OUR BULLISH TRADE ON OIL (USO) SHOT THROUGH THE ROOF WITH OUR OCT 34 CALLS LAUNCHING AN INCREDIBLE TWO-HUNDRED-SEVENTY-THREE PERCENT!

This past week the markets traded mostly sideways but the dollar continued down driving commodities higher...

OUR BULLISH TRADE ON OIL (USO) SHOT THROUGH THE ROOF WITH OUR OCT 34 CALLS LAUNCHING AN INCREDIBLE TWO-HUNDRED-SEVENTY-THREE PERCENT!

And the really good news is we're still in the play--as the price rises we'll tighten our trailing stop to maximize the gains from this outstanding performer. Plus our credit spread on the FAS only has two weeks left and that is looking excellent as well. Our new trade on STEC backed off after we got in but we haven't been stopped yet--in fact we were not stopped out of anything this past week. With an excellent profit locked in on the USO we're now ready for two more high potential set-ups.

To help locate where the profits are this week let's take a good look at...

WHERE THIS MARKET IS HEADED

The market traced its most bullish September since 1939 trading higher in an almost unbroken line--but for the past week that upward momentum has stalled. With September being the most historically bearish month of the year many traders that shorted the markets were forced to buy back--driving the indices higher. Once the momentum starts it is hard to stop but last week we may have seen the markets hit the tipping point.

The SP-500 first tested resistance at 1150 on August 21st and hasn't been able to break through yet. We saw some good volume last week with about 7.5 billion shares on average---however Thursday's opening spike pumped that volume to 8.7 billion shares and two-thirds of it was down volume. That tells us there were plenty of traders waiting to take profits at 1150.

The Nasdaq Composite hit hard resistance at 2400 at the open on Thursday but was immediately knocked lower on massive sell-volume. Friday's spike to 2389 was just as quickly rebuffed for a lower high. The index lost 27 points last week as the momentum in Apple, Amazon and Priceline slowed--for the first time in a month the Nasdaq 100 is looking vulnerable.

That vulnerability is being reinforced by falling chip demand. A Bernstein Research semiconductor analyst cut his estimates again for Intel and AMD last week warning that Q3 notebook orders were below their already reduced expectations. He said early signs for Q4 suggest demand will be below seasonal norms. Apparently notebook shipments from Taiwanese manufacturers show "a significant deceleration" from recent quarters and typical historical trends. He said Taiwan notebook makers are now guiding to lower shipments with as much as a -7% decline. Historical norms for Q4 are +20% increases so these are alarming downward deviations---is not shaping up for a good quarter for chip stocks.

Quarter end window dressing was credited with keeping the indexes pushed to their September highs until month end but every attempt to push through those highs was immediately sold. The spike on the S&P to 1157 at Thursday's open lasted about 15 minutes before the sellers piled on to push the S&P to the low of the day at 1136 about an hour later. Resistance at 1150 is very strong and moving into a normally volatile October only strengthens the resolve of fund managers wanting to lock in profits.

Now the quarter is over and funds have to make those hard decisions about what to keep for their fiscal year end on October 31st--and what to sell. Those decisions will start affecting the markets soon and it's doubtful the markets will be going much higher without first seeing some profit taking.

Friday's bullishness pulled the markets back up from Thursdays dip in the US but the action was less enthusiastic in Europe. Stocks settled near three-week lows as traders focused on widespread anti-austerity protests thoughout the region.

After the worst recession since world war two, European governments ramped up spending to pull their economies out of the ditch. Now they're trying to reduce their massive deficits but the population isn't going along with it--they've gotten very used to their government hand-outs. As the great Maggie Thatcher once said, "The problem with socialism is you eventually run out of other people's money".

Belgium, Spain, Ireland, and Greece saw the biggest demonstrations with over 100,000 protesters marching in Brussels alone. Spain experienced its first "general" strike in eight years, which disrupted transportation and some television broadcasts. Athens experienced widespread strikes in its transportation, port, and communication industries.

Investors are worried that the growing anger over these austerity measures in Europe is going to make it politically impossible for many countries to implement the budget cuts necessary to bring their spending in line with their revenue. As investors lose confidence they are demanding higher and higher yields on any government bonds making the burden on those governments even harder to sustain. Spain saw its debt yields jump to new relative highs last week and that won't be the end of it. The English FTSE index lost -0.16%--the German DAX fell -0.46% and the French CAC-40 lost -0.67%.

In spite of the situation in Europe the euro hit $1.3628 against the dollar Friday representing a new eight-month low for the greenback. The problem for the dollar is the Federal Reserve indicating a new round of quantitative easing after the mid-term elections--in other words more massive dollar creation to try and jump start the economy. This expectation continues to push the dollar lower and foreign currencies, commodities and metals higher.

Copper futures hit new two-year highs last week thanks to a weaker dollar and stronger manufacturing data out of China. Copper inventories have fallen for 31 weeks in a row, which is another contributing factor to copper's strength. Gold shot up 2% on the week tracing new highs and silver was another winner with a +3% gain for the week. Silver futures briefly traded over $22.00 an ounce, hitting a high not seen since 1980. Silver is outpacing gold with a +30% rise for the year but gold is approaching a +20% gain. Gold settled last week at $1,319 an ounce for the first time in history and it looks like it will continue to climb as long as the Fed keeps printing money and keeps interest rates artificially low.

The biggest concern with unbridled money printing is inflation--and in spite of the government figures showing zero inflation those rising commodity prices tell a different story--a story that can be seen unfolding in the national ISM or Purchasing Managers Index released Friday. An telling aspect of the ISM was the sharp rise in the prices paid component from 61.5 to 70.5. This is the highest level since May and suggests the rising cost of commodities is starting to show up at the producer level--the first signs of inflation.

The big report this coming week is the Non Farm Payrolls report on Friday--current estimates from Moody's is for total employment to have risen by 5,000 jobs in September. They believe private employment has risen by 90,000 but government terminations will approach 85,000 jobs. Census employment declined by an estimated 77,917 in the September period.

If the headline number is positive for September despite the 85,000 lost government jobs then it will be a good sign the economy is growing. The October report should not have a significant impact from terminated census workers so we could be back to a +100,000 rate when that report is released in November. This week traders will just want to see a positive headline number--anything else is a bonus.

Economic news is important but the big driver starting this week is the beginning of the Q3 earnings season. This week starts out slow with MOS, YUM, MAR, MON, PEP and AA as tickers you might recognize. Alcoa is the first Dow component to report on Thursday. Marriot and Costco on Wednesday will give us our first read on business and retail spending. The real flood of earnings reports starts the week of October 11th.

A relevant fact not well reported in the media is the growth of earnings warnings this quarter. We have seen more than double the warnings for the coming Q3 earnings than we saw for the Q2 cycle. This is not a good sign.

Quarter end retirement fund flows should help support prices early this week but with the payroll report on Friday and the markets struggling at resistance there will be some serious second thoughts about adding to long positions--the question is...

HOW DO WE MAKE MONEY ON IT?

We've got two trades lined up this week and they both look ripe for profits. The first is a straight bearish trade on an index with plenty of reasons to drop--and the chart tells us it's teetering on the edge. The options are cheap and the potential is big so we'll be climbing on board for the best price we can Monday.

Our next trade is a 'both ways' position on a stock stuck in neutral--but with earnings coming out in the next few days it isn't liable to stay that way for long. We can set ourselves up to profit in either direction for a small investment on a stock ready to explode--one way or the other!

We've got two high potential trades set up on a market ready to move--so let's get to it...

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