over"-sold in terms of TIME and 
CONDITION.  

TIME – 
By time I am referring to whether this is in terms of say an 
hourly chart and a 2-3 day time frame or a daily chart and the 
past 2-3 weeks of trading; or, perhaps a weekly chart and a 2-3 
month period. A stock or index is thought to be at an extreme 
only relative to, or in terms of, a certain period of time. For 
example, the OEX might be thought to be quite oversold because it 
went down sharply down for a week or for 5 trading days. However, 
this might be in the context that the index went up strongly for 
5 straight weeks as was the case coming into last week. 

In the example of a sharp down week (e.g., if this were to happen 
over the coming week), on an intermediate or long-term basis the 
index may only be in a short-term oversold condition as it may  
still be overbought in terms of its major trend. When you hear 
someone say the market is overbought or oversold, you have to 
also know or figure what out time frame they're talking about – 
if they are talking about the Market in general they are likely 
referring to a several week period. 

If I'm saying for example, that S&P 500 (SPX) is overbought, I 
probably referring simply to a technical indicator like the 
Relative Strength Index (RSI) on a DAILY chart being at a reading 
above 70/75 with "length" (number of trading bars considered)set 
to the commonly used 14 setting.  If oversold, 30-35 on the 
downside - 


    

On an hourly chart, I will often use a length setting of 21, 
which means that the formula always uses the last 21 hours of 
trading data; i.e., the last 21 hourly closes, which tends to 
work well in trading the 2-3 day price swings.

CONDITION – 
By "condition" I mean that the relative terms overbought and 
oversold mean different things in different market conditions or 
different types of markets.  By this is meant that overbought and 
oversold are best defined in a market that is in a fairly defined 
trading range as seen in the above chart when SPX traded in a 
fairly well-defined price range from March through October. 

In a strong bull or bear market on the other hand, the overbought 
and oversold concepts are less meaningful as a stock or index  
will go to the upper or lower extremes and tend to stay in that 
area for a prolonged period – this, because there are only short-
lived and corrections that retrace very little of the dominant 
trend.  In the above S&P chart, the 14-day RSI registers a first 
high at nearly 77 and then stays up above 65 for about 2 months – 
hey, not very useful if you used this indicator in a "mechanical" 
way and went long puts!

BASICS – Overbought & Oversold: 
A stock or its related index is commonly thought to be overbought 
or oversold when prices have an advance or decline of a degree 
that is greater than what is normal or usual relative to its past 
price behavior for a certain time frame and condition. 

The concept of overbought and oversold refer to rallies or 
declines that are steeper than usual, but the degree of this can 
vary a good deal in terms – there is no precise, objective or 
agreed upon measurement. A central important aspect of overbought 
or oversold is that these concepts relate to a situation where 
there is a preponderance of hours, days or weeks, over some 
specified period of time, where prices are moving strongly up or 
down.  

The concept of a specific price area that represents a level that 
is overbought or oversold does not normally come into play 
(except with moving average envelopes) -- only that price 
momentum or the rate (speed) at which prices change, is stronger 
than usual and predominately in one direction.  Experience then 
suggests that at some point, after a market gets into the 
overbought or oversold ranges, there is an increased likelihood 
that there will be a price correction or counter-trend move.

USE IN TRADING – 
The "best" or most effective use for oscillator type indicators 
is in a trading range market – again as can be seen in the SPX 
chart above. During the period when the Index was in trading 
range, it was quite profitable to buy calls when the RSI was in 
the 30-35 range and to buy puts when the RSI was at or near 65. 

However, I never use the RSI, Stochastics or MACD momentum 
indictors ALONE in making a trading decision. But as soon as 
there are signs of other aspects in the chart pattern like a key 
reversal, a double bottom/top, or a trendline that is broken, the 
overbought or oversold indicator gives some definite added weight 
to taking that trade.  

The SECOND major use and value of the RSI is when there is a 
price/oscillator bullish or bearish DIVERGENCE – 

This was also seen above in the SPX chart and in the OEX chart 
below as, in the past few weeks, the price trend continued higher 
while the RSI was trending lower on balance.  Now, it can take a 
LONG time for this divergence to manifest in a sharp reversal – but 
such a sharp reversal does most often eventually come with this 
kind of divergence.  

In the above chart of the recent action in the S&P, you might 
well have stayed long S&P calls (e.g., OEX) but were on high 
alert for patterns (e.g., the rising wedge) or OTHER indicators 
that were saying that the existing trend was going to change – 
when there are 3-4, or 5 times when my Call-Put indicator gets to 
2 or above (CBOE total equity call volume at least TWICE put 
volume), a bull trend is about to fail given this much and 
prolonged bullishness. 

I'm sure many of you have discovered that it can pay to go 
AGAINST the prevailing market view – but not indiscriminately.  
The market is not that simple! There are times when the majority 
view prevails for a long period, hence the saying that the "trend 
is your friend".  

I tend to use to the RSI most in spotting potential divergences as 
it tends to highlight them most often.  This has to do with it 
being a ratio of down closes to up closes and to being a single 
reading and single point or plot.  However, sometimes the 
Stochastics model highlights a bullish or bearish divergence quite 
well also.  

A bullish Price/RSI divergence is just the opposite of the above 
example and is highlighted in the S&P 100 (OEX) chart here – 


 

This bullish price/RSI divergence preceded a rally that came very 
soon thereafter the divergence set up and this is more typical than 
the most recent bearish divergence that went on for weeks before 
prices broke sharply.  Of course it remains to be seen if this 
recent correction will develop into the more prolonged correction I 
would anticipated from the prolonged time that that the index 
rallied without much of a correction.  Stay tuned on that! 


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

A Light At The End Of The Tunnel?  Perhaps

By Mike Parnos

It's time to put our hypothetical toe back into the hypothetical 
water.  It seems like the market is pausing -- perhaps a little 
indecisive on its direction.  That's what we want -- a market that 
is unsure of direction.  For our non-directional strategies, we'd 
like nothing more than the S&P to go up twenty-points, then down 
thirty points, then up ten points, then down ten points.  In other 
words -- it goes nowhere and remains in our established trading 
range.   Perhaps there's a light at the end of the tunnel -- or, 
perhaps it's the light of a train coming right at us.   Time will 
tell, but we'll be ready for both.

When I come up with these positions every month, I'm often asked 
"How is it you always think you're right?"  Well, of course I'm not 
going to be right all the time, but I find it hart to operate under 
the opposite assumption.

Before you put on a new position is when you are thinking most 
logically.  It's your opportunity to think.  Yes, think!  It's what 
separates humans from other species and CPTI students from 
directional traders.  You have the information at your fingertips.  
You study it.  You absorb it, interpret it and then act on it.  The 
minute you put on the position is the minute your emotions take 
over.  It's the battle of those little voices on your shoulder.  
There's a fine line between having the self-discipline to pull the 
trigger at the appropriate time -- when to FWI and when not to FWI.  
___________________________________________________________

February Position #1 - SPX Iron Condor - 
Sell 10 SPX Feb. 1255 calls
Buy 10 SPX Feb. 1265 calls
Credit of about: $.50 ($500)

Sell 10 SPX Feb. 1140 puts
Buy 10 SPX Feb. 1130 puts
Credit of about: $1.00 ($1,000)

Total net credit of about $1.50 ($1,500).  Maintenance of $10,000.  
We've created a maximum profit range of 1140 to 1255 -- that's 115 
points.  If everything works out as planned, our return on risk 
will be 17.6%.  We're still conservative and defensive minded.  
That's why we're limiting our spread size to 10 points or less.  
_________________________________________________________

February Position #2 - OEX Bull Put Spread - 567.54
Sell 15 OEX Feb 530 put
Buy 15 OEX Feb 520 put
Credit of about: $.50 ($750)

Net credit and potential profit of $750.  Maintenance of $15,000.  
We're going to be content to put on the bull put spread for now.  
If/when the time is right, we'll put on the bear call spread to 
complete the Iron Condor.
__________________________________________________________

Bid/Ask Spreads
The above hypothetical positions are based on Thursday's closing 
prices.  A portion of the premiums on some of the positions are 
based on the successful negotiation between the bid and ask of each 
option.  Since we're dealing mostly with the SPX and OEX, here's a 
ballpark idea of what you can hope to get in your bid/ask 
negotiations.  It will vary, but consider these just a guideline.  
If your orders don't get filled, you may have to adjust your 
figures down.  But, it's a place to start.

Bid / Ask	     Negotiation Discount
$.30                     $.10
$.40                     $.15
$.50                     $.20
$.60                     $.20-.25
$.70                     $.25-.30
$.75                     $.30
$.80                     $.30
$.90                     $.35-.40
$1.00                    $.40
$1.20                    $.50

Also, remember that when options are trading above $3.00, they will 
only trade in $.10 increments.  Options below $3.00 will trade in 
$.05 increments.  
___________________________________________________________

January Position Status
The market came down a bit in the last week, but we're still in 
great shape.  Roughly two weeks to go and there are comfortable 
cushions in all of our positions.  The "sure thing" position might 
get a little exciting, but sooner or later, we're going to be 
right, right?
_________________________________________________________________

JANUARY CPTI POSITIONS:
January CPTI Position #1 - SPX Iron Condor (Part 1) - 1187.89
We sold 20 January SPX 1125 puts and bought 20 January SPX 1110 
puts for a credit of about $.50 ($1,000).  Profit potential $1,000.  
Maintenance: $30,000.  I know I said I prefer not to use anything 
larger than five or ten-point spreads, but this is almost 80 points 
out of the money that I'm going to make an exception.  This seems 
incredibly safe, but then we thought that before, didn't we?

January CPTI Position #2 - SPX Sure Thing Credit Spread - 1187.89
We're still in an up-trend and we might as well try to take 
advantage of it.  Our "sure thing" spread worked to perfection for 
the December cycle.  So, until the market tells us otherwise, we're 
going to continue with the strategy.  Again, remember that this 
strategy is for only those who have a lot of maintenance dollars 
available, because you may need them.  Eventually, we'll be right, 
but you may need that staying power (money, financial Viagra). You 
have to be able to withstand being whipsawed back and forth.

In last Thursday's column I suggested initiating the "hypothetical" 
position by placing the January 1195/1170 bull put spread for a 
credit of $6.30.  However, on Friday, the SPX headed down in the 
morning.   When it leveled out, we put on a two contract SPX 
1190/1165 bull put spread instead and we were able to take in 
$$6.80 ($1,360).

We are still mildly bullish for the next month, but we couldn't 
pass up an opportunity to lower our short strike to 1090 -- plus 
get a little more premium.  Maintenance (initially): $5,000.

January CPTI Position #3 - MSH Iron Condor (Part 1) - 481.58
This is the Morgan Stanley High Tech Index.  We haven't traded it 
before, so now is as good a time as any.  Maybe it will turn out to 
be a usable replacement for the RUT.  We're going to continue to be 
conservative.
We sold 15 MSH January 450 puts and bought 15 MSH January 440 puts 
for a credit and potential profit of about $.55 ($825). 
Maintenance: $15,000.

January CPTI Position #4 -- SPX Iron Condor  (Part 1) - 1187.89
Put on weeks ago -- and a wise choice it was (so far).  I've become 
very conservative -- even more so after our unpleasant experience 
in the November cycle.  I saw an opportunity to put some serious 
distance between a bull put spread and where the SPX was trading.   
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 (now over 100 points) 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
____________________________________________________________
ONGOING POSITIONS
QQQ ITM Strangle - Ongoing Long Term -- $38.34
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.  
We rolled out the Dec. $34 calls at break even and then sold the 
January $40 puts for $.80 ($800).  Our new total premium is about 
$14,200.
ZERO-PLUS Strategy. OEX - 567.54
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 Adjustment
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).  New cash total: $11,175.
The December bull put spread expired worthless.  We put on a five 
contract OEX 545/535 bull put spread for a credit of $.70.  If all 
goes well, we can, at January expiration, add another $350 to our 
cash total.
 
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 
(even though many do). The portfolio represented here is 
hypothetical and for investment education purposes only. It is only 
an illustration of what type of gains a knowledgeable trader might 
receive utilizing these strategies.  If you don't get close to 
these results, it ain't the fault of the strategies.

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