Moving on Up. Stocks continued their winning streak on Friday despite the thinly traded session. This capped off the strongest five sessions in the S&P 500 since 1933. Trading volume was one-half the normal session, but the end result was another solid gain for stocks across the board. The most positive aspect to last week's result was that the gains came in despite the barrage of troubling economic reports. When traders are able to overlook the doom and gloom, it has us wondering if the Street has already priced in the worst case scenario. If so, perhaps the future isn't quite as horrendous as what we have been bracing for?

Friday's close brought the end to the wickedly volatile month of November. Up until the last five sessions of the month, $1 trillion of shareholder wealth had been wiped out. But the final stretch more than made up for that by gaining $1.2 trillion. Considering how far that we've fallen from last fall, we have quite a way to go before we recover all that has been lost.

The thinly traded session was norm for holiday weeks when traders and market participants take time off. Only 790 million shares were traded on Friday's abbreviated session, compared to an average of 1.5 billion shares typically changing hands.

Perhaps the bigger news on Friday was the long awaited arrival of Black Friday. The day after Thanksgiving has been named Black Friday because it is historically the first day of the year that retailers turn profitable on the year. While expectations for this year's holiday shopping season remain negative, analysts will spend the beginning of this week dissecting the results of the three day stretch. With consumer spending accounting for more than two-thirds of the U.S. economy, the next month's retail numbers will tell us a lot about the state of the current recession.

There was some surprisingly good preliminary numbers released on Saturday that showed an actual jump in year-over-year sales. According to the figures released by ShopperTrak RCT Corp., sales on Black Friday were actually up 3% to 10.6 billion. If the data continues to come in better than expected, it would be a significant boost to the economy. However, one problem for retailers this year is that the shopping season is five days shorter this year compared to the last one.

The lone sector that missed out on Friday's rally was energy. Crude fell early in the session but was able to pare those losses and close down just a penny at $54.43 a barrel on the New York Mercantile Exchange. Traders' anxiety over a production cut from OPEC eased after ministers doubted there would be any output decisions made until next moth. The oil cartel is not scheduled to formally meet again until December 17th. Most analysts expect the group to push for a production cut when they meet.

With funds starting to flow back into stocks, there has been a slight uptick in Treasury notes. The two year and 10-year notes both climbed along with the 30-year bond. The dollar also strengthened against both the euro and the yen.

While the stock market's strong rebound was certainly welcome, analysts were hesitant about getting too optimistic. Not only were trading volumes very light on Friday, but investors will be digesting a slew of economic data next week ranging from a reading on the manufacturing sector to the all-important employment report from the Labor Department. Both are expected to be dismal.

Government bonds rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, tumbled to 2.92 percent from 2.99 percent late Wednesday. The yield on the three-month T-bill, considered one of the safest investments, edged up to 0.05 percent from 0.03 percent Wednesday.

The government's push to aid mortgage rates last week appears to be working. The average overnight rate on a 30-year fixed mortgage was 5.76 percent and the 15-year fixed mortgage was 5.50 percent.

Friday's Economic Reports

The Dow Jones Industrial Average had its first five-session winning streak since the summer of 2007. Friday's 102-point gain takes the index up to 8,829. The 1.17% gain helped the Dow climb almost 10-percent last week and left it sitting just below resistance on the chart at 9,000. How the Dow handles this resistance line this week will tell us a lot about its current rally. The index is currently on a nearly 17-percent winning streak, however, it still finished the month of November with a 5.3-percent loss.

The S&P 500 gained 8 points on Friday and finished the week at 896. For the week, it climbed 12% but still lost 7.5-percent for the month of November. Once the index makes it over 900, its next stop will likely be near 950 on the chart.

The Nasdaq Composite lagged the other two indexes for most of the session on Friday, but was still able gain 3 points and close out the week at 1,535. The index was able to advance almost 11-percent over the holiday-shortened week. Now that the Nasdaq has broken through 1,500, the next barrier will likely be at 1,600.

The VIX (Chicago Board Options Exchange Volatility Index) was falling nicely on Friday but wasn't able to stay down at the closing bell. Instead, it climbed 0.36 and closed at 55.28. We'll be watching this week to see if the index can stay under its 50-day moving average (red line).

We knew that Friday would be thinly traded and likely an uneventful session, but we were still able to take advantage of the short trading day by getting filled in two new spreads. The red early in the session helped us get filled before the buyers came in to the Market. Of course, Apple remained weak for the whole session, which was fine with us. With three weeks left to go in the December cycle, we have three spreads going with all of them sitting in good shape.

CURRENT DECEMBER SPREADS

OIH 60-55 DECEMBER BULL PUT SPREAD (15 Contracts entered on 11/25/08)

Potential profit of $70.00 per contract

Contingent Stop Order set at $62.50

OIH took a breather on Friday after rocketing higher on Thursday. Of course, it didn't receive any help from oil slipping a penny on the session. This caused the energy sector to lag on the day and left OIH at $87.54 when the closing bell rang. OIH spent the second session just below its 20-day moving average (light blue line) on the chart. If it can make it through this barrier, the next resistance line is sitting at $90. For now, we're sitting in very good shape in this spread with almost a 30-point cushion.

RUT 350-340 DECEMBER BULL PUT SPREAD (10 Contracts entered on 11/28/08)

Potential profit of $60.00 per contract

Contingent Stop Order set at $355.00

The Russell 2000 index continued marching up the chart on Friday when it rose 4.28 points and closed at $473.14. Similar to the OIH, the RUT closed just below its 20-day moving average (light blue line) on the chart. If it can make it through this moving average it should have plenty of room to run to the upside. Friday capped off an excellent run for the index with the small caps climbing 66 points or 16.38%. This remarkable move puts the index over 120 points above our "short" strike price.

AAPL 75-70 DECEMBER BULL PUT SPREAD (15 Contracts entered on 11/28/08)

Potential profit of $55.00 per contract

Contingent Stop Order set at $77.50

Apple also turned in a very good week, but battled some profit taking on Friday when it gave back $2.33 and closed at $92.67. Just like the rest of the charts, Apple also ran into resistance when it hit its 20-day moving average (light blue line). We'll be watching this line carefully this week. Currently, we seem to be fine in this position with the stock almost 20 points above our put spread.

As always, Trade Happy and Trade Smart

In last night's trade alert, the Apple trade listed the new spread as 75-70, but below in the detailed description it incorrectly said sell the 75 puts and buy the 55 puts. It should have stated sell the 75 puts and buy the 70 puts. The 0.55 should have been listed as the credit. Please find this corrected below.

Please Note: This is both a limit order and a day order.

NEW TRADE ALERT (corrected from Thursday night)

Apple Inc. (AAPL)

OPENING 75-70 DECEMBER BULL PUT SPREAD (15 contracts)

Sell 15 December Puts at 75 strike price

Buy 15 December Puts at 70 strike price

Total Credit 0.55 per contract

Potential Profit $825.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $77.50. For auto traders, we will send in a close-out order if this happens.

Make it four in a row. It's been nearly seven months since the Dow has gone up four sessions in a row, but that's what took place heading into the Thanksgiving Day holiday. The Market was propelled higher by a number of government actions over the last week, which has caused traders to wonder if the Market bottom has been put in. It's certainly way too early for us to step out on a limb and say that the selling is done, but the recent bounce sure has felt good. However, keep in mind that we almost always test a bottom before we head into a Bull Market.

After leaving the Street in a state of dismay a few weeks ago with its decision to not enact a program to purchase mortgage-backed securities, the government came out with new ambitious plans on Tuesday. Instead of using the TARP, the government will be enlisting the Federal Reserve to provide nearly $800 billion to get mortgage lending, credit cards, auto and small-business loans flowing again. Tuesday's action immediately helped mortgage loans, which dropped by a half-point immediately. That was its biggest drop since 2001. We'll have to wait to see its affect in the other areas of lending.

On Wednesday, there was a barrage of economic data that confirmed the recessionary nature of the current economy. However, with the indices already being chopped in half from their highs a year ago, the news had little effect on the Market. After all, the conversation has gone from questions about if this is a recession to how long and deep will the recession be?

The weekly update on claims for unemployment benefits fell from the week prior, but remained at recession levels. According to the Labor Department, it received 529,000 applications for benefits for the week ending November 22. This is kind of a double edge sword. The number dropped, but remained at an extremely elevated level.

Meanwhile, although the consumer spending data came in, but the good news is that personal income is rising. On the spending side, consumer activity fell 1.0% in October. This marked the fourth straight monthly drop and was the steepest decline since 9/11. However, the bright spot is that incomes rose more than expected at 0.3% last month. When we combine the data, it tells us that consumers are deleveraging themselves by paying down debt and refusing to spend.

Graphic from Briefing.com

In this type of environment, Wednesday's data shouldn't have been surprising to anyone. After all, the consumers are simply doing what the banks have been doing themselves. They've taken in billions of dollars from the U.S. government that they've used to deleverage their balance sheets. At the same time, they have severely reduced their lending and reduced their off-balance sheet liabilities.

Also on the session, the durable goods report showed a 6.2% drop in big ticket orders. The pullback in spending was twice as severe as the Street was expecting and was the worst decline in nearly two years. October was the third straight month of declining numbers in the durable goods data and was definitely the most severe.

Talk about not surprising, the new home sales dropped 5.3% in October, taking the annual pace to 433,000. This put the level of purchasing at the same rate as the early 1990's. At the same time, the median home price declined 7.0%. Remember, housing brought us into our current turmoil and until we see some stabilization in the housing market, things aren't going to start getting better.

Wednesday's Economic Reports

Oil continued rising on Wednesday with a $3.67 advance, taking it up to $54.44 a barrel on the New York Mercantile Exchange. This advance was in spite of a much larger build than expected in the weekly EIA (Energy Information Administration) report. The dollar also strengthened on the day against both the euro and yen.

The stock that had traders on the edge of their seats last week was Citigroup. Investors continued to dump shares of the bank on Friday with the stock tumbling another 20-percent. Although the banking aspect of the business appears to be holding up fine, the vultures are certainly swarming around this one. It's very likely that the company will be the next test for the government with many wondering if it will be another intervention. The chart below shows just how fast the stock has fallen over the last few months.

The Dow Jones Industrial Average gained 247 points on the session and finished at 8,726. The light trading volume usually means more volatility in the session, but it wasn't anything close to what we've seen over the last several months. The good news is that the index is up almost 16% in the last four sessions. We'll see if it can continue that streak on Friday.

The S&P 500 also turned in a very good performance on Wednesday when it climbed 30 points and closed at 887. Similar to the Dow's chart, the S&P closed at its 20-day moving average (light blue line) on the chart. We'll see if the index can break through this barrier on Friday when the S&P attempts to make it five straight green days.

The Nasdaq Composite was on fire Wednesday when it spiked 4.6-percent and finished the session at its high of the day. Its 67 point jump took the index up to 1,532. Tech has certainly been the weakest of the three indices over the past few weeks, but Wednesday's leadership by the Nasdaq was a very good sign heading into Friday.

Wednesday's rally continued the slide in the VIX (Chicago Board Options Exchange Volatility Index). It shed 5.98 points on the day and closed below its 50-day moving average (red line) for the first time since September. This is a very good sign heading forward. However, after the journey we've been on over the last several months, we need some additional weakness in the VIX for us to take a sigh of relief.

Although holiday-shortened weeks tend to be bullish historically, we were certainly skeptical heading into this week. However, we have welcomed the streak of positive sessions with open arms. It was also a very good sign to see the indices move higher despite plenty of negative economic data. This has us wondering if the worst case scenario has already been priced in. Time will tell, but for now we have one shortened trading session left to go this week. Although we were only able to get filled in OIH in the first three days of the week, we aren't giving up just yet.

For tomorrow, we are once again attempting to get filled in our RUT bull put spread. The big run-up in the index has caused us to move up our strike prices and reduce the credit. Despite doing this, we feel very good about the spread with both strike prices remaining below the low made by the index on November 21.

At the same time, we are entering a new put spread on Apple Inc. (AAPL). Over the past several sessions, the stock has shown us a great deal of relative strength. While we've have been perennial bulls in Apple, the downturn has turned us very apprehensive about being on the put side. But with its recent rebound, we feel that the stock has given us an excellent entry for a put spread at strike prices below the pivot low on the chart. Similar to what we did last month, if there is a retracement back down the chart, then we're likely to come back and make the position into an iron condor.

Please Note: These are both limit orders and day orders.

NEW TRADE ALERT (2)

RUSSELL 2000 INDEX (RUT)

OPENING 350-340 BULL PUT SPREAD (10 contracts)

Sell 10 December Puts at 350 strike price

Buy 10 December Puts at 340 strike price

Total Credit 0.60 per contract

Potential Profit $600.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if index reaches $355.00 (close out spread). For auto traders, we will send in a close-out order if this happens.

Apple Inc. (AAPL)

OPENING 75-70 DECEMBER BULL PUT SPREAD (15 contracts)

Sell 15 December Puts at 75 strike price

Buy 15 December Puts at 55 strike price

Total Credit 0.70 per contract

Potential Profit $825.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $77.50. For auto traders, we will send in a close-out order if this happens.

RUT DAILY CHART

AAPL DAILY CHART

CURRENT DECEMBER SPREADS

OIH 60-55 DECEMBER BULL PUT SPREAD (15 Contracts entered on 11/25/08)

Potential profit of $70.00 per contract

Our timing on this one couldn't have worked out any better on Tuesday. We were able to get filled on the pullback just before OIH decided to take off. Then on Wednesday it gained another $7.17 and finished the session at $87.54. Keep in mind that the recent terrorist actions cause the price of oil to always jump. It's way too early to tell it will stay elevated, but right now we're enjoying a cushion of almost 30 points in this spread. So far...so good.

As always, Trade Happy and Trade Smart

We went one for two with our fills today. We were able to get everyone filled in the OIH spread, but not the RUT. Due to this, we are going to keep the RUT spread the same and once again send it in as a day order and see if our patience pays off.

Please Note: This is a limit order and day order.

NEW TRADE ALERT (1)

RUSSELL 2000 INDEX (RUT)

OPENING 290-280 BULL PUT SPREAD (10 contracts)

Sell 10 December Puts at 290 strike price

Buy 10 December Puts at 280 strike price

Total Credit 0.75 per contract

Potential Profit $750.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if index reaches $295.00 (close out spread). For auto traders, we will send in a close-out order if this happens.

As always, Trade Happy and Trade Smart

With the Market moving sharply to the upside on Monday, we weren't able to get filled in either of our new spreads. Due to this, we are going to make adjustments to these trades and attempt to get filled on Tuesday.

Please Note: These are both limit orders and day orders.

NEW TRADE ALERT (2)

RUSSELL 2000 INDEX (RUT)

OPENING 290-280 BULL PUT SPREAD (10 contracts)

Sell 10 December Puts at 290 strike price

Buy 10 December Puts at 280 strike price

Total Credit 0.75 per contract

Potential Profit $750.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if index reaches $295.00 (close out spread). For auto traders, we will send in a close-out order if this happens.

Oil Services HOLDRs (OIH)

OPENING 60-55 DECEMBER BULL PUT SPREAD (15 contracts)

Sell 15 December Puts at 60 strike price

Buy 15 December Puts at 55 strike price

Total Credit 0.70 per contract

Potential Profit $1,050.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $62.50. For auto traders, we will send in a close-out order if this happens.

As always, Trade Happy and Trade Smart

Rumors of a new Treasury Secretary helped stocks rise Friday afternoon. The uneventful session got a little more interesting when word that the uneasiness surrounding the new administration's pick to head up the Treasury was going to be put to rest. Whether it was because of the selection or just finally giving the Street some clarity surrounding the announcement, the end result was a very nice rally Friday afternoon.

Although stocks were trading in green territory for most of the session, it got a huge boost when word that New York Federal Reserve Chief Timothy Geithner was being tapped to fill Paulson's shoes. While the Market spiked on Friday, the appointment has mixed reviews on Wall Street.

The positive side is that he has plenty of experience managing government responses to financial crises. He was involved in the 1990's with the bailouts of Mexico, Indonesia, and Korea. Of course, as current New York Fed President, he has been heavily involved in government intervention and played a heavy role in the Bear Stearns situation. He also has worked very closely with current Federal Reserve Chairmen Ben Bernanke, which will continue to be crucial in his new position. He was also said to have been on McCain's shortlist for the head of the Treasury.

The downside to his selection is that he does not come with private-sector experience, unlike many of his predecessors. He also is likely to continue more of an activist approach of government intervention in the Market, which so far has not been too successful. There's one thing for sure, he'll certainly be tested from day one.

On the economic front, new claims for unemployment continued climbing and have moved into recessionary levels. Last week's numbers came in worse than expected at 542,000, which was above the expectations of 503,000. The new claims number has now reached its highest level in 16 years. The chart below shows the four-week average is now above the 500,000 mark.

Graphic from Briefing.com

Friday's Economic Reports

The renewed anxiety in the Market has once again pumped up the price of gold. It moved above $800 an ounce on Friday, but finished the session at $791.70. The $43.10 jump in the commodity was a sign of investors continuing to flee to safe havens.

The stock that had traders on the edge of their seats last week was Citigroup. Investors continued to dump shares of the bank on Friday with the stock tumbling another 20-percent. Although the banking aspect of the business appears to be holding up fine, the vultures are certainly swarming around this one. It's very likely that the company will be the next test for the government with many wondering if it will be another intervention. The chart below shows just how fast the stock has fallen over the last few months.

The other focus last week was "formally known as" the big three automakers. After their pitiful testimony on Capitol Hill last week, the Democratic leadership asked the companies to submit plans to the lawmakers that will show exactly how they will turn around their businesses. Once they receive the business plans, Congress will consider the possible bridge loan. The only new information this weekend is that the General Motors board is evidently open to a possible bankruptcy. This is the opposite of what CEO Rick Wagoner told Congress last week. Of course, the unions would definitely be against this type of restructuring because it would void their current employment contracts. It will be interesting if there are any legs to this story.

The Dow Jones Industrial Average's 494-point rally on Friday took the sting out of last week's sell-off. But even the 6.54-percent jump in the index wasn't able to move the Dow back into positive territory for the week. Instead, it fell another 450 points over the last five sessions and finished the week down another 5.3-percent at 8,046. This leaves the Dow off 39.3-percent for the year. On the chart, the index has bounced nicely off our support level near 7,500. However, we'll have to wait until this week to see if this was just a one-day event.

The S&P 500 also turned in a nice 47-point rally on Friday, taking the index up to an old support level at 800. However, the 6.32-percent jump on the day wasn't able to turn the week positive for the index. The S&P fell 73-points over the last five sessions, making last week an 8.4-percent decline for the index. This also leaves the S&P down 45.5-percent for 2008. Similar to the Dow, we'll have to wait to see if this is any meaningful reversal or just a one-day wonder.

The Nasdaq Composite also jumped on Friday afternoon when it gained 68 points and finished the session at 1,384. However, just like the other indices, it still dropped 132 points on the week, taking it down 8.7-percent over the last five trading days. This leaves the index down nearly 50-percent for the year....ouch! Although Friday's candle is bullish, it's very hard to believe that it will simply be able to stop the longer term bearish trend.

Friday's rally certainly helped take some of the bullish momentum out of the VIX (Chicago Board Options Exchange Volatility Index). It pulled back 8.19 points on the day and closed out the week at 72.67. The downside is that it remains at an extremely elevated level and the upward trend is still intact on the chart.

Friday's rally in the Market was nice, but we could have used it a few days earlier. As it turned out, we were forced to close out two of our spreads early when the stocks fell to our close-out trigger prices. Unfortunately, this took away a big chunk of our potential profit this month. However, our new risk management strategies seemed to work out fairly well. We ended up having two spreads go against us and still walked away with a profit of $1,095.00. When we reevaluated our decisions last month, there's not a lot that we would have done differently.

In our MON iron condor, we added the put spread only after the stock ran up to within five points of our call spread. At the time, the stock showed signs of strength and we didn't want to sit back do nothing when it appeared that we were going to have to close out our call spread. In the end, by making the position into an iron condor, our eventual loss was minimized.

For the AZO put spread, it wasn't until the very end that our position even appeared to be in trouble. Even heading into the final week, we had plenty of a cushion in this spread. But the failing automakers appeared to affect this stock much more than we anticipated. Perhaps the only thing we would have done differently is to have made this spread into an iron condor a few weeks ago. This could have lessened our loss in the put spread.

With the cycle now completed, let's take a look at the end result in each of the positions.

EXPIRED/CLOSED NOVEMBER SPREADS

RUT 640-650 November Bear Call Spread (10 contracts entered on 10/20/08)

Profit $100 per contract

RUT 350-340 November Bull Put Spread (10 contracts entered on 10/30/08)

Profit $50 per contract

AZO 90-85 November Bull Put Spread (15 contracts entered on 10/222/08 & closed on 11/20/08))

Loss $77 per contract

OIH 60-55 November Bull Put Spread (15 contracts entered on 10/23/08)

Profit $60 per contract

MON 100-105 November Bear Call Spread (15 contracts entered on 10/23/08)

Profit $55 per contract

MON 65-60 November Bull Put Spread (15 contracts entered on 10/30/08 & closed on 11/20/08))

Loss $65 per contract

NOVEMBER TOTAL PROFIT $ 1,095.00

The good news heading into this week is that we get a break on Thanksgiving when the Market is closed for a day. In the past, holiday-shortened weeks have been fairly bullish. Of course, nothing in the past seems to be relevant these days.

We read a lot about how hedge funds and mutual funds keep on facing a huge amount of redemptions. This causes what many call forced selling, where these funds have to sell equity positions in order to free up cash to pay off the investors that want to cash out of the funds. One interesting aspect is that last week, investors pulled roughly $19.5 billion out of these funds. In the previous week, investors pulled $31.8 billion out of funds. Investors have now cashed out of equity funds in 16 of the last 17 weeks. Perhaps the bright spot is that last week was certainly much smaller than the previous week. After all, if investors aren't out of the Market by now, it would appear that it's too late to avoid the large losses. They might as well hang around for the rebound.

With the December cycle now in the forefront, it's time to get some new spreads started. We are going to start off with a new put spread on the RUSSELL 2000 INDEX (RUT). We believe that there's a good likelihood that the small caps will get some type of a relief rally in the near future, which will then open the door for a nice call spread. But first, we want to start on the put side with a very conservative strike prices. By going way out of the money last cycle, we enjoyed a stress free trade in this index. Our plan is to do the same thing this month by starting on the put side and then adding a call spread when the opportunity arises.

We are also going with another put spread on Oil Services HOLDRs (OIH). Similar to last month, we are once again placing our strike prices at historical levels that the ETF hasn't been at since 2003. While there's no doubt that we've hit a short-term deflationary period, we still believe that OPEC will be able to step in and stop the fall. Not to mention countries like Russia and Iran need the price much higher to fund their day-to-day operations. With this in mind, it would be very easy for them to cause an international event to get the price moving back up the chart. With these factors working on our side, we are going to place our strike prices at very conservative strike prices and pick up a very good premium along the way. As with last month, we will also have our contingency stop orders ready to go above the "short" strike price in case the position goes against us.

Please Note: These are both limit orders and day orders.

NEW TRADE ALERT (2)

RUSSELL 2000 INDEX (RUT)

OPENING 280-270 BULL PUT SPREAD (10 contracts)

Sell 10 December Puts at 280 strike price

Buy 10 December Puts at 270 strike price

Total Credit 0.80 per contract

Potential Profit $800.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if index reaches $285.00 (close out spread). For auto traders, we will send in a close-out order if this happens.

Oil Services HOLDRs (OIH)

OPENING 55-50 DECEMBER BULL PUT SPREAD (15 contracts)

Sell 15 December Puts at 55 strike price

Buy 15 December Puts at 50 strike price

Total Credit 0.70 per contract

Potential Profit $1,050.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $57.50. For auto traders, we will send in a close-out order if this happens.

RUT DAILY CHART

OIH DAILY CHART

OIH MONTHLY CHART

As always, Trade Happy and Trade Smart

Monsanto has dropped to our trigger price. Due to this, we are moving forward with our closeout of this spread. This applies to any member in this position.

MON TRADE ALERT

Monsanto Co. (MON)

CLOSING 65-60 NOVEMBER BULL PUT SPREAD (15 contracts)

Buy 15 November Puts at 65 strike price (puts we previously sold)

Sell 15 November Puts at 60 strike price (puts we previously bought)

We Suggest Using a Market Order to get filled quickly.

AutoZone has dropped to our trigger price. Due to this, we are moving forward with our closeout of this spread. This applies to any member in this position.

AZO TRADE ALERT

AutoZone Inc. (AZO)

CLOSING 90-85 NOVEMBER BULL PUT SPREAD (15 contracts)

Buy 15 November Puts at 90 strike price (puts we previously sold)

Sell 15 November Puts at 85 strike price (puts we previously bought)

We Suggest Using a Market Order to get filled quickly.

The plunge continues. Although there was a positive start to the session, it wasn't long before the bears came roaring back. By the time the closing bell rang, the indexes were sitting at multi-year lows with significant damage done on the charts across the board.  

The big news this afternoon was the release of the Fed minutes, which showed a reduction in economic forecasts and hints of a rate cut. The central bank's forecast dropped for both GDP and unemployment. According to the minutes, the Fed is expecting the gross domestic product to come in flat for this year, or best case scenario showing a growth of 0.3 percent. This is down from its previous forecast of 1.0-percent to 1.6-percent. For next year, the forecast is for growth between 1.0-percent and 1.6-percent. At the same time, officials raised the unemployment forecast to 6.3-percent to 6.5-percent for 2008.

Perhaps the positive news from the FOMC minutes was when they made it clear that weakening economic conditions could lead to another cut in the federal funds rate. The committee also said that they are continuing to review the adequacy of its liquidity facilities.

There was some good news this morning when consumer prices dropped by the largest amount in over 60 years. The big catalyst behind October's 1 percent decline in the CPI was due to the pullback in the price of gasoline, which dropped by a record last month. Today's decline in the CPI was much larger than what the Street was expecting. At the same time, core inflation (which excludes food and energy) fell by 0.1-percent last month. This news was also better than anticipated. The chart below shows that inflation has now come off the high level in 1991 and should continue lower in the near term.

Graphic from Briefing.com

When we look inside the numbers, we see the largest drop in transportation, which was down 5.4-percent in October. The biggest line-item was in motor fuel that showed a drop of 14.2-percent last month. Besides energy, everything else seemed pretty much in line with the prior month.

There was also good news from the Commerce Department, which reported that construction of new homes and apartments fell to its slowest pace in nearly fifty years. The 4.5-percent drop in October leaves the annual rate at 791,000 units. We take this as good news because until the supply dries up, we aren't going to see a bottom in the housing market. And it's hard to see supply drying up until builders stop bringing new units online.

Meanwhile, building permits also fell by 12-percent in October. This was also one of the worst showings in almost a half of a century. The data showed that applications now are on an annual pace of 708,000 units. This number came in below the Street's expectation of 772,000.

Today's Economic Reports

Today's weekly EIA (Energy Information Administration) inventory report showed the continued trend of rising stockpiles and falling demand. The data showed a jump in crude inventories that was double what analysts were expecting. Last week's oil supply of 1.6 million barrels was combined with a drop in demand that was the slowest usage in more than a month at 18.97 million barrels a day. At the same time, gasoline inventories increased more than expected at 500,000 barrels.

By the end of the session, oil was down $0.77 at $53.62 a barrel on the New York Mercantile Exchange. This leaves the price of crude sitting at the lowest level since the start of 2007.

The other big news on the session was the testimony of the big three automakers on Capitol Hill. The U.S. automakers spent their second straight day asking lawmakers for a $25 billion bridge loan to get them through their current financial troubles. However, Congress has been anything but a welcoming audience the last two days. But after listening to the same type of hot air as during the original request for the TARP, we don't put too much into the committees' speeches. We believe that when it comes to "push to shove," Congress will dig back into our pockets and keep the car makers afloat.

It was another brutal afternoon for the Dow Jones Industrial Average today when it dropped 5.1-percent and closed at its lowest level since 2003. The 427-point decline took the index through prior months' closing lows as the index continued to sell into the closing bell. The Dow finished the day just below 8,000 at 7,997. On the chart, it appears that the index is destined to reach 7,500 unless there's some type of positive news that can jumpstart the bulls. At this point, it's hard to believe this might happen anytime soon.

The S&P 500 fared even worse today when it shed 6.1-percent and sliced right through its support on the chart at 850. By the time the closing bell rang, the S&P was sitting just above another major support level at 806. The major driving force behind today's tumble in the index was the 10.5-percent drop in the financial sector.

The Nasdaq Composite started the day especially strong, but wasn't able to maintain that momentum. It finished the day down 6.5-percent at 1,386. It also broke through a decent support level and appears headed for the next one just below 1,350. We'll be watching this level carefully over the next few sessions.

Volatility is definitely back. The VIX (Chicago Board Options Exchange Volatility Index), spiked by another 6.62 points today, finished the session at 74.26. Based on the chart, it appears that it's headed back to its all time high near 80.

We knew the past four weeks were too good to be true. After playing out perfectly so far this cycle; things started to deteriorate today. The downward pressure in AZO and MON turned the heat up significantly on our put spreads as the stocks flirted with our trigger prices. We were very careful when we originally placed our put spreads below the lows from October, but today's wicked selling brought them into play as the stocks themselves became battered and beaten.  

We also made the adjustment of placing contingency orders above our "short" strike prices in the spreads to avoid substantial losses if we encountered what appears to be taking place. Keep in mind that for auto traders, we will send the close-out trades to the brokers if the stocks hit our trigger prices. As in the past, we will also send out an alert to all members stating the action that we are taking.

However, members that are not auto trading can easily have these orders already set with their brokers so that you don't need to be tied to your computer screen. Just leave them GTC orders and then you need to place them only once in the cycle.

Although the momentum is definitely working against us in these two put spreads, there's always the chance that we could get a change in direction tomorrow. After all, that's the thing about trading credit spreads. We want to give the positions every chance to work in our favor because in this trading environment, we never know what's going to happen from one day to the next. The rest of our positions appear to be sitting in very good shape with not a lot of time left in this cycle. This should easily make up for any loss if we need to close out our AZO and/or MON early. For now, let's take a look at all of our positions in detail.

CURRENT NOVEMBER SPREADS

RUT 640-650 November Bear Call Spread (10 contracts entered on 10/20/08)

Potential Profit $100 per contract

Contingent Stop Order set at $635.00

RUT 350-340 November Bull Put Spread (10 contracts entered on 10/30/08)

Potential Profit $50 per contract

Contingent Stop Order set at $355.00

The Russell 2000 finally broke through our strong support level on the chart today when it tumbled 35.13 points. All the selling left the index at its low of the session on the close at 412.38. When the index closes at its low, it is never a good sign. However, with just one full day of trading left in this spread, we should be fine with over a 60-point cushion on the put side and over 200 points on the call side.

AZO 90-85 November Bull Put Spread (15 contracts entered on 10/222/08)

Potential Profit $70 per contract

Contingent Stop Order set at $92.50

AutoZone gave us an ulcer today when it plunged $12.91 on extremely high volume. Anytime we see high volume, it gives us a huge warning flag. This means that big money is dumping the stock, which is a very bad sign for our put spread. The only good news is that it seemed to take a breather at a good support level on the chart. The problem is that with the stock sitting at $94.25, it's only around 2 points above our closeout price in this spread. Considering the volatility in the Market, we could easily hit our trigger price tomorrow morning. With this in mind, make sure your contingency order is set and then sit back and stick to the game plan. By placing our stop above our "short" strike price, any loss should be kept small.

OIH 60-55 November Bull Put Spread (15 contracts entered on 10/23/08)

Potential Profit $60 per contract

Contingent Stop Order set at $62.50

With the price of oil continuing to crumble, it's become extremely difficult on the stocks that make up this ETF. Today's drop of $5.25 in the OIH takes it down to a key support level on chart at $79.82. A break below this line will likely take OIH significantly lower. The good news is that we still have almost a 30-point cushion in this spread with not much time left. This should give us plenty of room to coast to the finish line.

MON 100-105 November Bear Call Spread (15 contracts entered on 10/23/08)

Potential Profit $55 per contract

Contingent Stop Order set at $97.50

MON 65-60 November Bull Put Spread (15 contracts entered on 10/30/08)

Potential Profit $50 per contract

Contingent Stop Order set at $67.50

Monsanto broke through another key support level today when it shed $4.74 and closed the day at another one at $70.07. This cuts our breathing room on the put spread to 5 points, which is our only concern in this position. Of course, it didn't help today when the European Union farm ministers couldn't reach an agreement to allow imports of genetically modified soybeans developed by Monsanto. However, there is still hope that this will lead to a default approval for the product. Similar to our AZO position, we have our plan in place to avoid the emotion tomorrow. At the same time, our call spread should be profitable this month to make up for any potential loss in the put spread.

As always, Trade Happy and Trade Smart

It was another wild ride last week, with the result being the same for stocks. Despite a massive rally on Thursday, stocks finished the week with another move to the downside. The heavy selling Friday afternoon left stocks at their lows of the session and at the lower end of their trading ranges. Not exactly the most optimistic place to be heading into the final week of the November option cycle.

The Street received more troubling news about the consumer on Friday morning when the Commerce Department reported that retail sales dropped by 2.8-percent in October. This turned out to be the largest decline ever, which was led lower by the decline in gas and car sales. But that wasn't the only troubling area. Clothing sales came in 1.4-percent weaker while furniture and electronics also fell during the month. It was the fourth straight month of weakening sales and gives more credence to a possible long and protracted recession talk. This news also lowers expectations for the upcoming holiday season for retailers.

The retail sales number is probably the most accurate indicator of consumer spending because it uses total receipts from retail stores. Keep in mind that the data can be very volatile and is often accustomed to large revisions. With that said, the graph below shows that we've now taken out the low that we hit during the last recession.

Graphic from Briefing.com

Meanwhile, the pessimism continued to show up in the Reuters/University of Michigan consumer sentiment index, which came in at 57.9 on Friday. Although this number was slightly better than expected, consumer negativity remains at extremely low levels. The slight uptick since the report was released two weeks ago was likely due to the falling prices at the gas pump. The chart below shows just how low the index has fallen this year. Considering the state of the current economy, it wasn't surprising to see the index remain at such low historical levels.

Graphic from Briefing.com

Oil struggled on Friday when it lost $1.20 a barrel and settled at $57.04 a barrel on the New York Mercantile Exchange. The global slowdown continued to weigh on the commodity, which is down over 60-percent from its all-time high last July.

Friday's Economic Reports

After getting a glimmer of hope on Thursday, the Dow Jones Industrial Average was hit with another heavy dose of selling on Friday. The afternoon bloodletting took the index down 337 points on the session and left the index at 8,497. This puts the Dow down 5.0-percent for the week and 35.9-percent on the year.

The S&P 500 also took a beating on Friday when it tumbled 38 points and closed at 873. The 6.2-percent loss last week leaves the index down 40.5-percent for 2008. On the chart, it appears that the index is once again going to test support at 850 this week.

The Nasdaq Composite didn't fare any better than the other two on Friday when it shed 79 points and closed at 1,516. The index declined 7.9-percent over the last five sessions and is now down 42.8-percent on the year. On the chart, it appears ready to test support at 1,500 in the very near future. A break below this support will likely take the index down to last week's low on the chart.

After pulling back on Thursday, the VIX (Chicago Board Options Exchange Volatility Index) surged higher on Friday by 6.48 points. The 10-percent jump takes the index back up to 66.31, close to where it was sitting on Wednesday. More selling this week will certainly keep the VIX moving up the chart.

After getting a much needed relief rally on Thursday, the final trading session of the week appeared to give back most of that reprieve. The selling during the final hour on Friday cranked the heat back up on our put spreads in MON and AZO. Although we still have some decent cushions in these spreads, the downward momentum has us slightly concerned in these two put spreads. However, if there's one thing we know about this kind of trading environment, it's "expect the unexpected."  It seems like anything and everything has been the norm. With this in mind, we're going to sit tight in these spreads for now and keep a close eye on how these stocks handle the next support levels on the chart. Keep in mind that we still have our contingency close-out orders ready to go in case we need them. Until this happens, let's use some patience and see if we can make it to the finish line with our spreads intact. For now, let's take a look at all our spreads in detail.

CURRENT NOVEMBER SPREADS

RUT 640-650 November Bear Call Spread (10 contracts entered on 10/20/08)

Potential Profit $100 per contract

Contingent Stop Order set at $635.00

RUT 350-340 November Bull Put Spread (10 contracts entered on 10/30/08)

Potential Profit $50 per contract

Contingent Stop Order set at $355.00

After making a solid reversal on Thursday, the Russell 2000 once again was hit with a heavy dose of selling Friday afternoon. The small-cap index dropped 34 points and closed out the week at $456.52. The troubling part is that the RUT closed at its low of the session and appears that it will test support at $450 on Monday. The index dropped below this mark on Thursday before bouncing back strongly in the afternoon. We'll have to see if it can once again hold above this level at the close on Monday. With only four full trading days left in this position, we have a cushion of 184 points in the call spread and over 100 points in the put spread.

AZO 90-85 November Bull Put Spread (15 contracts entered on 10/222/08)

Potential Profit $70 per contract

Contingent Stop Order set at $92.50

AutoZone gave back most of Thursday's gain when it lost $6.92 on the final trading day of the week. The 6.14-percent loss on Friday left the stock sitting at $105.76. This gives our put spread a little over 15 points of breathing room heading into the final week. The problem is that the stock started to weaken significantly last week. We'll be very interested to see how the stock handles the next couple support levels on the chart. For now, let's sit tight and see how it plays out this week.

OIH 60-55 November Bull Put Spread (15 contracts entered on 10/23/08)

Potential Profit $60 per contract

Contingent Stop Order set at $62.50

OIH appeared to reignite its downward momentum last week. On Friday, it lost $5.75 and closed out the week at $85.25. We'll be looking for any news out of OPEC this week that might affect the price of oil. Despite its recent tumble, OIH is still trading over 25 points above our "short" strike price in this spread. We'll watch it closely, but for now, we're sitting in pretty good shape.

MON 100-105 November Bear Call Spread (15 contracts entered on 10/23/08)

Potential Profit $55 per contract

Contingent Stop Order set at $97.50

MON 65-60 November Bull Put Spread (15 contracts entered on 10/30/08)

Potential Profit $50 per contract

Contingent Stop Order set at $67.50

It has been a very interesting cycle for our Monsanto position. Just a few weeks ago, it appeared as if our call spread was in some serious jeopardy. Now, heading into the final week of the cycle, the stock appears to be headed towards our put spread. Friday's session was very painful for our put spread when MON dropped $7.99 and finished the day at $74.10. This leaves us with less than a 10-point cushion on the put side. However, the good news is that we still have a couple solid support levels on the chart that should work to our advantage. Let's not jump the gun in this position. Instead, we're going to sit tight and see what transpires the first part of this week.

As always, Trade Happy and Trade Smart