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Daily Newsletter, Wednesday, 01/19/2005

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The Option Investor Newsletter                Wednesday 01-19-2005
Copyright 2005, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Inflated Hopes?  
Futures Wrap: See Note
Index Trader Wrap: See Note


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      01-19-2005           High     Low     Volume   Adv/Dcl
DJIA    10539.97 - 88.82 10626.28 10536.49 1.86 bln 1063/1797
NASDAQ   2073.59 - 32.45  2105.84  2072.20 2.18 bln  971/2067
S&P 100   563.89 -  5.64   569.53   563.72   Totals 2034/3864
S&P 500  1184.63 - 11.35  1195.98  1184.37
SOX       397.89 -  8.66   407.75   397.76
RUS 2000  617.91 -  6.96   625.38   616.73
DJ TRANS 3552.48 - 36.74  3591.67  3550.43 
VIX        13.18 +  0.71    13.21    12.41
VXO (VIX-O)13.74 +  1.07    13.79    12.77
VXN        19.24 +  0.49    19.43    18.82 
Total Volume 4,054M
Total UpVol    848M
Total DnVol  3,159M
Total Adv  2034
Total Dcl  3864
52wk Highs  143 
52wk Lows    35
TRIN       2.00
PUT/CALL   0.86
******************************************************************

Inflated Hopes?
Linda Piazza

Inflation was the catch-word in Wednesday's trading.  Market
watchers scrutinized economic releases for signs of inflation and
poured over Fed speeches and the Beige Book for clues as to how
the FOMC felt about the issue.  Inflation had another meaning,
too, with hopes for this earnings season perhaps inflated by the
scarcity of warnings.  Competing bullish and bearish chart
characteristics already predicted choppy trading conditions for
Wednesday, and the attention garnered by each release contributed
to the impression that trading conditions might be choppy.

By the end of the day, that choppiness had resolved into a strong
downward push that thrust many indices below their 50-sma's
again.  The SOX, long ago falling below its 50-sma, dropped below
400 by the close.  Internals had been bearish all day, with the
advdec line negative.  Most sectors dropped, with the SOX; GHA,
the GSTI Hardware Index; DDX, the Disk Drive Index; NWX, the
Networking Index; and XAL, the Airline Index among the sectors
dropping more than two percent.  

Annotated Daily Chart of the SPX:

 

The presence of two confirmed long-in-the-making inverse head-
and-shoulder formations may make it difficult for the SPX to
reach any downside target predicted by this H&S on the daily
chart, if it's confirmed.  Competing chart characteristics often
point to confusion among bulls and bears and sometimes lead to
choppy trading conditions.  The SPX may not yet be finished
building that right shoulder, for example, and might chop around
at the appropriate right shoulder level another day or two before
either confirming the formation or negating it.

Other indices show some of the same chart characteristics.

Annotated Daily Chart of the Dow:

 

The Nasdaq's chart proves more difficult to decipher.

Annotated Daily Chart of the Nasdaq:

 

Wednesday opened to a busy earnings and economic release
schedule, with some release times and dates shaken up from the
usual.  At 7:00, the MBA Refinancing Index jumped 19.1 percent
from the previous week's.  Refinancing activity fell as a total
percentage of mortgage activity, however.  The Composite Index
also jumped, by 16.2 percent on a seasonally adjusted basis.  

In an industry-related release at 8:30, the Commerce Department
released housing starts figures for December, characterizing the
10.9 percent seasonally adjusted increase as occurring at the
fastest monthly rate in seven years.  Starts numbered a
seasonally adjusted annual rate of 2 million units, up slightly
from the forecast 1.9 million.  All regions and subcategories saw
a rise in housing starts.  Less than two hours later, a component
of December's CPI was to show that housing prices also rose 0.2
percent.  In all of 2004, housing prices rose 3 percent.

A look forward wasn't as cheery, with December's building permits
falling 0.3 percent on a seasonally adjusted basis.  While
housing starts measures the number of units upon which
construction has begun, building permits offers a preview of the
future, as permits often lead housing starts.  Some discounted
the decline in permits, however, saying that the number can be
volatile and that it takes several months to see a trend.  The
number can be affected by weather conditions.  

Later, the Beige Book release was also to show that residential
mortgage lending was generally slower.  However, the DJUSHB, the
Dow Jones U.S. Home Construction Index, proved to be one sector-
related index that eked out a gain, climbing 0.31 percent.

With inflation the catch-word, the dollar was also in focus pre-market. 
Overnight, The Bank of Japan's Governor Fukui made a statement that
impacted the dollar/yen pair during the pre-market session.  He avowed
that during next month's G-7 meeting, Japan would oppose any wording of
the joint statement suggesting that Europe has unfairly absorbed dollar
weakness and that Asian countries should absorb more.  

Why should U.S. equity investors care what the dollar is doing?  A
commentator on CNBC summed up traders' impressions this morning.  He
said that if there is a feeling that the dollar has bottomed, U.S.
markets should see record inflows from Asia and Europe.  

That statement was made after the 8:30 release of the CPI data, with
that data also figuring into the dollar's behavior.  Falling crude
prices in December helped keep consumer prices low, with prices
decreasing 0.1 percent.  Excluding energy and food prices, the core CPI
climbed 0.2 percent, with both numbers characterized as being in line
with expectations.  

It's when examining the yearly numbers in the context of Fed goals and
recently rising crude prices that some worry arises.  The Federal
Reserve's goal of maintaining core inflation rates between 1.5 and 2.5
percent was met, with the core CPI rising 2.2 percent, but that
increase was still the largest since 2001.  The headline number rose
3.3 percent for 2004, the largest increase since 2000, perhaps
dampening hopes that the Fed might be through raising rates for a
while.  While core CPI was in-line with expectations, both for the
month and the year, continued higher crude prices could sharpen the
beaks of the hawks on the FOMC.  

Wages don't seem to be adding pressure.  Adjusted for inflation, real
hourly wages declined 0.8 percent in 2004, falling for the first time
in ten years.  Not adjusted, hourly wages rose 2.7 percent.  Weekly
wages declined 0.2 percent.  The Labor Department also noted that
initial jobless claims fell 48,000 for the reporting week, but some
note that weather and other factors might have impacted that number. 

After the blizzard of economic releases at 8:30, equity futures
climbed, but the dollar fell. Ten-year yields rose. Fed Governor
Bernanke was speaking before the market open and hurried to qualm
inflation fears, saying that risks hadn't risen over the last six
months.  That dollar decline was to be temporary, as was the climb in
equities.  After climbing for another hour, ten-year yields came off
their high, too, drifting lower into the release of the Beige Book,
steadying ahead of the release, and then falling further.

Interest in equities had been damaged by pre-market results by JP
Morgan Chase (JPM), Lucent (LU) and Pfizer (PFE), as well as Motorola's
(MOT) after-hours report Tuesday. By the close, JPM had dropped 1.45
percent; LU, 7.56 percent; PFE, 1.66 percent and MOT, 7.05 percent.

Two of those four, JPM and PFE, are Dow components.  JPM's earnings
disappointed, while LU's revenues did.  MOT received three downgrades
after yesterday's earnings report, and led communications equipment
stocks lower.  In the afternoon, the Beige Book release was to show
that the Dallas district, at least, experienced slowing demand for
consumer communications equipment.  

Headlines proclaimed PFE's quarter soft, with both strong drug sales
and cost-cutting measures contributing to profit gains but with its
adjusted EPS failing to meet estimates.  The company reported a 7
percent revenue increase, but that revenue was in part attributed to a
24 percent increase in Celebrex sales and a 57 percent increase in
Bextra sales.  An FDA advisory committee meeting as to the safety of
those two drugs will be held in mid-February, with their further
contributions to PFE's sales in question.  

Perhaps due at least in part to uncertainty regarding the outcome of
that upcoming FDA meeting, PFE declined to offer guidance for 2005
until an analyst meeting planned for April.  The outcome of that
meeting isn't the only uncertainty regarding PFE.  Of interest to PFE
and many other multinationals is a law signed late last year that
allows for a much lower rate for repatriation for domestic use of
earnings from foreign subsidiaries.  Discussions at PFE and offices of
other multinationals concern how much money can be repatriated, under
what conditions, and for what uses.

As expected, markets chopped around into the 2:00 release of the
Beige Book Report, with that report's summary including a
statement that during December and early January, inflationary
pressures remained in check.  While costs had risen for
manufacturers and builders, the consumer saw only modest cost
increases for final goods and services.  The Boston and
Minneapolis districts reported a sharp rise in input prices, with
modest to high price increases in the costs of building materials
in Atlanta, Kansas City and Minneapolis. Other districts reported
mixed results.  The Dallas district reported that stiff
competition stopped firms from passing rising costs through to
the consumer.

Nine out of twelve districts saw factory output rise.  Consumer
spending increased, with the Fed reporting that the much-disputed
holiday sales season saw retail sales above year-ago levels in
many districts.  Economic activity continued to expand.  In the
context of a generally strong real estate market, some districts
noted slowing in both residential real estate and construction
activity.  As had been shown by the previous Labor Department
release, some firming was seen in labor markets, but no increase
in wage pressures.  Districts reported a mixture of results
related to auto sales, with some districts seeing a rise in
inventories "above desired levels."  

Whatever market watchers had hoped to see in the Beige Book, they
didn't find it.  Although crude prices closed down $0.35 and some
earnings had proven strong, none of that was enough to overcome
the earnings disappointments listed above or those from LUV, AMD
and NWAC or even event fear ahead of the inauguration. After the
bond market closed, equities plunged.  

After the close, EBAY and QCOM joined other reporting companies,
and inflated expectations from traders sent them sharply lower
when they didn't meet those inflated expectations.  As Jim Brown
noted in the OptionInvestor Market Monitor, EBAY blew through
multiple support levels in after-hours trading after
disappointing on profit guidance, but dropped all the way into
possible support.  After-hours trades plunged all the way toward
the 200-ema and -sma.  EBAY had beat on Q4 profit and revenue,
and announced a 2-for-1 stock split.  The conference call pinned
that lowered guidance at least on part to increased investments
in China, a strong point rather than a weak one to some watchers.  

QCOM was also dropping in after-hours trading.  QCOM reported Q1
sales of $1.39 billion against expectations for $1.40 billion,
with profit of 28 cents excluding items against expectations of
27 cents.  However, the company guided analysts to expect Q2
revenue of $1.35-1.45 billion, lower than the previously expected
$1.49 billion.  It also predicted earnings lower than
expectations, but many cautioned that accounting changes could be
responsible for those misses.  

Other reporting companies included COF, missing expectations;
FFIV, beating expectations; QLGC, falling as this report was
prepared after reporting Q3 profit a cent lower and revenue
slightly lower than expected; PLNR, missing on earnings and
warning for 2005; SYMC, falling after reporting higher-than-
expected sales and forecasting revenue higher than current
expectations; and SWKS, falling after reporting profit of 9 cents
against expectations of 13 cents, coming up shy on sales, and
forecasting next-quarter revenue below current expectations. 
Whatever market watchers expected to see, they found their
expectations inflated.

The release of crude oil, gasoline, and distillate inventories
was pushed back to 5:00 p.m.  The Department of Energy and
American Petroleum Institute numbers differed as widely as they
often do, with the API reporting crude inventories up 6.0 million
barrels while the DOE reported them up 3.4 million barrels; the
API reporting distillates down 450,000 barrels and the DOE, up
880,000; and the API reporting gasoline up 5.4 million barrels
and the DOE, up 1.7 million barrels.  Estimates had been for a
rise of 1.5 million barrels in crude inventories, so both the API
and DOE reported a much-bigger-than-expected buildup.  Estimates
had been for a 1.00 million barrel increase in gasoline
inventories, and those beat by estimations of both the API and
DOE, too.  

However, it's the supply of distillates that's been of most
concern during the winter months, and it was in that number that
the API and DOE differed most.  The API reported a drop of
450,000 barrels and the DOE a gain of 880,000, with the DOE's
number close to the expected rise of 750,000.  

With crude traders appearing to accept the DOE's more reassuring
number, crude dropped after-hours.  A drop below $45.68, the 50-
sma, or a climb above $50.00 may be important, but for now crude
prices remain at a level where the validity of the potential H&S
remains questionable.  It hasn't yet been invalidated, but may be
on a climb much above $50.00.

Annotated Daily Chart for Crude for February Delivery:

 

Thursday's economic releases begin with December's Leading
Indicators at 10:00, concurrent with the Fed's Poole discussion
on the economic outlook at a speech in Mississippi.  Those events
are followed by the January Philadelphia Fed at noon and the
Fed's Yellen following up Poole's Mississippi address on the
economic outlook by one on the same topic in San Francisco. 
Money supply figures are to be released at 4:30, but the Semi
Book-to-Bill number at 6:00 might draw the most attention.  

Much-watched earnings tomorrow include before-the-open releases
by a number of retailers and airlines and after-the-close
releases by KLAC and XLNX.    

As noted on many of these charts, long plays currently look iffy. 
Many indices appear to be in right-shoulder building exercises,
with potential confirmation of head-and-shoulder formations
looking imminent, but "looking" imminent and seeing follow-
through are two different matters.  If already in bearish plays
from rollovers beneath the right-shoulder levels, follow indices
down with your stops, noting potential profit-protecting levels
mentioned on the various charts, with the necklines being obvious
levels that might prompt a bounce.

If there's a bounce tomorrow from those neckline levels, options
traders, paying spreads and facing decay in the likely case of
falling volatility indices while equity indices bounce, may not
be able to capitalize on a choppy upward move within a potential
right shoulder formation.  Tomorrow, ahead of the inauguration
and the Semi Book-to-Bill number, for that matter, may not be the
right day to make a bet on a long position from the neckline area
of potential H&S formations, betting against the chart formation
being confirmed.  Shorts could be surprised by such a bounce and
the markets could run away to the upside, but the wiser choice
may be passing up any such potential play if it occurs tomorrow. 

Bearish players should exercise caution, too, as symmetry
suggests that there may be another day or two of choppy shoulder-
forming behavior before indices decide whether to confirm those
formations and head downward or invalidate them and climb toward
recent highs.  Decide before the day begins whether you will be
willing to hold overnight tomorrow if markets plunge and you've
accrued bearish profits. 

Bears will have real difficulty if the indices chop back up
toward the tops of those right shoulders tomorrow into the close.
From this distance, that looks like a good bearish entry, but
that's ignoring the change in tenor that might be present Friday
morning and the role that event risk might be playing in the
markets' declines.  Would that be a good bearish entry ahead of
potential event risk?  Probably not with anything but lottery
money.  It might be better to wait until volatility settles out
Friday morning to make a decision, realizing that a gap move
might be possible, thwarting plans for new entries. 


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

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


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_011905_1.asp


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The Option Investor Newsletter                Wednesday 01-19-2005
Copyright 2005, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Watch List: A Mixed Bag of Trading Ideas
Stop Loss Updates: None
Dropped Calls: None
Dropped Puts: None
New Calls: None
New Puts: None

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

A Mixed Bag of Trading Ideas

___________________________________________________________________

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.
___________________________________________________________________


Sunoco Inc - SUN - close: 83.88 change: +0.80

WHAT TO WATCH: The OSX oil services index was one of two sector-
specific indices to close in the green today.  This relative 
strength peaked our curiosity so we decided to look into the 
group.  We noticed that SUN has been very strong the last several 
days with shares running toward new highs and resistance at the 
$85 level.  Short-term technicals are very bullish and its MACD 
has produced a new buy signal.  The P&F chart is also bullish 
with a $117 target.  The company reports earnings tomorrow 
morning before the opening bell and we would watch to see if the 
stock can breakout over the $85 level. 

Chart=


---

Harris Corp - HRS - close: 56.45 change: -1.32

WHAT TO WATCH: HRS was mentioned in the MarketMonitor today as a 
potential bearish candidate.  The stock has been falling for 
several weeks after a very strong August-November rally.  Now 
after churning sideways in a tight trading range for the last 
seven sessions HRS is breaking lower.  We do see potential 
support at the $55 level and below that at the 200-dma but 
momentum traders may want to give it another look.  Consider a 
stop loss above $58.50. 

Chart=


---

Moody's Corp - MCO - close: 85.34 change: +1.14

WHAT TO WATCH: MCO is showing some relative strength today.  The 
stock has been in a consistent up trend since September but 
finally hit some profit taking in January like most of the 
market.  Bulls bought the dip to the 50-dma a few days ago and 
now the stock is breaking out to new two-week highs above the $85 
level.  Short-term oscillators are bullish.  This could be a 
bullish entry point for a run towards $88-90.  Earnings are 
expected on Feb. 3rd. 

Chart=


---

eBay Inc - EBAY - close: 103.05 change: -3.32

WHAT TO WATCH: Investors have not responded well to a 
disappointing earnings report from EBAY tonight.  Shares are 
trading down several points (as much as -11) after hours as 
momentum traders exit.  Even a 2-for-1 stock split announcement 
will likely fail to save EBAY from a very sharp drop tomorrow.  
However, the details of EBAY's earnings guidance may not be so 
bad.  The company is investing $300 million in its Chinese 
operations, which was more than previously announced.  This is a 
segment the company believes will eventually outshine the U.S. 
division.  This investment is going to impact earnings short-term 
for future growth in 2006.  While the initial reaction is 
negative there could be some bargain hunters out tomorrow.  A $10 
drop would put EBAY near technical support at its 200-dma.  Watch 
for a bounce from the 200-dma as a potential (aggressive) bullish 
entry point.  Oh and don't forget to buckle your seatbelt the 
ride could be very volatile. 

Chart=



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

AEOS $48.56 -0.44 - Wow!  The bullish trend in AEOS has been very 
consistent for months.  It's also been a very slow-moving trend 
but covered call traders could have done very well.  The stock is 
obviously very overbought and its indicators suggest a new sell 
signal.  Yet we would watch for AEOS to pull back toward rising 
technical support at the 40 or 50-dma near $45.00.  A bounce from 
this level could be a new bullish entry point.  

IVGN $68.06 -1.24 - IVGN has pulled back after failing to 
breakout over the $70 level.  If shares slip toward $65 we'd look 
for a bounce. 


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STOP-LOSS UPDATES
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*************
DROPPED CALLS
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************
DROPPED PUTS
************

None

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

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stocks that have the potential to deliver stratospheric gains. 

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buying and why you should too. 


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

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

None

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

None


*******************
FREE TRIAL READERS
*******************

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

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

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

To subscribe you may go to our website at

www.OptionInvestor.com

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

 "Contact Support"

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

You may also fax the information to: 303-797-1333


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

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


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