This past week the markets bounced around bouncing us out of several positions...

This past week the markets bounced around bouncing us out of several positions...

F5 NETWORKS (FFIV) REVERSED STOPPING US OUT OF OUR CALLS AT A MODEST FIVE PERCENT PROFIT!

PLUS MARIETTA MATERIALS (MLM) DIPPED BELOW OUR PROFIT TRIGGER AND THEN REVERSED GAINING A NINE PERCENT PROFIT ON OUR PUTS!

Those gains are small but we still appreciate them but they were overshadowed by losses on Chicos FAS (CHS) and Pepsi (PEP). When you set exit points on both the upside and downside you never know when a rogue spike will take you out of a play--sometimes it's at a gain, but in the case of Pepsi it was at a loss.

The key is to not let the losses dominate the portfolio--which is why we use stops. The other key is to make your winnings much more plentiful--which is exactly what we are going to work on right now by taking a good look at...

WHICH WAY THIS MARKET IS HEADED

Talk about a range bound market--the S&P-500 dipped to 1085 once again on Wednesday and then returned to 1110 right on cue. The S&P bounced to 1085 four times over the last four weeks and each time rebounded to 1100.

The Nasdaq could not stay positive Friday and finished with a loss of -4 points for the week. The midweek decline totaled -40 points but it recovered nearly all of that loss.

The resistance on the Nasdaq at 2200 has been rock solid since Nov-16th. However, we do have a pattern of higher lows and the Nasdaq is wedging nicely into a breakout pattern. Techs are expected to lead the way in 2010 so investors are continuing to buy the dip and any move higher will show another higher high.

China's factory production hitting 19% in November was a big reason for the market to rally last week. However, that is now old news and there is a Fed meeting in our immediate future. Stocks are not likely to rally much ahead of the Fed for fear of some rate raising language whacking stock prices.

Once past the Fed meeting we will be hitting the holiday vacations and volume will fall off dramatically. While late December has shown some nice rallies in the past there is cause for concern.

Many funds and institutions are sitting on gigantic gains from the rebound since March. The Dow is up +61% from its lows and the S&P +66%. That is a good decade of gains and it came in only nine months. There are many funds, institutions and money managers just counting the days until January so they can close those positions and lock in profits. If they sell them now in 2009 they have to pay taxes almost immediately. If they wait three weeks and sell them in January they can postpone those taxes for a year.

Which means quite a few managers are trying to sit tight for the next couple of weeks and praying that the market doesn't implode. The wildcard here is professional traders trying to front run any potential January dip. Do they sell into any Santa Claus rally or do they tag along for the ride into January? It will be interesting to find out. Meanwhile we need to keep our stops tight.

The economic reports for the last couple weeks have produced some big expectations for Q4 GDP. Whisper numbers are starting to move over 5%---including one analyst from JP Morgan.

That would be a huge number and would create significant ripples in the market and more pointedly at the Fed. It would force a rethinking of GDP estimates for all of 2010 and force the Fed to start thinking about raising rates. The Q4 GDP estimates are going to be the big story over the next month because the first official Q4 release is not until Jan-29th. Expect a lot of talk about the GDP as we near that release because official estimates are only for 2.6% GDP for all of 2010.

The calendar for next week is dominated by the FOMC meeting on Tue/Wed. That will be the sole focus for analysts until after the announcement on Wednesday. We have a pretty good idea nothing is going to change because Bernanke said as much in his testimony last week. However, in light of the recent economic improvements there could be some change in the language other than the "extended period" comment that will show the Fed is setting up for a bias change. This possible change in bias is going to be the overriding worry for the markets this week.

In addition to the Fed will be the Best Buy earnings on Tuesday and the FedEx, ORCL, RIMM and PALM earnings on Thursday. These reports will be key--especially in the case of Best Buy. As the largest electronics retailer--and without Circuit City to undercut their prices this year---BBY earnings should be decent. Of course it won't be the earnings that attract the most attention but the guidance for Q4. With only two weeks left in the shopping season Best Buy should be in a position to call the game for the rest of the year. If they say sales are good then everyone will benefit. If they warn about weaker sales and smaller margins because of the heavy discounting then the whole sector will head south.

After weeks of incredible volatility where every uptick in the dollar produced losses in equities and commodities a strange thing happened on Friday. The dollar broke out to a six-week high and commodities did not tank. Equities rallied as well. There is normally a direct inverse relationship between the dollar and stocks but that changed on Friday.

The reason for the change was the jump in consumer sentiment, retail sales and the first rise in business inventories in 13 months. For analysts that means the U.S. economy is improving faster than expected and that produces a stronger dollar. The best of both worlds is the dollar and equities both rising--and that may be the case right up until the Fed talks about raising rates--at that point stocks will plunge and the dollar will continue heading higher.

Recent economic reports are showing some catalysts suggesting the U.S. economy as well as China's is gaining traction. These reports are putting upward pressure on the dollar and making some investors more comfortable with the outlook for 2010. However, this range bound market is also telling us that the bullish sentiment from the +60% rally from March may be fading.

There are signs that some money managers may be just biding time until January to dump stocks for tax reasons. That could also lead to some additional window dressing into year-end driving stocks higher--the question is...

HOW DO WE MAKE MONEY ON IT?

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

Our bullish trade is on a stock with an excellent chance of gapping higher this week. The reason is its past history--we're coming up on an event that virtually always makes this one explode--and this time it looks like it's heading higher. Fortunately we've got time to buy some great calls that should rocket higher by the end of the week--calls we'll be getting into Monday.

Our next play is on a company that sells a product that is dropping in price--and the stock shows it. This one has a perfect pattern of lower highs and lower lows--and we just hit one of the those lower highs setting us up for the perfect downside play.

We've got two great looking positions and a market ready to move so let's get to it...

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