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Daily Newsletter, Thursday, 01/13/2005

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The Option Investor Newsletter                Thursday 01-13-2005
Copyright 2005, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Not A Pretty Picture
Futures Wrap: See Note
Index Wrap: Oil jitters keeps buyers at bay
Market Sentiment: Earnings Jitters


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      01-13-2005           High     Low     Volume   Adv/Dcl
DJIA    10505.83 +112.00 10618.15 10486.17 1.87 bln 1481/1737
NASDAQ   2070.56 - 22.00  2094.80  2068.27 2.15 bln 1167/1926
S&P 100   561.56 -  5.75   567.31   560.47   Totals 2648/3663
S&P 500  1177.45 - 10.25  1187.70  1175.80 
SOX       396.17 -  5.70   401.79   395.87
RUS 2000  610.13 -  3.06   616.57   609.06
DJ TRANS 3533.57 - 53.60  3591.89  3532.15
VIX        12.84 +  0.28    12.86    12.37
VXO (VIX-O)13.07 +  0.28    13.42    12.59
VXN        19.09 -  0.19    19.45    18.81  
Total Volume 4,242M
Total UpVol  1,407M
Total DnVol  2,713M
Total Adv  3058
Total Dcl  4163
52wk Highs  169
52wk Lows    57
TRIN       1.39
NAZTRIN    1.12
PUT/CALL   0.93
************************************************************

Not A Pretty Picture
by Jim Brown

After a rebound on Thursday and a positive open thanks to
Apple earnings the markets lost momentum early and began 
to slip. As the day progressed oil prices greased the skids
and the closing drop was anything but bullish. Time to take
a hard look at the future for January. 

Economically there are warning clouds on the horizon. The 
Jobless Claims rose again to 367,000 for the week and the
highest level in three months. The Labor Dept was at a 
loss for the reason and did not try to explain it away 
as a seasonal adjustment problem. This was +27,000 above
the consensus estimate of 340K and it pushed the four
week average to 344,000. This was also a new cycle high.
This is not a good sign for the economy but it is too
soon to tell if this is just post holiday terminations
of peak employees or the start of a new trend. 

Import Prices fell much stronger than expected at -1.3%
pulled down mostly by falling oil prices in December. Oil
prices fell -11.5% but that drop is rapidly evaporating 
as oil moves higher in January. Excluding energy, import
prices rose only +0.5%. Export prices rose only +0.2%.
These numbers will reverse if oil continues its climb.

The Retail Sales for December (MARTS) jumped +1.2% led
by strong sales in autos. Without those year end specials
on cars/trucks that were designed to blowout old models
the gains would have only been +0.3%. There are so many
different retail sales reports and conflicting numbers
it is hard to determine the real truth. Another study
out today said holiday sales were up +5.7% for Nov/Dec
and the strongest gains since 1999. Autos, furniture 
and online sales helped ramp up the numbers. Considering
the huge support from auto sales are dependent on the
very strong year end incentives we can't expect the 
sales for Q1 to continue to post strong gains. 

The Manufacturing Alliance Survey headline number fell
from 75 to 70 and the second quarterly decline. The 
index high for this cycle came in 2004-Q2 at 80 and we
have seen a drop back to 2003 levels with this report. 
All components, shipments, new orders, order backlog and
margins fell with only inventories showing a gain. The
inventory component at 72 is now at the highest level
since 1995. This could be bad news if the inventory
gain is due to falling sales.

Perhaps the report with the most impact on the market
was the weekly natural gas storage report that showed
a drop of -88 billion cubic feet. Despite warm weather
in most of the U.S. there was enough cold climates to
overpower the distribution system and cause a significant
draw down in inventories. This caused oil prices to spike
back over $48 on speculation next weeks expected cold 
wave would cause an even further drop in supplies. In
my oil crisis report I outlined that Chesapeake Energy
said 95% of their prior gas wells were between 3-5,000
feet. In 2005 35% will be 13,500 feet or deeper. Gas
is becoming harder to find in any quantity and more
expensive to produce. The CHK CEO said a nationwide
cold snap at the same time would deplete supplies and
there would be shortages. He said if all plants were
generating at peak capacity there would not be enough
gas in the pipeline system to satisfy demand. He said
a future shortage was almost guaranteed as more electric
generation plants were built because they consume huge
amounts of gas. The U.S. is already a net importer of
natural gas. 

As oil sprinted back over $48 and a six week high the
markets began to decline. Oil traders said they were
afraid supply was going to run short again as demand
increases from the coming cold weather but bigger problems
ahead were also looming. Over the next two weeks we will
see the Presidential Inauguration, Iraq elections and
the OPEC meeting on the 30th. They expect increased supply
disruptions as the election approaches in Iraq and in the
other OPEC countries. 

There is also a concern building that the inauguration
could be a terror target. Those expressing concerns say
that we have gone far too long without an event on U.S.
soil and this would be a highly visible, hard to defend
target. I know we went through this concern period in
2004 for each of the conventions and the Olympics with
no problems. This event could be seen as an opportunity
to attack the administration directly. 

Despite all the worry above the real reason for the late
afternoon decline was attributed to a Treasury ruling
that repatriated cash could not be used for dividends
and stock buybacks. In Q4 it was reported that these
were allowed uses of the nearly $600 billion in cash
that companies were planning on bringing back into the
U.S. as a result of the 2004 Repatriation Act. That
act allows a bargain basement tax rate on any cash that
is brought back into the U.S. and used for a specific
number of job creating uses. Companies had hoped to be
able to use the money for dividends and stock buybacks. 

We also saw negativity from a surprise earnings warning
from GM. GM announced this morning that profits were going
to fall because of lower profits at its financing unit and
a $1 billion increase in healthcare costs. GM fell -1.07
on the news but the depression was felt across the entire
market. GM is the largest private provider of healthcare
in the U.S. and supports hundreds of thousands of retirees,
employees and their dependents. The rising cost of health
insurance and medical costs is not only impacting GM but
all major corporations and continues to spiral out of
control. The GM problem is just the latest in a long
line of corporate revelations. GM expects earnings to
drop to between $4-$5 a share in 2005 compared to an
estimated $6.31 for 2004. Another big hit is coming from
the financing arm which has had to eat billions in zero
percent financing over the last couple years and higher
interest rates it has to pay. GM tried to pacify investors
by restating its goal of $10 a year in earnings but now
says it could be 2007 at the earliest before that goal is
met. I am not holding my breath given the continues influx
of Asian automakers. Their market share in 2004 was the
largest ever and growing rapidly. In 2004 sales by the big
three U.S. makers fell to only 58.7% of vehicles sold and
its lowest rate ever. Asian U.S. sales grew at a double 
digit rate in 2004.   

The higher oil prices accelerated the drop in the Dow
Transports with a drop to 3533 at the close. The high for
this index was 3823 back on December 30th. This -7.6% drop
broke strong November support at 3560 and is very close to
the 38% retracement of the gains since August at 3493. This
index confirmed the Dow rally in Q4 and is now confirming
the Dow drop in 2005. For many weeks in 2004 the TRAN rose
while the Dow floundered. It was far stronger and rose
despite the record high oil prices. It was very influential
in pulling the Dow out of its doldrums in October. The
implosion over the last two weeks could be continued profit
taking from the strong run with oil prices giving it an
added push. Adding to the negativity was the warning from
UPS. The -$7 drop in UPS over the last two days has been
a major factor in the drop in the TRAN for this week. The
drop in UPS on "less than expected volume growth" should 
not be an indictment of the entire sector. FDX said business
could not have been better and affirmed estimates saying
they had a strong Q4 and favorable economic conditions ahead.
Could it be that UPS is simply losing the ground war and the
"FDX 35% cheaper than UPS" ads are winning converts? I believe
investors will find this to be the case but they are currently
throwing them all out until the outlook clears. 

Chipmaker CREE announced earnings after the bell and was
quickly slaughtered by investors. CREE lost -$7 to $27 after
warning that earnings for the current quarter will be well
below estimates. This should tank the SOX again on Friday
and makes 380 a viable target for the next big drop. The
Intel news was unable to provide more than a few minutes
of bounce before the weakness appeared again. The SOX 
closed today at 396 and just a couple points over the 
pre Intel low at 394. The SOX is proving to be the Achilles
heel for the Nasdaq and the CREE news is not going to help.

Sun Micro also announced earnings after the bell and while
it met earnings the revenue for the quarter was lighter 
than estimates. It seems a new range of products has failed
to excite buyers and shares dropped -5% in after hours. 

Bears are coming out of the forest in droves. Investors
Business Daily ran a headline today saying the "Bull Market
Rally is Over" and many believe it. The markets have been 
unable to find any traction despite hundreds of analysts 
making public statements that 2005 is going to be a great 
year in the markets. Considering they were saying we would
only see gains of +5% to +8% just a month ago that should
make you pause to ponder. TrimTabs said investors withdrew 
-$3.7B from U.S. stock funds last week and inflows this week
have only amounted to $500 mil. International funds saw an
inflow of $3.1B the prior week but saw withdrawals of -$685
million for the week ended on Wednesday. Considering TrimTabs
had forecasted inflows of $31 billion for all of January 
this is a huge estimate miss. The markets were counting on
that cash inflow to provide a cushion for new year profit 
taking and it simply did not appear. Analysts are scratching
their heads for the reason and suggesting investors want to
get past the January events before putting money back into
the market. 

Those events I mentioned before, Inauguration, Iraq elections
and OPEC are in addition to earnings. The earnings calendar
for 2005 has so far been extremely light and there has been
some very mixed results. There is currently no consensus for
Q4 as not enough companies have announced to provide a trend
of beats, hits and misses. Next week should be a defining
week for the markets. Nearly 500 companies will report and
we should have a clear picture of guidance by this time next
week. 

The trouble with that view is we have to struggle another
week to try and hold the markets above critical support or
risk a technical breakdown in addition to the current 
sentiment breakdown. The sell off this afternoon was ugly.
It was ugly because there was not any specific negative 
stock news and it followed good news from Intel and Apple. 
The Dow rebound from 10500 on Wednesday was seen as putting
a bottom in place for January and today's break back to below
10500 could be seen as negating that bottom. It clearly targets
the 38% retracement level of 10425 which is also just above
the December low of 10418. Make no mistake. This is the line
in the sand that we must not cross. A move below 10425 will
negate the bullish uptrend from October and put us right 
back in the congestion zone from all of 2004. We do NOT 
want to go there as investors chopped to pieces last year
by the range bound trading will tire of the process and 
move to the sidelines. 

Dow Chart – Daily

  
Dow Chart – Weekly

 


The Nasdaq is on the verge of a nasty decline as well. The
Nasdaq has one more level of weak support at 2050 and the
38% retracement level at 2022. I believe if 2050 breaks we
could retrace all the way to 1900. It is too soon to predict
that breakage but it will be a critical test. Over the last
two days the Nasdaq has broken the uptrend support from August
and the 25% retracement level at 2080. Given the good news
from Intel and Apple this is not an inspiring performance.
Friday will be a pivotal day with the CREE earnings and the
potential continuation of today's downdraft. The 2080 support
level was also the resistance dating back to Jan-2002. Now
that we are back below this resistance it should grow in
strength again. 

Nasdaq Chart – Daily

 
Nasdaq Chart – Weekly

 

The S&P is clinging to support at 1178 and right at the 1175
level I am using as a market sentiment indicator. 1175 was 
the low back in December and has been tested twice this week.
This is a very critical test for market sentiment and the
outlook tonight is not good. We could have been the victim
of a large sell program at the close but I believe the 
problem is deeper than that. I mentioned above that money
flows have been almost zero and in extreme contradiction
to recent norms and predictions. This could be a change in
sentiment that will develop into a new leg down. 
 
SPX Chart – Daily

 


The SOX could be our leading indicator for the health of the
tech sector. Analysts are telling us that the rebound in chip
demand has ended for this cycle and 2005 will be a year of
rebuilding, retooling and waiting for the next wave of demand
to develop from new applications. The SOX has broken 400 and
is just above the uptrend support from the 2002 bottom. If the
SOX can hold this support around 380 then techs have a chance
for a rebound from a higher low. If this support breaks along
with the 2004 support low at 360 then techs are in for a very
bearish year. 

SOX Chart – Daily

 
SOX Chart – Weekly

 


For Friday I don't have a very positive outlook. We are
right on the edge of switching from a bull market to a
bear market in my bias and SPX 1175 must hold along with
Dow 10425. Should either break slightly we could still 
see an end of January rally but I believe the window of
opportunity has passed. Funds are faced now with an outlook 
of protecting prior profits rather than expecting new profits
in 2005. Those that held on while others took profits last
week are facing a new leg down that could be steep and they
could be worrying about protecting their remaining holdings
from the bears. A break of 1175/10425 could be the trigger
that sends everyone to the opposite side of the boat and 
begins a sharper downdraft as the boat capsizes. I hope 
this does not happen but we can't build our future on
bullish hopes if there is nothing bullish in the market.
So far the January market has been anything but normal and
this has to be sending shivers through many money managers
as they watched today's drop. Remember my recommendation 
from Tuesday. I am not a buyer under 1175, I would either
be flat or short. Tomorrow is a critical day. There are
many possible scenarios and we could still go either way
but I would be very cautious of any bounce unless it 
contains high volume and a very strong advance/decline 
line.

Enter Passively, Exit Aggressively!

Jim Brown
Editor

"The trouble with stretching the truth is that
it is liable to snap back."


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

Oil jitters keeps buyers at bay

The major averages finished near their lows of the session where 
upbeat earnings from Apple Computer (NASDAQ:AAPL) $69.80 +6.63% 
couldn't offset the recent rise in crude oil prices, as traders' 
nerves were tested by short-term production snags in the North 
Sea, expectations of colder U.S. weather and concerns about 
further OPEC production cuts and the coming election in Iraq.

February Crude Oil futures (cl05g) settled higher by $1.67, or 
3.60% at $48.04, it highest settlement since November 30.

Safe haven buying had today's yield curve flattening.  Treasuries 
found a strong round of buying among the major maturities with 
the benchmark 10-year yield ($TNX.X) falling 4.9 basis points to 
4.187%

The U.S. Dollar Index (dx00y) 82.44 +0.36% had the dollar 
recouping some of yesterday's steep declines after wider-than-
expected trade gap figures sent the dollar tumbling on Wednesday.  

February Crude Oil Futures (cl05g) Chart - Daily Intervals

 

February Crude looks destined for the $49.29-$50.27 area, and for 
that to take place, traders would be well advised to set a near-
term upside alert at this contract's WEEKLY R1 of $48.55.

It is still a bit perplexing to this analyst as to why the Oil 
Index (OIX.X) 399.61 +0.50% lags the commodity, and why some of 
the producers have been cutting their cap-ex budgets with oil 
prices still above $40.00.

One explanation may be the thoughts of Andrew Lebow, a senior 
vice-president at Man Financial Inc., who recently told the 
Canadian Press that he thought there is still somewhere between 
$10 and $15 a barrel worth of "fear premium" in the oil commodity 
market, which should be removed by the end of the month, 
following the Iraq election and the next meeting of OPEC.

The OIX.X remains an index I feel traders and investors should 
bee keeping an eye on, where similar lag in this equity index to 
the commodity itself, is as suspicious as the Gold Bugs Index 
($HUI.X) showed versus gold prices in November.  When gold stocks 
tumbled, gold followed not long after.

With this exercise, I'm looking for the OIX.X to "tell us" if the 
rise in oil prices is going to be sustainable (Mr. Lebow might be 
doing this too), or is oil's rise simply being caused by trader's 
looking to hedge some risk into Iraq's elections.

Earlier this month I showed a chart of the OIX.X with just one 
retracement, where we discussed the possibility that a head and 
shoulder top could be forming with a neckline at 385.50.  

Tonight, I'm going to show that same chart, but I'm also adding a 
BLUE retracement, which is anchored at an inflection low found in 
August (to tie into above futures) and then an inflection high 
found in October (to tie into above futures), which the OIX.X 
then exceeded in early December.  I am also showing a downward 
trend on the OIX, from its October relative high (to tie to above 
futures) and a December relative high (to tie to above futures).

Oil Index (OIX.X) Chart - Daily Intervals

 

The OIX.X appears to be lagging the commodity itself, and this is 
a point of suspicion to me (Jeff Bailey) after the OIX.X exceeded 
the October highs for oil futures in late November, when the 
OIX.X went on to trade 417.

Since January 1, there has been what I would consider to be a 
"general distaste for equities" and that by itself may explain 
why the OIX.X appears to be lagging oil futures (the commodity).  

However, the OIX.X's "lag" could also be sign that broader MARKET 
participants think oil's recent rise is only temporary, and is a 
defensive play into the Iraq elections.

My thoughts are this.  If the OIX.X get above 405, then not only 
could we see a short-squeeze in some oil-related stocks as upside 
risk is immediately assessed to at least 411, but could also be a 
beginning to confirm thought that oil itself, did NOT trade all-
time highs in October of last year.

U.S. Market Watch - 01/13/05 Close

 

Outside of the Dow Industrials (INDU) 10,506 -1.05%, which never 
did see green today (for reasons possibly revealed last night) 
things didn't look as bearish at 03:00 PM as they do by the 
close.

Bids (buyers) simply evaporated, and I mean evaporated at 03:00 
PM EST when the bond market closed.  Look at the Russell 2000 
Index ($RUT.X) 610.13 -0.49%.  It traded its session high at 
02:30 PM EST, had "eased back" to 614.00 at 03:00 PM EST, then 
simply fell apart.  Any encouragement for a bull would be that 
the RUT.X didn't violate yesterday's low of 604.64.  I will note 
here that 606.41, which was traded to the downside yesterday, was 
April's high.

Market Snapshot / Internals - 

 

I didn't like the flattening curve today.  Fellow analyst Jane 
Fox had noted earlier in the day that while stocks were trying to 
hold near unchanged, the rising TRIN indications had her thinking 
something was up, or eventually down as the case would be.

Filed away in my memory bank today is that the 5-day NH/NL ratios 
for both the NYSE and NASDAQ show improvement.  For the NYSE, 
today is the second day.  For the NASDAQ, it is the first.  No 
reason for a bull to act on this, just file it away, there's 
probably plenty of time to initiate a new bullish trade.  

Think of these VERY EARLY SIGNS of some type of resumption of 
short-term bullish leadership in relation to the prior discussion 
above regarding OIL.

I don't know if you may have caught an interview late this 
afternoon on CNBC, but Maria Bartiromo was interviewing Commerce 
Bancorp's Vernon Hill.  The banks/financials were lagging again 
today and when asked about higher rates of interest, Mr. Hill 
quickly brought in the yield curve.  While still steep, Mr. Hill 
immediately noted that he would prefer the yield curve to not be 
as flat as it has become lately, as that can squeeze margins.  
While Mr. Hill said strong business trends can offset the 
flattening of the yield curve, the best of both worlds is strong 
business trends and steepening of the curve.

Pivot Matrix -

 

I'll note tomorrow's DAILY S2 for the DIA as being $104.00, then 
remember that suspicious option trade noted in last night's wrap.

To get there, I'm thinking correlative SPX S1 and DAILY S1 would 
need to be violated to the downside.

To do that, then perhaps further flattening of the curve, with 
the 10-year yield ($TNX.X) falling below its correlative DAILY S1 
and WEEKLY Pivot.

For strength?  How about the QQQQ/NDX?  The QQQQ gets a "tweezer 
bottom" with today's low matching that of yesterday.  

The "sucker move" a bear need to be careful of is a break below 
$38.00, steepening curve, and TRIN moving LOWER, with first sign 
of the "sucker move" being a sudden snap back above the tentative 
(dashed red) MONTHLY S2/DAILY Pivot correlations.

Jeff Bailey

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

Earnings Jitters
- J. Brown

Another round of high-profile earnings warnings from the likes of 
Verizon Communications (VZ) and General Motors (GM), both Dow-
components, was enough to sink the markets yet again.  
Homebuilders may be doing well and Apple Computer is knocking the 
ball out of the park but overall the market remains defensive.  
Or if you believe some of the market pundits out there this is 
just a partial retracement of the super strong fourth quarter.

Whatever the case investors aren't finding many reasons to be 
bullish.  The headline earnings news has been disappointing and 
there remains an under current of worry about interest rates, oil 
and to a lesser extent the Iraqi elections coming up.  Market 
internals continue to favor the bears as well.  

The real deluge of earnings news doesn't hit until next week so 
it's possible that money continues to sit on the sidelines as we 
wait for the first big week of corporate announcements.  One 
thing is for sure - this is one January where the "effect" on the 
smallcaps has been nonexistent.  


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

Market Averages

DJIA ($INDU)

52-week High: 10868
52-week Low :  9708
Current     : 10505

Moving Averages:
(Simple)

 10-dma: 10626
 50-dma: 10577 
200-dma: 10278 



S&P 500 ($SPX)

52-week High: 1217
52-week Low : 1060
Current     : 1177

Moving Averages:
(Simple)

 10-dma: 1189
 50-dma: 1187
200-dma: 1132



Nasdaq-100 ($NDX)

52-week High: 1635
52-week Low : 1301
Current     : 1545

Moving Averages:
(Simple)

 10-dma: 1571
 50-dma: 1580
200-dma: 1466 



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

CBOE Market Volatility Index (VIX) = 12.84 +0.28	
CBOE Mkt Volatility old VIX  (VXO) = 13.07 +0.28
Nasdaq Volatility Index (VXN)      = 19.09 -0.19 


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.90        893,271       799,634
Equity Only    0.68        711,982       484,745
OEX            0.68         43,216        29,649
QQQQ           2.44         20,168        49,245


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

Bullish Percent Data

           Current   Change   Status
NYSE          73.1    - 0.6   Bear Correction
NASDAQ-100    73.0    - 1     Bull Correction***
Dow Indust.   73.3    + 0     Bull Confirmed
S&P 500       74.4    - 0.4   Bull Confirmed
S&P 100       76.0    + 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: 1.27
10-dma: 1.34 
21-dma: 1.11
55-dma: 1.02


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    1244      1079
Decliners    1563      1925

New Highs      69        52
New Lows       19        39

Up Volume    651M      670M
Down Vol.   1179M     1342M

Total Vol.  1852M     2100M
M = millions


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

Commitments Of Traders Report: 01/04/05


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

Not much change in the large S&P futures contracts.  
Professionals remain net bearish and small traders remain
net bullish.


Commercials   Long      Short      Net     % Of OI
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%)
01/04/05      456,255   505,042   (48,787)   (5.0%)

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
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%
01/04/05      159,197   111,900    47,297    17.4%

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 have increased their bearish bias
just as small traders have increased their bullish bias.


Commercials   Long      Short      Net     % Of OI 
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%)
01/04/05      302,339   620,759   (318,420)  (34.5%)

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
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%
01/04/05      279,274     71,151   208,123    59.4%

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


NASDAQ-100

Commercial traders have turned significantly more bearish
on the NDX just as the small traders has turned sharply 
more bullish.

Commercials   Long      Short      Net     % of OI 
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%)
01/04/05       27,226     44,600   (17,374) (24.1%)

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
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%
01/04/05       22,227     8,293    13,934    45.6%

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 are increasing their bearish bias on
the Dow Industrials but small traders have jumped ahead
in their bearish attitude for the index.


Commercials   Long      Short      Net     % of OI
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%)
01/04/05       24,704    32,916   (8,212)    (14.2%)
 
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
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%)
01/04/05        5,166     7,596   (2,430)   (19.0%)

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 01-13-2005
Copyright 2005, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: None
Call Play Updates: AET, ARLP, AMGN, BBOX, COF, FRE, FRO, PD, RAI, 
                   TXI
New Calls Plays: KBH
Put Play Updates: ADBE, CAI, FDX, NTES
New Put Plays: ZMH


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

None


PUTS:
*****

None


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

Aetna Inc - AET - close: 128.17 change: +1.88 stop: 119.99

Trigger alert!  We did not have to wait long for AET to breakout 
over resistance at $127.50 and hit our trigger to go long/buy 
calls at $127.61.  Shares started the session with a pop and 
closed at a new all-time high.  Technicals still look good and 
its MACD is closer to a new buy signal.  We would consider longs 
at current levels.  

Picked on January 13 at $127.61
Change since picked:     + 0.56
Earnings Date          02/10/05 (confirmed)
Average Daily Volume =      2.2 million  
Chart =


---

Alliance Resource - ARLP - close: 71.13 chg: +0.53 stop: 66.49

The rebound in ARLP has paused a bit the last couple of sessions 
but the stock continues to look poised to trend higher.  There 
was some steady selling at the $71.00 mark recently but it 
appears that the stock has worked through that overhead supply.  
Readers can go long at current levels or look for another dip 
toward $70 as an entry point.  

Picked on January 10 at $ 69.80
Change since picked:     + 1.33
Earnings Date          10/28/04 (confirmed)
Average Daily Volume =      115 thousand 
Chart =


---

Amgen Inc - AMGN - close: 63.89 change: -0.98 stop: 62.00

Trigger alert!  We have been triggered in our short-term 
aggressive AMGN play.  Shares darted to $65.24 this morning, 
which was more than enough to hit our trigger to go long at 
$65.05 over resistance at the $65.00 mark.  Unfortunately, AMGN 
could not hold these gains and the whole move looks like a short-
term failed rally.  We would be cautious here.  Readers looking 
for new bullish positions can wait for AMGN to trade over $65.25.  

Picked on January 13 at $ 65.05
Change since picked:     - 1.16
Earnings Date          01/26/05 (confirmed)
Average Daily Volume =      7.3 million  
Chart =


---

Black Box - BBOX - close: 45.48 change: -0.87 stop: 44.99      

Once again we're faced with the prospect of BBOX breaking down 
under support at the $45.00 level.  On Tuesday we suggested that 
conservative traders exit to minimize any losses and we're going 
to make the same suggestion today.  The NWX networking index 
doesn't look healthy and BBOX produced a bearish engulfing 
candlestick today.  Together we would expect BBOX to continue to 
decline but we're going to hold out for one more day to see if 
BBOX can show some strength and rebound. 

Picked on December 22 at $ 46.15 
Change since picked:      - 0.67
Earnings Date           02/01/05 (confirmed)
Average Daily Volume =       128 thousand
Chart =


---

Capital One Financial - COF - cls: 82.04 chg: -0.43 stop: 79.95      

Banking stocks got spanked today with one-percent declines in 
both the BIX and BKX indices.  We're encouraged to see that COF 
out performed its peers but the sector looks to be in trouble.  
Furthermore we need to keep an eye on COF's upcoming Jan. 19th 
earnings report.  We are not suggesting new bullish positions at 
this time especially with COF still stuck in this $81-83 trading 
range.  

Picked on December 12 at $ 81.12
Change since picked:      + 0.92
Earnings Date           01/19/05 (confirmed)
Average Daily Volume =       1.4 million  
Chart =


---

Freddie Mac - FRE - close: 70.11 chg: -0.51 close: 69.49     

No surprises here.  We expected FRE to pull back to the $70 level 
and that's exactly what it did.  Now we just need to see shares 
bounce from what should be round-number, psychological support.  
Fortunately, the $70 level is also underpinned by the 40-dma and 
the 50-dma near $69.60.  We are not suggesting new bullish plays 
at this time although more aggressive traders may want to 
consider a bounce back over the $71 mark.

Picked on December 21 at $ 71.80
Change since picked:      - 1.69
Earnings Date           00/00/05 (unconfirmed)
Average Daily Volume =       2.8 million  
Chart =


---

Frontline Ltd - FRO - close: 47.69 chg: +1.63 stop: 42.49

Right on target.  Shares of FRO added 3.5 percent on above 
average volume just as crude oil prices surge to new relative 
highs.  Readers can choose to go long at current levels in FRO or 
hope for a pull back toward $45.50 as a potential entry point.  

Picked on January 12 at $ 46.06
Change since picked:     + 1.63
Earnings Date          02/00/05 (unconfirmed)
Average Daily Volume =      1.1 million  
Chart =


---

Phelps Dodge - PD - close: 100.65 change: +2.54 stop: 92.00

Traders must have been turning defensive as copper-producer PD 
out performed the markets as the major indices turned lower.  The 
2.5 percent rally on above average volume produced a new MACD buy 
signal and shares look poised to breakout over the $102 mark.  
Readers can go long at current levels or choose a dip towards $98 
or a breakout over $102 as an entry point.  

Picked on January 09 at $ 97.65
Change since picked:     + 3.00
Earnings Date          01/27/05 (unconfirmed)
Average Daily Volume =      2.2 million  
Chart =


---

Reynolds American - RAI - close: 78.92 change: +0.68 stop: 75.99

RAI turned in a strong session adding +0.8 percent versus the 
market's widespread decline.  We remain bullish on the stock but 
readers looking for an entry point may want to wait for a move 
over $80.00.  Don't forget to keep an eye out for RAI's earnings 
report, currently expected on or around Jan. 24th. We do not want 
to hold over the announcement. 

Picked on December 22 at $ 80.11
Change since picked:      - 1.19
Earnings Date           01/24/05 (unconfirmed)
Average Daily Volume =       1.0 million  
Chart =


---

Texas Industries - TXI - close: 61.90 change: +0.50 stop: 58.00

The up trend continues for TXI and we're encouraged by the 
stock's relative strength during Thursday's market pull back.  
Don't forget that our short-term target is only the $65 level so 
readers may want to watch for another dip towards $60-61 as a new 
entry point.  More aggressive players may want to hold on and see 
if shares of TXI can breakout over $65.  

Picked on January 09 at $ 60.18
Change since picked:     + 1.72
Earnings Date          12/16/04 (confirmed)
Average Daily Volume =      238 thousand 
Chart =



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

KB Home - KBH - close: 106.00 change: +2.51 stop: 99.50

Company Description:
Building homes for nearly half a century, KB Home is one of 
America's premier homebuilders with domestic operating divisions 
in some of the fastest-growing regions and states: West Coast-
California; Southwest-Arizona, Nevada and New Mexico; Central-
Colorado, Illinois, Indiana and Texas; and Southeast-Florida, 
Georgia, North Carolina and South Carolina. Kaufman & Broad S.A., 
the Company's majority-owned subsidiary, is one of the largest 
homebuilders in France. In fiscal 2004, the Company delivered 
homes to 31,646 families in the United States and France. It also 
operates a full-service mortgage company for the convenience of 
its buyers. Founded in 1957, and winner of the 2004 American 
Business Award for Best Overall Company
(source: company press release)

Why We Like It:
We have had our eye on the homebuilders again recently and KBH 
has made it to our nightly watch list as a potential candidate 
multiple times.  Fundamentally business is great and KBH 
reporting record profits.  The company was recently added to the 
Forbes 2005 list of "Supercharged" companies.  Technically the 
stock is turning bullish again as well.  Granted the stock price 
looks a little extended from its Q4 run up shares have actually 
been consolidating in a bull-flag pattern the last few weeks.  
We've been looking for a breakout above the $105 level and its 
short-term trend of lower highs and that breakout occurred today 
with volume about double the norm.  The bull-flag pattern 
suggests a $125-130 price target but it's worth noting that the 
P&F chart, while bullish, only points to a $107 target.  
Fortunately the DJUSHB sector index is also in break out mode 
hitting a new all-time high today.  We're going to suggest an 
aggressive bullish entry point at current levels with a $115-120 
target over the next four to six weeks.  

Suggested Options:
We are going to suggest the April calls.

BUY CALL APR 100 KBH-DT OI= 958 current ask $11.40
BUY CALL APR 110 KBH-DU OI= 441 current ask $ 6.00
BUY CALL APR 115 KBH-DC OI= 418 current ask $ 4.10

Annotated Chart:


Picked on January 13 at $106.00
Change since picked:     + 0.00
Earnings Date          03/17/05 (unconfirmed)
Average Daily Volume =      1.1 million  
Chart =




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

Adobe Systems - ADBE - close: 58.22 change: -0.76 stop: 61.01*new*    

The battle between ADBE's bulls and the bears is taking place 
between $57.70 and the $59.50 region.  Fortunately, the short-
term trend is still one of lower highs, which is bearish.  Our 
short-term target remains the $55 region so a failed rally under 
$60 (like today) could be a new entry point.  We are going to 
lower our stop loss to $61.01. 

Picked on January 06 at $ 58.99
Change since picked:     - 0.77
Earnings Date          03/17/05 (unconfirmed)
Average Daily Volume =      2.3 million 
Chart =


---

CACI Intl - CAI - close: 59.30 change: -0.64 stop: 63.01*new*

Good news for CAI bears.  A.G.Edwards upgraded the stock to a 
"buy" this morning but the resulting rally in CAI's stock price 
failed at the simple 10-dma.  Shares consolidated lower through 
most of the session and then crashed lower in the last couple of 
hours.  The close under the $60 mark makes this failed rally look 
like a new bearish entry point.  We are lowering our stop loss to 
$63.01.  

Picked on January 05 at $ 61.95
Change since picked:     - 1.34
Earnings Date          01/19/05 (unconfirmed)
Average Daily Volume =      348 thousand
Chart =


---

Fedex Corp - FDX - close: 93.76 change: -0.71 stop: 96.01     

We're seeing lots of movement in the transportation sector.  The 
Dow Transports index fell again for the second day in a row and 
has closed under the 3600 and 3550 levels, both potential levels 
of support.  The TRAN's next stop could be the 100-dma. Meanwhile 
FDX produced a small failed rally of its own at $95.34.  We've 
been targeting FDX's 100-dma so we need to adjust our exit to 
$91.15-91.25.  If FDX trades into that range we'll close the 
play.  Be sure to keep an eye on UPS, which slipped to its 200-
dma and could produce an oversold bounce. 

Picked on January 07 at $ 94.95
Change since picked:     + 0.46
Earnings Date          03/17/05 (unconfirmed)
Average Daily Volume =      1.6 million 
Chart =


---

Netease.com - NTES - close: 50.85 chg: +0.85 stop: 52.65

Hmm... we're not sure how to interpret the recent action in NTES.  
The 1.7 percent rally versus a 1.6 percent sell-off in the INX 
Internet index is not the sort of relative strength we want to 
see in a put candidate.  Shares of NTES did fail at the $51.66 
level near its 50-dma but the close over the $50 mark is 
discouraging.  We would be somewhat cautious here.  The INX index 
and HHH holders continue to look vulnerable to we expect that 
NTES will likely fall in line soon enough.  A move back under 
$50.00 could be used as a new entry point.  

Picked on January 11 at $ 49.97
Change since picked:     + 0.88
Earnings Date          02/15/05 (unconfirmed)
Average Daily Volume =      1.0 million 
Chart =



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

Zimmer Holdings - ZMH - close: 77.16 chg: -2.53 stop: 80.26

Company Description:
Founded in 1927 and headquartered in Warsaw, Indiana, Zimmer is 
the worldwide #1 pure-play orthopaedic leader in the design, 
development, manufacture and marketing of reconstructive and 
spinal implants, trauma and related orthopaedic surgical 
products. In October 2003, the Company finalized its acquisition 
of Centerpulse AG, a Switzerland-based orthopaedics company and 
the leader in the European reconstructive market. The new Zimmer 
has operations in more than 24 countries around the world and 
sells products in more than 80 countries.
(source: company press release)

Why We Like It:
We like ZMH for its technical breakdown on multiple levels.  The 
stock has been suffering under a trend of lower highs for the 
last four weeks.  That consolidation gave way today with a three-
percent decline on volume that was more than twice the average.  
The breakdown under $79 and its 200-dma and 100-dma's looks like 
a bearish entry point.  Not helping matters is the new MACD sell 
signal on its weekly chart and the new sell signal on its P&F 
chart.  The daily chart suggests we could target a drop towards 
the $70 region but the P&F chart shows support near $72.  We're 
going to follow the P&F chart and plan to exit near $72 for a 
quick $5 decline.  The challenge here is that ZMH is due to 
report earnings at the end of January and we do not want to hold 
over the event.  

Suggested Options:
This is a short-term play so we're only suggesting the February
puts.

BUY PUT FEB 80 ZMH-NP OI= 154 current ask $4.60
BUY PUT FEB 75 ZMH-NO OI=1550 current ask $2.15

Annotated Chart:


Picked on January 13 at $ 77.16
Change since picked:     - 0.00
Earnings Date          01/31/05 (unconfirmed)
Average Daily Volume =      1.6 million  
Chart =




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**********

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The Option Investor Newsletter                 Thursday 01-13-2005
Copyright 2005, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: A few big board stocks
Traders Corner: Telling a Top: "Key" and other short-term reversals
Combos/Straddles: A Little Late Day Action, But Why?

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

A few big board stocks

___________________________________________________________________

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.
___________________________________________________________________


Illinois Tool Works - ITW - close: 90.25 change: -0.77

WHAT TO WATCH: The slow, painful drift lower in shares of ITW has 
finally hit round-number, psychological support at the $90.00 
mark.  Coincidentally it also happens to be the rising trendline 
of long-term support dating back to early 2003.  A breakdown here 
would be very bad indeed.  We would consider bearish positions 
under $89.50 and maybe bullish positions on a bounce over $92.  

Chart=


---

Amerada Hess - AHC - close: 82.60 change: +1.18

WHAT TO WATCH: The rally in oil prices today helped fuel a decent 
1.75 percent jump in the OSX oil services index.  AHC did almost 
as well with a 1.44 percent gain.  We like how AHC is bouncing 
from a test of support near $78 and its 200-dma.  Technicals are 
improving and its MACD just produced a new buy signal today.  We 
might consider aggressive bullish plays on a move over $84 with a 
$90 target. 

Chart=


---

General Motors - GM - close: 37.32 change: -1.07

WHAT TO WATCH: GM was the source of the market's weakness this 
afternoon when the car giant issued an earnings warning.  Shares 
plummeted into the close on very heavy volume.  This breakdown 
under support at the $38 mark puts GM right back in its long-term 
downtrend.  The bottom of this channel is somewhere in the $30 
region.  Patient traders might consider bearish positions and see 
how far GM can sink but take note that the P&F chart only points 
to a $35 target.

Chart=



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

EBAY $103.21 -4.04 - Ouch!  EBAY announced price hikes for some 
of its services but traders still sold the news.  Watch to see if 
shares break or bounce at $100.


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

Telling a Top: "Key" and other short-term reversals
By Leigh Stevens
lstevens@OptionInvestor.com

SUBSCRIBER QUESTION: 
Besides the indicators you use like the options (call/put) one, 
RSI etc and which don't always pin down within a day when a top 
or bottom is made, what can you tell just from the chart and from 
trading action?  A top was just made that was good for puts . Just 
using the chart what was the tip off?

RESPONSE:
You could have used JUST the chart to spot this one – it would 
have been VERY helpful to know ahead of this point, that that the 
indices were overbought and that the RSI (Relative Strength 
Index) was trending lower while prices were still going up, that 
volume was also trending lower and that sentiment was overly-
bullish.  But, the reversal pattern on the chart was pretty clear 
to and the pattern was a "key reversal" type.  The OEX daily 
chart will be used below to discuss this kind of reversal.

Some reversal patterns are formed in only 1-2 sessions of 
whatever time duration (e.g., hourly, daily, weekly) is being 
watched and you may hear the term "key" upside or downside 
reversals used for these situations.  Key reversals and 
some other types of short-term reversals are seen by using bar or 
candle charts - a chart that shows at least the High, Low and 
Close (HLC). Most such charts are set to show the Open as well 
(OHLC charts)– 


 

A "strong" short-term trend reversal pattern and which is 
sometimes the start of a significant turnaround in the dominant 
trend, is contained in the formation of 1 and 2-day key 
reversals.  So, what has to happen to qualify? – by the way, the 
definitions of a key reversal is often or typically only loosely 
defined in technical analysis.

The following is the definition for what is usually called a 
reversal up day or reversal down day and also sometimes called a 
"key" reversal up or key reversal down day:

1. Reversal down day – a day where there is higher high than the 
prior day, followed by close that is below the prior day’s close.  
Adding the term "key" downside reversal is too much as the 
"common" reversal day is pretty, well, common. 

2. Reversal up day – a day where there is a lower intraday low 
than the prior day, followed by a close above the prior day’s 
CLOSE.  

What I consider to be a more significant event is where the 
reversal conditions are less common - what makes a reversal 
a KEY reversal event, either up or down, is:

1. Downside "key" reversal day (or week, if the weekly range is 
used) – a day where there is a higher intraday high than the 
prior day OR prior 2-days AND the close is below the prior day’s 
LOW (a 1-day "key reversal" down), or of the prior 2-days (a "2-
day key reversal" down).

2. Upside key reversal day is a day where there is a lower 
intraday low than the prior day or past 2 days AND the close is 
above the HIGH of the prior day (1-day key reversal up) or, of 
the prior 2-days (a "2-day key reversal" up).

The preceding descriptions would also apply to intraday periods 
where each bar was 15, 30 or 60 minutes, etc. only we would not 
of course call it a 1 or 2-DAY key reversal; on a 60-min chart, 
such a reversal would be a key hourly reversal for example. The 
key reversal term does tend to be applied most often to a daily 
time frame or daily chart however. It's often a significant 
turning point where the trend changes for 2-3 weeks or more.

The S&P 100 (OEX) daily chart from above is shown again – 
Note that there were several days where the intraday highs were 
in the same area per the level dashed line.  This is different 
then the prior multi-day consolidations occurring before this 
period in late-December. When a pattern is different than what 
came before, look out for a (trend) CHANGE. The high was 
noticeably above this line, but prices soon began sinking.  


 

The low and the close pierced the lows of the entire prior week 
and then some. The above is a classic key 1, also a 2-day, 
reversal. 

If you checked prices near the close, say the final hour, you 
could be pretty well assured that this day was going to 
constitute a strong (key) reversal. You could have even waited 
until the next day and bought puts on any minor rally - in this 
recent OEX chart there was a slight rebound back to the 574 area.  
Rallies after a key reversal are usually weak. 

Remember, the overly-bullish sentiment?  There will be investors 
and traders who view such weakness as seen during the reversal 
highlighted in the above chart, as a buying opportunity – 
especially those who trade off from momentum or on a bullish 
fundamental outlook only.  Those who do not have the benefit and 
advantage of using technical analysis in spotting a change or 
reversal in the trend.  

My more restrictive definition for a "key" downside reversal 
involves not only a move to new high, followed by a reversal that 
is below the prior 1-2 bar’s LOW, not to just below the prior 
bar’s close.  This is for the simple reason that this pattern 
is a more definite sign of a trend reversal. 

[Key upside reversals are the reverse of the key reversal down – 
a "key" upside reversal involves not only a move to new low, 
followed by a reversal above the prior 1-2 bar’s HIGH - not just 
to above the prior bar’s close. Use of the term "bar" designates 
the prior trading PERIOD (e.g., hours, days, weeks, etc), so as 
to not just imply a key reversal is only something seen on a day 
chart – 1 or 2-DAY reversals are frequently the topic however.] 

A "2-day key reversal" tends to be a stronger "signal" than a 1-
day key reversal or a simple 1-day reversal up.  The same is 
true for a 2-week, versus a 1-week, key reversal. There was a 
chart of Microsoft (MSFT) I used from a prior year as an example 
of interest -  


 

The example in the above chart of a key 2-day reversal (in MSFT) 
was also a double bottom low.  The more bullish patterns that 
come into the play the stronger the "signal", so to speak. This 
is seen also in the recent example of the Nasdaq 100 (NDX) that 
also made a key downside reversal and where the day's high, a 
subsequent retreat, ALSO formed a double top – 


 


Stevens ranking universe for a the highest probability – notice I 
said probability, not "certainty" - 

HIGHEST PROBABILITY FOR A REVERSAL (#1):  

DOWNSIDE 
– A key reversal where prices go to a new high that is  
SUBSTANTIALLY above the prior bar’s high and this high is either 
an ALL-TIME new high or a new high for the secondary trend, 
followed by a close that is BELOW the prior 1 or 2-bars’ low.  A 
similar jump in volume would be a good secondary confirmation.  

UPSIDE 
- A pattern where there was a new low substantially below the 
prior bar’s low where this low was also an ALL-TIME new low or a 
new low for the secondary trend, but which is then followed by a 
close that was above the prior 1 or 2-bars’ high.  A jump in 
volume helps confirm the turning point.  

Key daily downside and UPside reversals were illustrated in my 
book (Essential Technical Analysis) that may also be of interest, 
so the idea of reversals is shown in some different situations - 


 

  
AND .........


 


There are some other short-term reversal patterns also, but none 
as topical or quite as potent as the key reversal – more on these 
other patterns another time perhaps.  


The key reversal gives a flavor and feeling for patterns that 
signal trend reversals. Getting in early in a trend is where you 
want to be – as opposed to 
STEVENS rule of thumb for dumb option trading –
buy and sell ONLY clear cut breakouts that everyone else also 
sees, especially the floor or market makers, in time to inflate 
or jack the premiums way up if you are trying to buy puts or buy 
calls on said "breakout"!

Where you want to be is IN (the trade) before every Tom, Dick, 
Harry and Jane is also perceiving the trend change - timing is, 
as they say, EVERYTHING! 

Good Trading Success!!

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

A Little Late Day Action, But Why?

By Mike Parnos

Did you ever wonder why, after a relatively quite market day, in 
the last hour it makes a large move in one direction or the other?  
Here, basically, is how it was explained to me.    

We know that brokers are often given huge orders by institutions.  
They are doing their best to get these orders filled.  But, it’s 
not always that easy to do.  They often find, that, with the end of 
the trading day approaching, they still have some sizeable trading 
to do.  For example, the big brokerage firm is sitting with an 
order to sell 2 million shares of a high tech stock.  All day the 
broker sells each rally in the stock.  Only 700,000 of the 
2,000,000 have been sold because prices have been weak all day.  
With an hour left till the close the broker must get the rest of 
the order filled – regardless of price.  Selling that large amount 
of stock can put tremendous pressure on the stock as buyers sense 
there is a big seller out there.  He is hitting the downtick bid 
side.  The public selling long positions can only keep hitting 
these downticks.

The same thing can happen, just in reverse, when stocks are moving 
up.  That broker may have been buying the stock all-day on dips and 
only bought 700,000 of his 2,000,000 order.  Now with an hour left 
in the day, he must continue to buy the remaining 1,300,000 at the 
ask prices thereby pushing prices higher.  Other market 
participants sense an urgency to buy and lift their offers forcing 
the stock to even rise faster until new sellers will sell stocks at 
higher prices.

The question is – how can we take advantage of these scenarios?  
You can treat it like a lottery ticket and buy a QQQQ out of the 
money call or put.  If it costs you $.20, a quick dip of $50 might 
net you $.10 – not a bad return for a short term trade.  If you’re 
more aggressive, you can buy an at-the-money put or call and 
perhaps participate a little more in the movement of the QQQQs.  
Remember, the further in the money strike price you buy, the more 
delta you have working for you – if the stock goes in your 
direction.  By the same token, that’s essentially the same amount 
of delta working against you if it goes the wrong way.  Remember, 
it’s a directional trade.  The dollars you risk, may be your own.
___________________________________________________________   

The Road More or Less Traveled
I’m writing this from the island of Roatan in Honduras.  I got off 
the ship in the hope of finding an Internet café.  Instead, I found 
a world of poverty.  There is no “quality” in their quality of 
life.  Last year’s hurricanes caused tremendous damage and they’re 
still trying to recover they – and they weren’t in very good shape 
to begin with.   It certainly puts life into perspective.  My 
friends, appreciate what you have.  We may trade options.  They 
have very few options.

Speaking Of “Quality” Of Life . . .
When you sign up for a vacation on a cruise ship, you have to make 
a few sacrifices.  For instance, I just paid $28.75 for all the 
diet coke I can drink on a seven-day cruise.  Now, this couch 
potato is used to paying $.99 for a two-liter bottle.  In the real 
world, seven two-liter bottles at $1.00 each would total about 
$7.00.   Having to pay $28.75 for a $7.00 value, is like putting in 
a market order on an option and letting market makers have their 
way with you.   It’s the loss of control that’s most disconcerting.  
___________________________________________________________

February Position #1 - SPX Iron Condor - 1186.19
We sold 10 SPX Feb. 1255 calls and bought 10 SPX Feb. 1265 
calls for a credit of about: $.50 ($500).  Then we sold 10 SPX 
Feb. 1140 puts and bought 10 SPX Feb. 1130 puts for a credit of 
about: $1.00 ($1,000).  Our total net credit was $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 
We sold 15 OEX Feb 530 puts and bought 15 OEX Feb 520 puts for a 
credit of about $.50 ($750).  Our net credit and potential profit 
is $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.
___________________________________________________________

JANUARY CPTI POSITIONS:
January CPTI Position #1 - SPX Iron Condor Bull Put Spread
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 
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 Bull Put Spread
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 Bull Put Spread
Put on two 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
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 
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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