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Technical Indicator Analysis of the Dow and Nasdaq Composite Index
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STOCK MARKET DIRECTION by Steve Zito Newsletter for Friday, April 22, 2005

Information in this newsletter based on prices on Thursday, April 21, 2005
Dow Jones Industrial Average
---------------------------------------- 10,218.60 +206.24 (+2.06%)
Nasdaq Composite Index
----------------------------------------- 1,962.41 + 48.65 (+2.54%)
Standard and Poors 500 Index
----------------------------------------- 1,159.95 + 22.45 (+1.97%)
10-Year Treasury Note yield
--------------------------------------------- 4.30% + 0.09

DOW JONES INDUSTRIAL AVERAGE analysis
The Dow closed at 10,218.60 +206.24 at 0.29% over its short-term moving average.
It gapped open and broke through the short-term trendline rather convincingly.
Dow stochastics are rising from 23%/18% on Tuesday to 33%/20% on Thursday.

Stochastics forecast continued upside for one or two days, but any longer is
questionable with increased volatility. High volatility does not mark a bottom.
Bottoms occur when everyone is long gone, sold out, and the rest fast asleep.

At the bottom in 1974, 1980, 1982, and again in 1990, stocks were flattened
from inflation worries driving interest rates to cyclical highs, not profits.
At the bottom of these Republican President bear markets, profits were okay
enough to produce price/earnings for the Standard and Poors 500 near 10,
compared to the current plus 16 ratio based on the next 12 months earnings.
U.S. industrial stocks are no bargain, despite CNBC calling stocks "cheap."
In fact, CNBC has been calling Google (GOOG) cheap trading at a P/E over 50.

From Wall Street to Main Street, the stock market began Thursday with a gap
higher open, close to Dow 10,188 of which I wrote in previous newsletters.
Once the 10,188 level was pierced, the Dow speeded up and never looked down.
While most of Wall Street was caught short and had to cover by buying back,
Main Street has been merrily invested 100% since the mid-1990's and about 85%
of mutual fund investors do not trade but practice "buy and hold." Only those
without jobs - such as retirees - have the time to day trade, which is tricky.

Big up days like Thursday generate bullishness, just as big losing weeks
like last week when the Dow fell 375 points add to fear and reduce optimism.
Very few practice the correct way to win, which is buy low (like Wednesday)
and sell high (like Dow 11,000), because most traders react, not anticipate.

Before the Dow collapsed last week, I told readers to load up on July puts
on the weakest stocks, June puts on the Dow. Monday, I wrote to lighten up
on Dow put positions, cash in on 75% of U.S. Steel puts, and buy Nucor puts
on a rebound of 5 points in NUE. In the last newsletter I advised XAU calls.
Nucor NUE closed 53.60 +1.83 (+3.53%) opened 52.95 range 50.51 to 53.99
July 50 put NUESJ 2.50 -0.80 Bid 2.45 Ask 2.60 vol 139 open 1,857
July 55 put NUESK 5.30 -0.50 Bid 4.70 Ask 5.00 vol 1,118 open 6,235
July 60 put NUESL 10.10 unch Bid 8.00 Ask 8.30 vol 21 open 2,596

Thursday, except for Bearing Point (BE) and Yum Brands, all of the stocks
I have mentioned in the past 3 years went up, but not gold stocks nor XAU.
The advance - decline was only 3 to 1 on the upside, so the explanation is
that I write about ACTIVE stocks, and it was the active stocks which led.
Bearing Point BE last 5.28 -2.49 (-32.05%) - YUM last 47.18 -2.12 (-4.30%)

Thursday was a money flow event, and that likely was a portfolio allocation
shift by major brokerages out of bonds and into stocks. Bonds will gain less
than stocks in an easy money scenario which happens when the FED goes on hold.

Portfolio allocation only lasts 2 or 3 days, because the sudden drop in bonds
from selling large bond accounts to buy stocks causes a jump in interest rates,
and that rise in longterm interest rates attracts capital back into those bonds.

The stock market gapped open as large flows of money bought at the opening.
Why the gap open? For one, inflation fears subsided as interpretations of the
FED turned on a dime, from willingness to raising rates at a "measured pace"
to perhaps a pause for several months, kind of like a "wait and see attitude."

This sudden shift in economic expectations came from a lower than expected
0.4% drop in the LEI, Leading Economic Indicators, vs. the 0.3% anticipated.
The falling LEI forecasts a slowing economy, which would allow the FED to
stop raising rates, which they have been doing for a year. If the FED stops
raising rates, then consumers can keep borrowing on their homes and spending.

Not coincidentally, the best gainers in the Dow were Altria (food and tobacco)
Walt Disney (entertainment and theme parks), and Microsoft (software, games).
All three would benefit greatly from increased discretionary consumer spending.
Discretionary is optional spending compared to non-discretionary like medicine.

Attention shifted away from the Dow pharmaceuticals, which had been smoking.
Even though 3% gains for the well known techs from Intel to Hewlett Compaq
were across the board, the best gainer I wrote of recently was in Ford up 5%.

In the last 2 newsletters, I recommended buy Ford (F) and write calls on it.
Readers bought Ford Motor under 9.40 as the Dow closed on the 10,000 level.
Those readers should place a GTC order to sell the Ford Dec 10 call at 1.75.
Ford Motor (F) closed 9.82 +0.48 (+5.14%) opened 9.50 range 9.50 to 9.86
December 10 call FLB last 1.05 +0.15 Bid 1.00 Ask 1.05 vol 542 open 1,238.

Intel did nothing on Wednesday following Tuesday's earnings release (up 25%)
but Intel moved on Thursday following Motorola and Nokia (both big in China)
reporting better than expected revenues. That move in Intel cut the July puts
in half, and those who want to hit INTC options traders where it hurts should
double July put positions in Intel. Semiconductor stocks face a summer and
seasonal slowdown from April to August, always have and they always will.
INTC closed 23.36 +0.70 (+3.09%) opened 22.99 range 22.93 to 23.39
July 20.00 put NQSD 0.15 -0.10 Bid 0.15 Ask 0.20 vol 320 open 17,387
July 22.50 put NQSX 0.65 -0.30 Bid 0.60 Ask 0.70 vol 1,390 open 54,868

Gold stocks in the XAU suffered on Thursday as everything else bobbed up
like Noah's Ark in the great flood. Of 200 stocks I have in my data list,
195 showed green arrows. Since gold stocks went down, even with gold up,
it's time to buy XAU calls when no one wants them, XAU June 95 at 1.00.
XAU closed at 89.00 -0.98 (-1.09%) opened 89.89 range 88.62 to 90.32
June 95 call XAUFS last 1.75 -0.25 Bid 1.55 Ask 1.80 vol 13 open 1331

I wrote Tuesday, the new Pope may redirect Vatican investments to Germany, i.e.
"Bonds in Europe, which the Vatican may be buying heavy with a new Pope elected
from Germany, and wanting to help out fellow East Germans with 20% unemployment."
Ratzinger said today, all the key Cardinals will stay in place, nothing changed.
One wonders if it was the Vatican buying heavy into U.S. stocks on Thursday?

I wrote buyers are waiting in the wings, the so-called sidelines money, that is,
"The stock market completely broke down last week, but is having a small bounce.
There are buyers at Dow 10,000, Nasdaq 1900, who gamble a temporary floor is in."
Thursday's action proves the point. Will it last? It could but bottoms are made
with low volatility. Long-term investors DO NOT LIKE VOLATILITY (= MORE RISK).
-------------------------------------------------------------------------
DJX closed at 102.19 +2.07 (+2.07%) opened 100.13 range 100.13 to 102.19
June 100 put DJVRV last 1.25 -1.05 Bid 1.15 Ask 1.35 vol 636 open 28563
June 104 put DJVRZ last 3.00 -1.50 Bid 2.85 Ask 3.10 volu 58 open 21396
I wrote Sunday night to sell 1/2 DJX puts to recover initial cost, and use any
oversold up Monday to roll profits from expired DJVPA into QQQQ Sept. 35 puts.
An oversold bounce occurred on Tuesday, readers bought QQQQ Sept 35, see below.

NASDAQ COMPOSITE INDEX analysis
Nasdaq Composite closed 1,962.41 +48.65 at 1.18% above its 7-day moving average.
Like the Dow, opened gap higher and never looked down, TV said it was Motorola.
Nasdaq stochastics rising fast from 21%/13% on Tuesday to 68%/22% on Thursday.

QQQQ closed at 35.62 +0.92 (+2.64%) opened 35.12 range 34.96 to 35.71
May 36 put QQQQJ last 0.85 -0.65 Bid 0.85 Ask 0.90 vol 19,472 open 180,566

Readers sold 1/2 of the QQQQJ (bought at 0.50) on Friday's jump over 1.50.
Readers who took cash settlement on DJX April puts bought QQQQ Sept. 35 puts.
Sept 35 put QQQUI last 1.35 -0.45 Bid 1.30 Ask 1.40 vol 1,621 open 53,898

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