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...

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