A SPIKE LOWER ON ABC STOPPED US OUT OF OUR DEC 22.50 CALLS AT A VERY NICE ONE-WEEK FORTY-FIVE PERCENT PROFIT!

This past week the markets hit the top and rolled over...

A SPIKE LOWER ON ABC STOPPED US OUT OF OUR DEC 22.50 CALLS AT A VERY NICE ONE-WEEK FORTY-FIVE PERCENT PROFIT!

That was a great win--but we also ran out of time on our Nike (NKE) puts creating a loss. The stock rolled over big this past week but not far enough or fast enough to save our puts on NKE. Fortunately Well Fargo (WFC) has turned our way and if it's current trend continues we'll have some nice profits to report on that one next week.

The markets are looking toppy after this past week's rise and fall--is this the end of the rally or are we stepping back for another great leap forward? To find out let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

The S&P rolled over Thursday and Friday after hitting a short term high right at 1110. The breakout essentially failed but without a decline below initial support. This is typical when a critical resistance area is broken for the first time. There are always sellers waiting above any critical level--which is what produces resistance. What the index does next is the key.

In this case the spike to 1110 held for three days without failing and without a further advance. That suggests the buyers and sellers were struggling with equal force. The gap down on Thursday morning was dollar related and helped by the downgrade of the entire chip sector---the stalemate was finally broken by external events.

The Nasdaq did not fail at any specific resistance level--instead it got hit by the Merrill chip downgrade and Dell's earnings disaster turning the index around in mid-air.

It was a tough week with Dell's 54% earnings short-fall following a major downgrade of the chip sector by Merrill Lynch on Thursday. BAC/Merrill downgraded INTC, TXN, MRVL, LSI, MXIM, NSM, POWI and MCHP to 'underperform' from neutral.

Underperform is the same as a sell rating. BAC said inventories have been replenished and inventory levels in the supply chain were approaching a surplus condition. The semiconductor sector was knocked for a loss on Thursday and again on Friday thanks to Dell but the actual damage could have been worse.

Volume on Friday was the lowest since Oct-12th and it is probably not going to get any greater this week---Thanksgiving week is typically one of the lowest volume periods of the year. That means any market-moving event is likely to be exaggerated because it won't take much to move stocks with little competition.

Despite the light volume and nearly flat markets on Friday the A/D line was negative with 3741 decliners to 2741 advancers. Friday was the third day of declines and the major indexes slipped back to initial support--but that support did not break. Considering it was option expiration that is a positive sign.

Some Analysts chalked up the pullback to a cooler view of the prospects for the U.S. consumer after a series of reports highlighting ongoing troubles in housing. Those worries could resurface this week with a fresh slew of reports on new and existing-home sales for October and the S&P/Case-Shiller survey of national home prices.

Existing Home Sales come out on Monday and the Case-Shiller index comes out on Tuesday.
The homebuilder sector was also knocked for a loss on Friday after DR Horton (DHI) reported a 73-cent loss---far worse than analysts expected. The company was forced to take a $192 million charge for impairments and write-downs on land contracts. DHI stock fell -15% for the day and depending on how these housing sector reports go it may fall further this week.

The biggest trade this year has been to short the dollar and go long gold and commodities--but is that about to reverse? The dollar refused to break support at 75 on the dollar index and if a short squeeze comes it's liable to be violent. Currencies and commodities can move exceptionally quickly and those traders who don't pull the trigger at the first sign of trouble could take huge losses. Over the long run the dollar will probably fall further but there could be several big reversals where weak players are ejected by violent short squeezes--and that could be starting right now. Any short squeeze in this trade will crush commodities like oil and gold--which we would view as a great long-term buying opportunity.

Gold hit a new high this week at $1153 an ounce and it could go higher if the dollar does not rebound soon. Rob Lutts of Cabot Management said central banks are mulling further investment into gold reserves. He quoted Mexico, Russia and the Philippines as having bought gold recently as well as the 200 metric tonnes purchased by India over the past week.

With currencies devaluing many countries are looking at gold as a reserve instead of the dollar. Lutts is predicting $1350 gold once the IMF announces the sale of the second half of their hoard. They sold half to India and they are taking bids on another 200 tonnes. The IMF said if no country bids for the entire amount they would sell it on the open market. That event could definitely depress prices temporarily while a single buyer would send prices soaring.

This week is holiday shortened and there are no economic reports on Thursday or Friday. All the normal reports have been moved forward making Tuesday and Wednesday extremely busy. The key reports for the week are the Chicago Fed National Activity Index on Monday, GDP revision, the Richmond Fed Survey and the FOMC minutes on Tuesday. Wednesday has the Kansas Fed Manufacturing Survey. The two most important events for the week are the GDP revision and the FOMC minutes.

The GDP revision is now expected to fall to +2.9% growth in Q3 from the initial estimate of +3.53%. Any material decline worse than 2.9% would be negative for the markets.

The FOMC minutes for the November meeting will be released at 2:PM on Tuesday. These will probably provide the most market volatility of the entire week. This is the inside look at what the Fed was thinking when they met to determine rate policy on Nov-3rd. We've already seen the FOMC statement but this Tuesday we'll see the thinking behind it.

We've got a market that has pulled back, a potentially volatile holiday week and a traditionally bullish year-end--the question is...

HOW DO WE MAKE MONEY ON IT?

We've got two plays lined up this week--one bullish and the other bearish.

Our bullish play is on a stock that just announced earnings and they tore the cover off the ball growing the bottom line a whopping 1300% versus the same quarter last year! And this is at a time when their competition is struggling. The stock took off like a rocket right after the announcement but fortunately for us it's come right back down to where it started--and now that it's filled the gap it's ready to launch again--only this time we'll be along for the ride!

Our next play is bearish and it's almost a mirror image of our bullish trade--this company is LOSING market share against its rivals and just announced earnings so bad it had holders dumping the stock in droves--but make no mistake--this downturn is just beginning and we'll be getting in on what promises to be a VERY profitable put play!

We've got two great low-cost, high-potential trades lined up so let's get to it...
For more information on everything you receive with your Pearly Gates subscription click on

www.cashflowheaven.com/pg