When You Hold Calls on a Stock that has 'Gone Parabolic'--SELL INTO THAT STRENGTH!

The market took a step backwards this week but not before racking up some outstanding profits on our bullish positions...

ATP OIL AND GAS (ATPG) POPPED ABOVE OUR PROFIT TRIGGER MONDAY AND THEN REVERSED KNOCKING US OUT OF THE PLAY AT A SWEET TWENTY-ONE PERCENT GAIN!

THEN ON TUESDAY THE IWM SWOONED STOPPING US OUT OF THE TOP HALF OF OUR STRADDLE FOR A COMBINED PROFIT ON BOTH SIDES OF THE TRADE OF THIRTY-SEVEN PERCENT!

BUT THE MONEY-MAKING GRAND-DADDY WAS THE METEORIC RUN UP AND REVERSAL OF TATA MOTORS (TTM) AFTER EARNINGS FOR AN OUTRAGEOUS THREE-DAY ONE-HUNDRED-FORTY PERCENT PROFIT!

The profits from last week were even sweeter considering we had zero losses making it a VERY constructive week for our accounts.

One point that is important to make about last week's trading concerns our bullish play on Tata Motors (TTM). The stock really caught fire on Wednesday moving higher and higher at an accelerating pace finally climbing almost straight up. Whenever you see this kind of exponential climb higher you can bank on one consistent pattern--that kind of straight up climb is unsustainable.

This extreme consistency is true if you are looking at the chart of the Nasdaq back during the dot-com bubble--or QCOM from July '99 to Feb 2000 (it went from $15 to $1000 per share!) or any other stock, index or commodity. And it's true whether that accelerating run higher takes place over months or in Tata's case one day.

The point is this--when you hold calls on a stock that has 'gone parabolic'--in other words it climbs at an ever steepening pace until it is going straight up--then SELL INTO THAT STRENGTH!

Sell immediately when you see that pattern because it is going to reverse as steep as it went up.

For our 'official' record on TTM we DIDN'T do that because I really stress using contingent orders on the service which work great most of the time--but in real life when you see that pattern grab the goodies and get out!

If you would have done that on TTM Wednesday afternoon you would have bagged somewhere in the neighborhood of a 250% profit--instead of the 140% we show after the stock gapped down Thursday morning. That's a 110% difference--pretty huge.

Now I'm not complaining--we had an awesome week. But the whole idea of aggressively trading options is to max your gains to make up for the inevitable losses this kind of trading engenders. And maxing your gains on TTM would have been as easy as hitting the sell button anytime during the last hour of trading Wednesday afternoon.

Okay--enough said. Our goal this week is to turn around and do it again. So where are the profits hiding now? To find out let's take a good look at...

The market drop last week was the biggest weekly decline in more than three months. Volume over the last four days averaged over eight billion shares per day--about average so not an indication of high-volume panic selling.

The S&P declined only 28 points from its highs over the last week and the pace of selling was slow once past the open. Each day had an afternoon rebound---not closing on the lows is a positive signal. Considering all the bad news released last week the markets held up fairly well.

Serious structural problems will be impacting the economy over the long term (out of control entitlement spending) but there is a good chance the short term will stay positive. Money is flowing into mutual funds and the Fed plans to keep it that way.

Unlike the S&P the Nasdaq broke uptrend support at 2550 and has already returned to the bullish consolidation area from late October. Thank you Cisco, Google and Apple. The Nasdaq declined -60 points to come to rest just above 2500. The support range from 2470-2500 needs to hold and halt this Cisco generated tech flight.

Cisco (CSCO) whacked the markets hard when they significantly lowered guidance for future quarters last week with shares declining an eye-popping -18% on the news to close at $20.15 Friday.

Cisco, which dominates sales of networking equipment and has moved into an array of other markets making themselves a decent bellwether for the tech sector---warned late Wednesday that it expects its revenue to grow 3% to 5% in the current quarter—alarmingly lower than analysts' forecasts of 13%.

Cisco's warning was a major blow to market sentiment--at least in the tech sector. The tech stocks had been leading the markets higher and Cisco turned into a major drag on the networking and PC sub sectors. Cisco said decreased government spending worldwide due to austerity programs and budget cuts would drag on revenues for the next two years. It was a bleak outlook from the normally positive tech giant.

Other factors dragging the markets lower last week were worries over rising inflation in China and more potential credit defaults in Europe--particularly Ireland.

China was the main focus on Friday with inflation at two-year highs and worries over further tightening to slow that rise. China's inflation for October came in at 4.4% and nearly a full point higher than the 3.6% rate in September. Inflation has tripled since January's 1.5% rate. The Shanghai Composite Index plunged more than 5.2% on Friday on fears China would hike rates. These fears dragged down all Asian markets and pushed the U.S. market to a negative open as well.

It's always interesting how news driven sell-offs seem to coincide with over-bought markets that need to correct a bit--when the market wants to go down it will always find an excuse. While China's 4.4% inflation rate might sound out of control it is only because traders don't realize the historical trends of Chinese inflation.

From 1994 through 2010 the average inflation rate in China was 4.25% but zoomed as high as 27.7% in October 1994 and was over 8% as recently as May/June 2008. For China's inflation to be 4.4% today it is right inline with the average and not a major problem. Yes, China might hike rates or take some other action to slow its rate of growth but the action will not be crippling to China's 10% growth rate. Growth will continue and even if it declined to 9% it would still be the hottest economy on the planet. Blaming the U.S. market decline on China was easy because the market was already looking for an excuse to take profits.

In addition to China--debt problems resurfaced in Europe as they will continue to do periodically for the foreseeable future. Apparently Ireland is the new Greece.

Last week the growing debt crisis in Ireland dominated the news--but that eased somewhat on Friday. Irish bond prices rose for the first time in 14 days after Britain, France and Germany issued a joint statement promising to stand behind all of Ireland's debts. Before the pledge Bloomberg surveyed analysts and 51% said they "regard a default as likely." That is triple the number who felt it was likely back in June.

By Friday nearly everyone believed the EU and the IMF would be forced to come to Ireland's rescue. The problem with that is the list of countries supporting Ireland are all in the same boat---only their situations are not unraveling right at this moment. How many countries can the EU bail out before it goes broke? As one analyst put it, "who will rescue the rescuers?"

Hopefully the pledge by the EU countries to guarantee Ireland's debt will put an end to the current round of debt worries. The Euro gained slightly on the news.

The drop in the Euro over the last week suddenly made the U.S. dollar a safe haven play despite the Fed's QE program. The dollar rebounded to a five-week high and suddenly made those "short the dollar, long commodities" traders were getting scorched. The weak hands raced for the exits causing an immediate drop in commodity prices.

Gold plunged -$35 on Friday for the biggest one day drop in months to close at $1365 and well below the $1424 high Tuesday. Copper fell -$12.60 or -3.1%---the most in four months. Crude prices fell -3.4% to $84.87 after hitting a new two-year high on Thursday at $88.60. Sugar fell -12% in London and the most in 22 years. Corn and Soybeans traded limit down. The entire CRB Index fell -3.6% for the biggest drop since April 20th 2009. China is the world's leading consumer of many commodities and the combination of possible Chinese tightening and the spike in the dollar crushed prices.

The dollar will reverse as the Fed increases the pace of its bond purchases and the U.S. goes further into debt--it may not happen this week but it will happen--and commodities will rise again. Expect some enthusiastic dip-buying once the dust settles because the Fed is seriously determined to undermine the dollar.

The Fed launched its first bond purchases under the QE2 program on Friday. The Fed offered to buy $7.2 billion in bonds and dealers offered to sell $29 billion in 3-5 year maturities. After the smoke cleared the scoreboard showed $7 billion sold and $593 billion to go. The Fed is expected to buy $105 billion in total at auction almost every business day for the next month in an effort to push rates lower. That did not work Friday with yields on the 10-year notes jumping +5.17% and the biggest increase since August. Yields on the 2-year jumped +17% for the biggest one day increase since April. However eventually the daily Fed purchases will produce the desired effect.

The market retraced last week as the herd tends to get all bent out of shape when negative news events start piling on top of each other. We may see some follow through early this week but the major up-trends are still in place and the real investors will begin snapping up bargains the moment the selling slows.

The news events from last week that were so effective in driving the market lower will likely fade now that the G20 is not producing dozens of sound bites a day and their accompanying "currency war" headlines. The Ireland news risk should also fade because of the EU pledge to stand behind Ireland's debt.

There are other possible bullish incentives coming as well. This week we've got the Philly Fed Manufacturing Survey on Thursday---notable because of the expected improvement. Consensus estimates are for a jump to 5.0 from 1.0 on the headline number. That would completely reverse the last three months of declines and predict a strong showing for the national ISM. This report could revive U.S. expectations for economic improvement.

Meanwhile Consumer Sentiment for November rose to 69.3 from the prior reading of 67.7. This is the highest level since June and it was led by a rise in the present conditions component to 79.7 from 76.6 while the expectations component rose only one point to 62.7. This is a bullish sign now that we are in the fourth quarter--the biggest consumption quarter by far and where many retail stores make or break their year.

The Fed is going to keep driving money into this market so buying the dips still seems like a smart strategy---at least through the end of the year--the question is...

HOW DO WE MAKE MONEY ON IT?

The key in a market like this one is to find the most bullish stocks and buy them on pull-backs--and that's exactly what we're doing.

Our first play is on an outstanding niche retailer that just increased their bottom line by a whopping 46%--in this economy! The company is firing on all cylinders and has no national competition in their space. One look at the chart will have you drooling to buy this pullback--a strategy we'll be implementing Monday with some well-place calls!

Our next play is on a tech stock that just got hammered Friday along with the rest of the market but we've got good reason to believe this one could rocket back within a matter of days--a ride we're planning on climbing aboard first thing Monday with some high-potential calls!

We've got the pullback traders have been waiting on for weeks--with two outstanding plays ready to take advantage of it--so let's get going...

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Options Pricing and the Amazing Benefits of Credit Spreads

HARLEY DAVIDSON (HOG) DRIFTED LOWER DRIVING OUR NEW PUT PLAY TO A ONE WEEK THIRTY-FOUR PERCENT OPEN PROFIT!

This past week the markets drifted sideways to down as traders await the November elections and an announcement from the Fed...

HARLEY DAVIDSON (HOG) DRIFTED LOWER DRIVING OUR NEW PUT PLAY TO A ONE WEEK THIRTY-FOUR PERCENT OPEN PROFIT!

Those are some nice gains so far but they'll be a lot bigger once the stock trades below our profit trigger--and that's the direction it's headed. Our other play on ATPG drifted lower finally filling in its gap from earlier this month and now looks poised to shoot higher--after falling all week it rose almost 3% on Friday.

The market is holding its breath waiting for the big election news this week and waiting to see how much more accommodative the Fed wants to be--so in this kind of a 'waiting to break one way or the other' market where might the profits be hiding? To find out let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

After hitting resistance at 1185 a little over a week ago the SP-500 has been trading sideways ever since. Bad economic news, currency spikes and earnings disappointments have triggered temporary declines but nothing has kept the SPX down for more than a day. Evidently the idea of easing interest rates and more money flooding into stocks still has the power to buoy the markets.

The Nasdaq came to a dead stop at just over 2500 but managed to extend its string of positive gains to eight consecutive days. If the Nasdaq breaks above the year's highs at 2520 the short covering rally could be explosive. There is no immediate resistance over 2520 and we could be in for an nice run higher if the index sees a breakout.

A big part of the power behind the Nasdaq has been the semiconductor sector. The SOX gained a whopping 4.4% last week when most of the indexes were flat. That kind of performance is surprising since several chipmakers warned about future sales and the slowdown in PC growth. Offsetting those worries were a few chip companies that are producing chips for phones and things like the new tablets coming to market. Business is good for them and that is what traders are latching onto.

Blended earnings growth for the S&P-500 is now up to 30.1% compared to the estimates for 23.8% growth back on October 1st. Of the 335 (67%) of companies reported 77% beat estimates and 17% missed estimates. This pushed the earnings growth rate for all of 2010 to +32%--pretty decent performance considering the economic headwinds companies are facing.

With 67% of the S&P reported we've got a good handle on the quarter as the few major companies left to announce will not change the outcome significantly. The news is out for Q3 and it will be increasingly difficult for a positive surprise to move the market.

The market has now priced in the election, a new Fed QE2 program and some pretty decent earnings surprises. Conventional wisdom would suggest it is time to take profits but keep in mind there are a whole lot of investors still waiting on the sidelines.

Trimtabs.com reported on Friday that investors put $759 million into U.S. equity funds in the week ended on Tuesday---which is huge news considering that funds have seen outflows of $4 billion per week on average for over six months straight. This is the first time in over six months money has been flowing into equity funds and yet the market is at the highs for the year. Retail investors have been pulling money out of equity funds and putting it into bond funds but if that trend reverses as we saw last week the impact on the stock market would be huge.

The bottom line is even though we've had a tremendous run from August there still may be some gas in the tank after this week's election and monetary news settles.

Consider this piece of historic market data---since 1942 in the 12 months following a midterm election the market has averaged a 24.7% gain. That is a hefty average considering some years did significantly worse. The normal Q3 to Q3 gain is only 8.9% so there is something to be said for buying into the election.

The economics this past week were mixed with the headline GDP number for Q3 coming in at +2.0% compared to growth of +1.7% in Q2. However, if you remove the inventory-rebuilding component the GDP would have been only +0.6%. Investment growth slowed dramatically from +2.1% to only +0.1%. Government spending accounted for +0.7% of the overall GDP. That means government spending is the only thing that kept the non-inventory GDP positive.

The inventory rebuild phase is nearly over but consumers have not stepped up their buying as they have in previous rebounds. That means future quarters will not have the inventory build to keep them positive. Plus this quarter the government will not be nearly as big of a contributor as in Q3. Some economists are predicting a +1.6% final Q3 number of which government spending will be nearly half and ex-inventory would be flat. Until employment picks up the GDP should remain at or below the 2% level--pretty anemic.

The GDP numbers are one more piece of assurance the Fed is not going to raise rates for a long time. Most analysts are now expecting the Fed to be on hold until 2012.

In spite of some great expectations there promises to be plenty of volatility this week as we could easily see a 'sell the news event'---but we should rebound if the Fed provides sufficient stimulus. The combination of cheaper dollars and the end of election uncertainty will eventually push the markets higher--the question is...

HOW DO WE MAKE MONEY ON IT?

We've got two high-potential trades lined up --because of the potential volatility this week they are both 'Both ways trades'. The first is on a stock liable to explode when earnings are released later this week as it is a high profile company that has been trading sideways for quite awhile waiting for the right catalyst to really move.

Our next play is also a 'both ways' trade and the moment you see the chart on this one you'll know why. It has been compressing in a sideways wedge pattern for three weeks foretelling an explosive move--one way or the other. The good news is we'll be ready in BOTH directions with some low-cost but high-potential options.

We've got two great plays lined up on a market waiting to bust a move--so let's get to it...

For more information on everything you receive with your Pearly Gates subscription click on www.cashflowheaven.com/pg