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Daily Newsletter, Thursday, 01/20/2005

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The Option Investor Newsletter                Thursday 01-20-2005
Copyright 2005, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Instant Replay
Futures Wrap: See Note
Market Sentiment: What a difference!


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      01-20-2005           High     Low     Volume   Adv/Dcl
DJIA    10471.47 - 68.50 10546.77 10457.94 2.01 bln  973/2133
NASDAQ   2045.88 - 27.70  2065.59  2045.88 2.18 bln  939/2117
S&P 100   561.19 -  2.70   564.06   559.93   Totals 1912/4250
S&P 500  1175.41 -  9.22  1184.63  1173.39 
SOX       394.81 -  3.10   402.11   394.14
RUS 2000  612.34 -  5.57   617.91   611.73
DJ TRANS 3513.42 - 39.10  3554.30  3510.93
VIX        13.83 +  0.65    14.11    13.28
VXO (VIX-O)14.34 +  0.60    14.52    13.80
VXN        19.50 +  0.26    20.22    19.45  
Total Volume 4,467M
Total UpVol  1,124M
Total DnVol  3,308M
Total Adv  2157
Total Dcl  4844
52wk Highs  119
52wk Lows    91
TRIN       1.34
NAZTRIN    1.22
PUT/CALL   0.87
************************************************************

Instant Replay
by Jim Brown

New lows across the board and all the indexes have moved
back to the brink of disaster. I feel like a broken record
with the markets stuck in a playback loop. There were so 
many reasons for today's dip that Friday's outlook is really
cloudy. 

Dow Chart

 
Nasdaq Chart

 
SOX Chart

 

The focus of the day was the inauguration and it is still
progressing as I type this at 6:30 tonight. So far the 
massive security force of 6,000 police and 7,000 armed
services personnel appear to have deterred any attack. We
still have to get past the nine formal balls tonight and
the market can erase another potential negative for Friday. 

Helping depress the markets today was the Philly Fed 
Survey, which dropped sharply to 13.2 from 25.4 in December.
This is a major drop and a major blow to the recovery picture.
This was the lowest reading in 18 months and a dramatic drop
from the 35 high back in July. Three components fell into
negative territory, backorders -5.2, delivery times -3.2
and inventory -2.7. Shipments fell to 15.9 from 35.6 and
new orders fell to 9.8 from 20.9. Possibly the most critical
change was a drop in the six month outlook to 25.5 from 39.0.
This suggests things are turning down sharply in the Third
District and other surveys have been suggesting the same
in other areas. Anything over zero indicates economic 
expansion but we are already closing in on single digits 
and the outlook is cloudy. On the bright side 84% of the
participants said capital expenditures would increase or
stay the same. Only 16% said they were reducing capex. If
you continue to build it will they really come?

Earnings continue to flow and it has been a really mixed
bag. Using the Forrest Gump analogy our box of chocolates
this cycle had plenty of surprises and several were very
bitter. The biggest surprise was the reaction to the EBAY
earnings not necessarily the earnings. As you probably 
already know EBAY missed street estimates by a penny and
said they were going to spend more on expanding their China
business and on marketing. Both areas will result in higher
profits ahead but a small drop in the current quarter. EBAY
affirmed its full year 2005 estimates at $1.48-$1.52 and
exactly at the $1.50 it had previously predicted. Traders
missed the fact that they affirmed the full year and were
expecting stronger earnings in 2006. The stock was trashed
to the tune of nearly -$20 despite announcing a 2:1 split
for February. Analysts were split on upgrades and downgrades
but traders ran for the exits in this time of extreme caution.
EBAY traded over 86 million shares and ended at $83.33. I
am still recommending a strong buy at this level for long
term holders. This is a gift in my opinion.

The EBAY drop of such magnitude scared tech investors and
cautious comments from others only accelerated the drop in
other issues. QCOM beat the street by a penny but in keeping
with its previously announced plan of changing the way it
accounts for earnings it guided lower than analysts were
expecting for the current quarter. Phone sales were expected
to be slightly less than the analyst estimate and traders
fled the stock in fear of another EBAY type drop. QCOM fell
-$3.29 to $37.78 at the close. QCOM has been on a very strong
ramp over the last year, as has EBAY, and the slightest hint
of slowing triggers massive profit taking. 

Another factor impacting individual stocks and indexes
was option expiration. The lack of a material January
bounce left far too many people with long positions and
hope was fading fast. Once the magnitude of the EBAY 
disaster was known all hope failed and investors began
dumping those losing positions in all sectors. 

Another factor for this weeks drop is the January LEAP
expiration. Any investor holding leaps over the last two 
years of gains found themselves without a normal January
bounce and profit taking from LEAPS added another huge
volume pop to the downside. January is the only month with
the LEAP expiration factor added to the equation. 

The magnitude of the overnight drops in several stocks
triggered sell stops on millions of positions and those
stops produced more selling which triggered more stops. 
Sometimes these things begin to feed on themselves and
become self perpetuating. The advance/decline volume was
3:1 negative and the number of new lows was the highest 
since October 29th. Technically the internals are confirming
a change in market bias. 

Add in the bad economics, another round of Fed comments that
suggest the Fed is going to change their policy and the event
risk for the inauguration and traders could find no reason
to buy. After the close today there was a flurry of chip
earnings and they were mostly positive. KLAC beat by +2
cents, LRCX beat +6 cents, XLNX was inline. Other tech
standouts were HLIT and a +4 cent beat and HTCH at +3.
Hutchinson guided analysts well over prior estimates for
the current quarter and could only say good things about
the future. HTCH said earnings would be in the +40-50 cent
range and analysts were only expecting 33 cents. HLIT also
guided higher for the current quarter.  

Unfortunately the Semi Book-to-Bill was announced late 
tonight and the number fell to 0.95 in December on a -7.1%
drop in orders. Since this is a three month moving average
the real number would have been much worse. The BTB peaked
in Dec-2003 at 1.23 and has been falling steadily ever
since. The .95 is only .01 off the lows for the year set
in September. This makes the forth-consecutive month under
1.00 and the trend is down. Just one more pothole in the
potential rally road.  

We still have that option expiration cloud hanging over 
the markets for Friday. We also have the complete lack of
cash flow into funds. According to the latest TrimTabs 
forecast we could actually have outflows of -$3 billion 
for January. This would be only the second time in 15 years
that January cash flowed out instead of in. That other year
was 2003 and investors stayed on the sidelines while waiting
for the Iraq invasion to begin. In January 2004 there were
inflows of +44 billion. The -$3B was for all funds and the
number is worse for those funds that only invest in the U.S.
Those funds are on track for a -$6.8B outflow for the month.
With only seven trading days left in January it would take 
a major reversal to lift us out of our slump and a near 
miracle to shift the indexes back into positive territory. 

As January goes, so goes the year is the most repeated
January axiom. If this turns out to be true we are in for
a very bad year. This outlook is also scaring investors and
keeping them on the sidelines. Most traders follow the herd
and right now the herd has backed up to the cliff edge for 
one last stand. 

The Dow closed at its low for the year at 10473 and is
nearing strong support at 10425. I have been mentioning
that support for the last two weeks and far more than I
wanted. While I could easily see the Dow taking one more
plunge I still feel that 10425 level will hold unless the
earnings guidance picture changes significantly. 

Unfortunately the Nasdaq closed a couple of points below
what I feel was a last ditch support level at 2050. There
is a 38% retracement level at 2022 but there is little
additional support in that range. To put it bluntly the
Nasdaq needs to hold this level or the implosion should
take out the other indexes as well. 

The SPX closed back on the critical 1175 support level we
have been watching for the last two weeks. Three times in
2005 the SPX has pulled back to this level but today's 
close was the low for the year at 1175.86. Unlike the
Nasdaq the SPX does have additional support from 1163-1175
but the 1175 level is the psychological breaking point. If
the Dow is determined to test its strong support at 10425
then the SPX is doomed to trade below 1175 at least intraday.

The bottom line for me is a decision point ahead. We are
back at the brink and I would not be a buyer under SPX
1175. Under 1163 I would be a strong short. We are seeing
the normal historical trends fail, the economics picture
weaken and earnings guidance is definitely weaker than
analysts had hoped. This is not a recipe for a new bull
market. Once the inauguration event risk has passed and
we get past option expiration we are still not in the clear.
The Iraq elections and the OPEC meeting is Jan-30th and the
Fed meets again on Feb-1st. Definitely a wall of worry in 
our future. 

Don't lose faith in the market for 2005 but don't buy any
dips under 1175 either. We need to get past the next eight
days before making any new predictions about the coming 
months.    

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

"The man who rows the boat generally does not
have time to rock it."


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


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

What a difference!
- J. Brown

 
Wow!  My how things look difference from just a couple of days 
ago.  As of Tuesday's close investors were cautiously optimistic 
as the S&P 500 put together it first back to back gains.  There 
was obviously no follow through and the major averages have sunk 
to new lows for the year. 

First and foremost to blame has been some high profile earnings 
misses and warnings.  EBAY makes it to the top of the list with 
an earnings miss and a disappointing forecast sending the stock 
to a $20 drop today.  Citigroup managed to beat estimates by 
offered its own warning for 2005.  Plus, a warning from QCOM 
helped secure a down day for tech stocks. 

Overall the market internals were very negative with declining 
stocks outnumbering advancers 2-to-1 on the NYSE and 20-to-9 on 
the NASDAQ.  Down volume was about three times the size of up 
volume on the NYSE and close to that on the NASDAQ.  Overall 
volume was heavy and stocks look poised to end the weak and 
option expiration on a sour note. 

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

Market Averages

DJIA ($INDU)

52-week High: 10868
52-week Low :  9708
Current     : 10471

Moving Averages:
(Simple)

 10-dma: 10572
 50-dma: 10596 
200-dma: 10280 



S&P 500 ($SPX)

52-week High: 1217
52-week Low : 1060
Current     : 1175

Moving Averages:
(Simple)

 10-dma: 1185
 50-dma: 1189
200-dma: 1133



Nasdaq-100 ($NDX)

52-week High: 1635
52-week Low : 1301
Current     : 1514

Moving Averages:
(Simple)

 10-dma: 1554
 50-dma: 1583
200-dma: 1467 



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

CBOE Market Volatility Index (VIX) = 13.83 +0.65	
CBOE Mkt Volatility old VIX  (VXO) = 14.34 +0.60
Nasdaq Volatility Index (VXN)      = 19.50 +0.26 


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.98      1,216,088     1,188,329
Equity Only    0.76        850,881       649,157
OEX            0.84         72,789        61,262
QQQQ           2.19         46,822       102,977


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

Bullish Percent Data

           Current   Change   Status
NYSE          72.9    - 0.4   Bear Correction
NASDAQ-100    72.0    - 1     Bull Correction
Dow Indust.   66.6    - 6     Bull Confirmed
S&P 500       73.4    - 1.2   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: 1.10
10-dma: 1.12 
21-dma: 1.08
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     814       916
Decliners    1984      2094

New Highs      85        56
New Lows       25        31

Up Volume    529M      584M
Down Vol.   1541M     1617M

Total Vol.  2083M     2221M
M = millions


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

Commitments Of Traders Report: 01/11/05


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

There was very little movement in the latest data leaving
commercials slightly bearish and small traders bullish on the
large S&P futures contracts.


Commercials   Long      Short      Net     % Of OI
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%)
01/11/05      457,383   509,892   (52,509)   (5.4%)

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
12/14/04      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%
01/11/05      157,131   110,174    46,957    17.5%

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 slightly increased their bullish positions
but everything else remained pretty much flat with the new data.

Commercials   Long      Short      Net     % Of OI 
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%)
01/11/05      322,800   622,509   (299,709)  (31.7%)

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
12/14/04      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%
01/11/05      277,808     73,288   204,520    58.2%

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


NASDAQ-100

Commercials upped both their longs and shorts for a minor 
decrease in bearishness.  Small traders upped their longs 
for a bump in bullishness.

Commercials   Long      Short      Net     % of OI 
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%)
01/11/05       31,984     49,244   (17,260) (21.2%)

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
12/14/04       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%
01/11/05       27,186     8,470    18,716    52.4%

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

There isn't much movement in the commercials' positions but
small traders significantly reduced their short positions.

Commercials   Long      Short      Net     % of OI
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%)
01/11/05       25,254    32,568   (7,314)    (12.6%)
 
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
12/14/04       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%)
01/11/05        5,141     5,389   (  248)   ( 2.3%)

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 01-20-2005
Copyright 2005, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: FDX
Call Play Updates: AET, ARLP, AMGN, BBOX, CMI, FRO, GOOG, KBH, PD,
                   PHM, PIXR, RAI, TXI, WFMI 
New Calls Plays: None
Put Play Updates: ADBE, CAI
New Put Plays: None


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

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


CALLS:
*****

None


PUTS:
*****

Fedex Corp - FDX - close: 91.57 change: -1.68 stop: 95.51

Weakness in the transports finally helped push FDX to our target 
at the simple 100-dma.  Shares actually hit a low of $91.35 but 
closed just under its 100-dma. Considering the weakness in the 
broader indices traders may want to keep the play open and see if 
shares can hit the $90.00 region.  We're going to close it now 
that our target has been achieved.  FDX did bounce from the 100-
dma back in August and we don't want to see that happen again (at 
least not while we're bearish).

Picked on January 07 at $ 94.95
Change since picked:     - 3.38
Earnings Date          03/17/05 (unconfirmed)
Average Daily Volume =      1.6 million 
Chart =



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

Aetna Inc - AET - close: 126.16 change: -1.44 stop: 119.99
 
The rally in AET is struggling against the market weakness.  
Yesterday AET bucked the market downtrend after two brokers 
reiterated their positive ratings on the stock.  Thursday shares 
paced the decline in the IUX insurance index.  We would be 
cautious about considering new positions.  Wait for the bounce in 
the 124-125 range or wait for the breakout over $130.

Picked on January 13 at $127.61
Change since picked:     - 1.45
Earnings Date          02/10/05 (confirmed)
Average Daily Volume =      2.2 million  
Chart =


---

Alliance Resource - ARLP - close: 69.29 chg: -2.30 stop: 67.99*new*

Ouch!  The market drop in the last two sessions has hit ARLP 
pretty hard.  Shares touched the $74 level on Wednesday morning 
before the afternoon sell-off.  Now the stock is testing rising, 
technical support at its 50-dma.  Technical indicators have 
turned negative.  If ARLP can turn things around readers might 
want to consider new bullish positions on a bounce back over 
$70.00.  Right now we're concerned that the market will continue 
to drop and ARLP will break support.  We are raising our stop 
loss to $67.99. 

Picked on January 10 at $ 69.80
Change since picked:     - 0.51
Earnings Date          10/28/04 (confirmed)
Average Daily Volume =      115 thousand 
Chart =


---

Amgen Inc - AMGN - close: 62.56 change: -0.92 stop: 62.00

The BTK biotech index continues to slip with the broader market 
and AMGN is following suit.  Shares closed at their low for the 
day on Thursday and that does not bode well for tomorrow.  We 
would not suggest new bullish positions at this time.  
Conservative traders may want to exit to avoid further losses.  
Our stop loss isn't far away.  

Picked on January 13 at $ 65.05
Change since picked:     - 2.49
Earnings Date          01/26/05 (confirmed)
Average Daily Volume =      7.3 million  
Chart =


---

Black Box - BBOX - close: 45.90 change: -0.13 stop: 44.99      

Once again BBOX has fallen back to test support at the $45.00 
level.  Considering the weakness in the NWX networking index and 
the NASDAQ in general shares of BBOX are holding up pretty well.  
Yet we would not suggest new bullish positions at this time.  

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


---

Cummins Inc - CMI - close: 75.67 chg: -1.28 stop: 73.99

CMI has not been able to avoid the market weakness on Thursday 
and shares slipped back toward round-number support at $75.00 
bolstered by its rising 100-dma.  If CMI can manage a bounce from 
this level we might consider new bullish positions but right now 
the major indices look vulnerable. 

Picked on January 16 at $ 76.40
Change since picked:     - 0.73
Earnings Date          02/01/05 (confirmed)
Average Daily Volume =      785 thousand 
Chart =


---

Frontline Ltd - FRO - close: 44.95 chg: -2.77 stop: 43.49     

Ouch!  FRO performed very poorly on Thursday with a 5.8 percent 
decline.  We can't see any news to account for the exaggerated 
weakness and that can be bad news by itself.  The drop under its 
100-dma and the $45.00 level is also very disappointing.  
Conservative traders may ant to exit now to avoid further losses 
or consider tightening their stop losses toward the $44.50 level. 

Picked on January 12 at $ 46.06
Change since picked:     - 1.11
Earnings Date          02/00/05 (unconfirmed)
Average Daily Volume =      1.1 million  
Chart =


---

Google Inc - GOOG - close: 203.90 change: +3.93 stop: 190.00

GOOG has been no exception to the profit taking in tech stocks 
the last couple of sessions.  Yet there was talk today that money 
might rotate out of EBAY and into other big Internet names like 
GOOG.  Currently we are un-triggered and still waiting for shares 
to hit our entry point at $205.51.  Until GOOG trades at or above 
this level we're still sitting on the sidelines although we may 
close the play unopened if shares break the $190 mark. 

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked:     + 0.00
Earnings Date          02/01/05 (confirmed)
Average Daily Volume =     11.3 million 
Chart =


---

KB Home - KBH - close: 106.05 change: -3.53 stop: 99.50

It was a rough day for stocks across the board but the 
homebuilders were one of the worst under performers and investors 
scrambled to lock in recent profits.  The DJUSHB index lost more 
than three percent and KBH paced the decline.  This pull back may 
not be so bad.  KBH was looking a little extended.  If shares can 
bounce from the $105 level we'll consider it a new bullish entry 
point.  

Picked on January 13 at $106.00
Change since picked:     + 0.05
Earnings Date          03/17/05 (unconfirmed)
Average Daily Volume =      1.1 million  
Chart =


---

Phelps Dodge - PD - close: 98.50 change: -1.51 stop: 92.00

Even a defensive stock like PD was unable to avoid the market 
sell-off in the last two sessions.  Normally we would be 
concerned about a drop back under the psychological $100 level 
but PD has been flirting on either side of it for a while now.  
The question we should be asking is where will traders step in to 
buy the dip.  We would not suggest new bullish positions until we 
see some sign of a bounce.  

Picked on January 09 at $ 97.65
Change since picked:     + 0.85
Earnings Date          01/27/05 (confirmed)
Average Daily Volume =      2.2 million  
Chart =


---

Pulte Homes - PHM - close: 64.58 chg: -1.94 stop: 61.00

PHM suffered some profit taking today like its brethren as the 
DJUSHB index lost more than three percent in Thursday's sell-off.  
We are a little concerned with the drop under the $65.00 level, 
which should have acted as stronger support.  Currently we'll 
look toward the $62-64 region to act as support.  Aggressive 
traders can look for the bounce.  We'd suggest the rest of us 
wait for a move back over $65.00.  

Picked on January 16 at $ 65.99
Change since picked:     - 1.41
Earnings Date          02/02/05 (confirmed)
Average Daily Volume =      1.5 million 
Chart =


---

Pixar - PIXR - close: 87.91 change: -0.58 stop: 84.00

Believe it or not for all the weakness in the tech sector shares 
of PIXR are weather the storm pretty well.  We would watch the 
$86-87 level for a potential bounce.  More conservative types can 
wait for a breakout over the $90 level as a new bullish entry 
point. 

Picked on January 18 at $ 88.24
Change since picked:     - 0.33
Earnings Date          02/10/05 (confirmed)
Average Daily Volume =      934 thousand
Chart =


---

Reynolds American - RAI - close: 80.07 change: -1.09 stop: 76.75     

Time is running out for RAI.  Traders did buy the dip to $79.24 
this morning but earnings are expected on Monday morning and we 
do not want to hold over the report.  Our plan is to exit on 
Friday afternoon near the closing bell.  

Picked on December 22 at $ 80.11
Change since picked:      - 0.04
Earnings Date           01/24/05 (unconfirmed)
Average Daily Volume =       1.0 million  
Chart =


---

Texas Industries - TXI - close: 63.44 change: +0.20 stop: 59.00     

TXI continues to display impressive relative strength.  Shares 
have not succumbed to the market pull back this week and the 
stock actually closed in the green on Thursday.  We are still 
suggesting that short-term traders consider exiting in the 
$64.50-65.00 range - a target that was hit on Tuesday.  If TXI 
does dip then new positions might be considered on a bounce from 
the $60 level. 

Picked on January 09 at $ 60.18
Change since picked:     + 3.26
Earnings Date          12/16/04 (confirmed)
Average Daily Volume =      238 thousand 
Chart =


---

Whole Foods - WFMI - close: 96.07 change: -0.32 stop: 93.00

Once again we are playing a waiting game with WFMI.  We are 
untriggered and wait for shares to breakout over the $98.00 
level.  The stock got close on Wednesday but failed to break the 
$98 mark.  Our entry point to go long/buy calls is $98.01.  Until 
then we'll be content to sit on the sidelines and watch.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked:     + 0.00
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: 58.07 change: +0.19 stop: 60.11    

We continue to suggest caution with our ADBE put play.  We're 
puzzled by the lack of weakness given the drop in tech stocks but 
then the GSO software index only fell 0.4 percent on Thursday.  
Bears will point out that ADBE is still struggling under the $59-
60 level so we're going to keep the play open but we're not 
jumping up and down about entering new positions. 

Picked on January 06 at $ 58.99
Change since picked:     - 0.92
Earnings Date          03/17/05 (unconfirmed)
Average Daily Volume =      2.3 million 
Chart =


---

CACI Intl - CAI - close: 60.10 change: -0.82 stop: 62.11*new*

CAI continues to operate under a pattern of lower highs.  While 
this trend remains in place we're going to keep the play active.  
Readers might want to consider new positions on a drop under $59 
or $58.  We're going to tighten our stop loss to $62.11. 

Picked on January 05 at $ 61.95
Change since picked:     - 1.85
Earnings Date          01/24/05 (unconfirmed)
Average Daily Volume =      348 thousand
Chart =


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

None


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The Option Investor Newsletter                 Thursday 01-20-2005
Copyright 2005, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Two bearish and two bullish
Traders Corner: How support "becomes" resistance and vice-versa
Combos/Straddles: What's Up?  Not The Market! -- February Position 
                  Preview

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

Two bearish and two bullish

___________________________________________________________________

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.
___________________________________________________________________


Chicago Mercantile Exchange - CME - close: 197.05 change: -7.20

WHAT TO WATCH: Heads up!  This looks like a bearish entry point 
for the high-flying CME.  Shares have broken round-number, 
psychological support at the $200.00 mark on big volume.  Plus, 
the stock's daily chart shows a hard to see slanting head-and-
shoulders pattern.  If it were not for CME's upcoming February 
1st earnings report we would open bearish positions here with a 
target at the 100-dma near $186.  

Chart=


---

Illinois Tool Works - ITW - close: 89.40 change: -1.85

WHAT TO WATCH: We are putting ITW on the watch list again.  The 
stock has broken major support at the $90.00 mark, its 
exponential 200-dma and the long-term trendline of support dating 
back to March 2003.  We would use this as a bearish entry point 
with a short-term target of $85.00.  The only reason we do not 
add ITW to the play list is because of its upcoming earnings 
report on Jan. 27th. 

Chart=


---

Procter & Gamble - PG - close: 56.70 change: +0.02

WHAT TO WATCH: PG was one of the few Dow components to close in 
the green on Thursday.  If you look at the daily chart you can 
see the inverse or bullish head-and-shoulders pattern.  PG is 
currently testing resistance at the neckline of this pattern.  A 
breakout over $57.50 could be used as a bullish entry point.  The 
H&S pattern suggests a $63 target.  Be sure to use a long enough 
option as PG doesn't move very quickly. 

Chart=


---

Wrigley Wm Jr - WWY - close: 69.67 change: +1.94

WHAT TO WATCH: WWY bucked the market weakness today after a 
broker upgraded the stock to an "out perform" this morning.  
Volume was very big on today's rally and its MACD produced a new 
buy signal.  We would consider bullish positions if WWY breaks 
out over resistance at the $70.00 mark. 

Chart=



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

How support "becomes" resistance and vice-versa 
By Leigh Stevens
lstevens@OptionInvestor.com

SUBSCRIBER QUESTION: 
I remember you talking about the s&p hitting a price level that 
used to be a buying area, which might later be a place to sell.  
I noticed that the middle of last month 1195 was support in SPX 
before it ran up to 1215.  After it came down through there, it 
then topped out the same area both this week and last.  Is there 
a way to predict this might happen useful for buying options?     

RESPONSE:
This is true of trendlines also – a support or up trendline, when 
broken, often becomes a resistance or support when prices return 
to such a previously broken trendline.  

But first and a starting point is how it is that a prior high or 
low reverses its role.  This is where a high in a stock or index 
over some period of time or an area of resistance, might later be 
a place where buying comes in (support).  Or, how a prior low, 
what used to be a price area with buying interest, later becomes 
resistance and a place where traders are looking to sell.  

This is an important concept and when you start looking at charts 
with this awareness you will see many examples. I can go through 
just the major indexes over the recent past and find numerous 
examples.  Experience however tells you what situations like this 
are trading opportunities - not all of them are.  I mention this 
only because there is a tendency to apply a lot of things 
mechanically.  

For example, you got into a great put trade because the indicators 
said the market was overbought.  You may want to then buy puts the 
next time that happens – WRONG! - very possibly in the next 
instance the market just keeps on going. It takes a nimble 
appreciation of what unique set of factors in each possible trade 
are showing you a trend DIRECTION you can bet on -   


 

Why this phenomena exists of tops becoming bottoms later on and 
vice-versa, like most market dynamics, is a function of what 
happened to investors at those prior lows and highs and their 
later attitude when prices return to the same areas - 


   

Example: peaks or highs - 
When any significant high that persists over a few hours, days or 
weeks, is reached in an index (or stock), it is also a high point 
in terms of bullish sentiment for the period of time being looked 
at.  A peak is reached in the degree of emotional conviction that 
prices will go still higher.  And, there are buyers who are still 
showing up for the first time draw in by the trend and an  
opportunity for profit. 

However, for one reason or another, this high point attracts more 
selling than willing further buying and prices start to fall from 
this area. With this correction to the uptrend and as prices 
fall, there will still be buyers showing up. However, these 
buyers who "bought high" usually exit if the index keeps 
dropping.  When the index or stock subsequently goes back above 
this prior peak, those former sellers are often not interested in 
going back in and take a wait and see attitude about it. Nothing 
like a loss to sour you on the position you had before!

Later, many of course see that the market is back into an 
uptrend.  If the index then drops back to near where they bought 
before, many of those who sold out before, are buying again – if 
they liked the market earlier they may even like it more now and 
might well be chiding themselves for having not stayed in calls 
and are eager to make up their prior loss.  This dynamic results 
in a built in source of buyers at a price that is at or near a 
prior top(s) - what was resistance has "become" support. 

Example: lows or bottoms -  
At any significant low, there are more buyers than sellers - more 
see the decline as only a correction in an uptrend and are 
willing buyers at some point. This buying interest creates a 
bottom and the index (or stock) rebounds – the price area from 
which the rally occurs becomes pegged as a "support" level.  

Later, prices break support but many traders and investors hold 
on. If in calls, they hold and don't fold - hey, after all, 
owning calls or puts is attractive because you can't lose more 
than you put into it.  Bad attitude over the long run!  

Bullish convictions or sentiment falls with the market trend 
sooner or later and eventually more traders want to get out.  If 
they then see prices come back to the area of the last bottom, 
many of these take advantage of the return of prices to their 
breakeven point (or close to it) and they sell.  This selling 
creates a secondary top and becomes defined as a new resistance 
area – and, prior support "becomes" a new resistance area. 

TRENDLINES REVERSE "ROLES" ALSO - 
This phenomena is harder to explain. In fact, I don't try and 
just observe the tendency for support (up) trendlines, once 
broken, to later define or become resistance and vice versa - 
i.e., for resistance (down) trendlines, once broken, to later 
define or become support. The S&P 500 (SPX) chart below is an 
example - 


           


The recent break in the well-defined up trendline in the Nasdaq 
100 Index (NDX), was followed fairly quickly by a rally attempt - 
so far, this rally has reversed at the previously broken up 
trendline.  


 


Sometimes this business of the reversing roles of trendlines all 
gets fairly complex as in the S&P 100 (OEX) chart below.  I tend 
to keep track of trendlines, especially long-standing ones, and 
keep at least one chart that has the trendline still extended so 
that it can be seen later on.  

In the case of the left-hand the first trendline in the OEX chart 
below, the market was coming down to an oversold reading on the 
oscillators and sentiment was quite bearish. The final "touch" of 
the lows to the previously broken down trendline, followed by a 
strong upside move the following day, was a good signal for a 
tradable rally - possibly, an intermediate low.


 

Good Trading Success!! 


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

What's Up?  Not The Market! -- February Position Preview

By Mike Parnos

OK, it's time to rock and roll.  The bulls have been neutered.  
Tomorrow's calves of have become the calv-nots and the cows have 
been sent back out to graze for awhile.  The bulls will have to 
find another outlet.  The market has settled into what appears to 
be a trading range.  That's OUR kind of market.  We're still going 
to be conservative with our "hypothetical" plays.  However, I feel 
comfortable enough to put on both sides of our Iron Condors.  
Remember, we're only going to use five or 10-point spreads as the 
memories (and lessons learned) from November loom large in our 
minds.

Thoughts On January
Many predicted that the market would keep movin' on up (just like 
the Jeffersons) in January.  Hasn't happened -- yet.  It appears 
like all of our January positions will all be profitable.  I think 
Sunday's wrap-up column will be fun to write.  We're on a roll 
again.  What kind of roll?  It's a warm and comfortable feeling – 
sort of like how the ingredients inside a Philly Cheese Steak 
sandwich must feel.  How's that for imagery? 
_________________________________________________________________

(NEW) February Position #3 - MSH Iron Condor - 469.76
Sell 10 MSH February 430 puts
Buy 10 MSH February 420 puts
Credit of about $.60 ($600)

Sell 10 MSH February 510 calls
Buy 10 MSH February 520 calls
Credit of about $.55 ($550)

Net credit and profit potential of about $1.15 ($1,150).  Our 
maximum profit range is 430 to 510.  510 looks like solid 
resistance and 430 is comfortably below other support levels.  
Maintenance is $10,000.

(NEW) February Position #4 - SPX Iron Condor - 1175.41
Sell 10 SPX February 1230 calls
Buy 10 SPX February 1240 calls
Credit of about $.40 ($400)

Sell 10 SPX February 1120 puts
Buy 10 SPX February 1110 puts
Credit of about $.65 ($650)

Total credit and potential profit of about $1.05 ($1,050.)  We've 
created a maximum profit range of 1120 to 1230.   Maintenance of 
$10,000.
________________________________________________________________

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 Position #1 - SPX Iron Condor Bull Put Spread - 1175.41
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 Position #2 - SPX Sure Thing Credit Spread - 1175.41
We originally put on the "hypothetical" position by placing the 
January 1195/1170 bull put spread for a credit of $6.30.  We were 
able to take in $6.80 ($1,360).

Early last week our “sure thing” credit spread went a little too 
far to the downside.  We closed out our two contracts of the 
1190/1165 bull put spread for $13.90 ($2,780).  Now, we had to make 
up the $2,780.  So, we had a choice.  We could put on a total of 
five contracts of the January 1190/1215 bear call spread for 
January at $6.15 ($3,050), or just four February bear call spreads 
for $7.35 ($2,940).  The maintenance for the January alternative 
was $12,500 and the four February bear call spreads would require 
only $10,000.  With a little less than two weeks to go, I opted for 
the January alternative.  Our new potential profit is $1,600 
($1,360 + $240).

January Position #3 - MSH Bull Put Spread - 469.76
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 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 -  $37.35
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 - 561.19
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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DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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