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Market Outlook
The Week Beginning Monday,
November 29, 2010



The Week Ahead



Preface

I believe that it is important to point out to all my readers, especially those who are not already members of S.O.M.E. (as members are already well-aware of my trading strategy!), that the more volatile the market becomes, whether it trades up or down, is more beneficial to us, as the returns on our options increase dramatically, as observed throughout June and July, so far.

I must say I am a great supporter of the bulls, but will play-along with the bears to extract as much value from our options plays, as possible. I am a great believer in things moving forward and improving as time progresses but I also know that we have to play-the-game to extend our profits. The only catch in this type of market is “knowing” or realizing in which direction it will take, and it seems that we have been able to fulfill this decision in most cases, to gain our profitability.

Key Events This Week



upand coming

This Week’s Economic Reports

There are still quite a few major economic indicators available this week, which are:-

Monday –

  • There are no major economic reports scheduled for Monday

Tuesday –

  • The Case-Shiller 20-city index for September,

  • The Chicago purchasing managers' index for November, and

  • Consumer confidence in November.

Wednesday –

  • Weekly report on U.S. petroleum supplies,

  • ADP and Challenger private sector growth in November,

  • Gray & Christmas data on layoffs.

  • November manufacturing index,

  • Construction spending in October,

  • Auto sales in November, and

  • The Beige Book for December.

Thursday –

  • Initial jobless claims.

Friday –

• Nonfarm payrolls and the unemployment rate for November,

• October factory orders, and

• Services index for November.



earnings

This Week’s Major Earnings Reports

Note:-All earnings dates listed below are tentative and subject to change.

Monday –

• Inergy, L.P.

Tuesday –

• Barnes & Noble Inc. (BKS), Trina Solar Limited (TSL), and OmniVision Technologies Ltd. (OVTI).

Wednesday –

• Charming Shoppes Inc. (CHRS), Aeropostale Inc. (ARO), Collective Brands Inc. (PSS), Jo-Ann Stores Inc. (JAS), Krispy Kreme Doughnuts (KKD) and Zumiez Inc. (ZUMZ).

Thursday –

• Del Monte Foods Company (DLM), The Kroger Co. (KR) Toll Brothers Inc. (TOL), Coldwater Creek Inc. (CWTR), Novell Inc. (NOVL) and VeriFone Systems Inc. (PAY)

Friday –

• Big Lots Inc. (BIG).



the week ahead



Outlook for This Week

The November jobs report, released Friday, tops a full calendar of U.S. economic data in the coming week.

Investors will also be gauging the outcome of early holiday shopping to see if it shows the expected evidence that consumers are feeling slightly better about the economy and are willing to spend a bit more. Consumer confidence, auto sales and monthly chain store sales may also support the story of a more confident consumer.

The anticipated bailout agreement for Ireland over the weekend will be important for markets, as will efforts by European officials to calm concerns about the financial condition of Spain and Portugal. The sweeping U.S. insider trading investigation, as well as the military tensions on the Korean peninsula, is also on the markets' watch list.

Recap of Past Week

Last week, we analyzed the market's historical performance during Thanksgiving week and found that the week tends to perform countertrend to the year to date. That is, if the market is up, as it is this year, Thanksgiving week tends to see a pullback. Sure enough, the Dow Jones Industrial Average retreated 1% last week. Of course, there was plenty of help from renewed worries over euro zone debt, hostilities between the Koreas, FBI raids on major hedge funds and the kickoff to the holiday shopping season.

The holiday week got off to a decidedly downbeat start Monday with FBI raids on several major hedge funds in connection with a major insider trading investigation. Goldman Sachs (GS) is among the targets of the investigation, according to The Wall Street Journal, which broke the story online the previous Friday night and in print on Saturday. The probe "could eclipse the impact on the financial industry of any previous such investigation," according to the Journal. Traders also watched developments in Ireland, which agreed to accept an aid package tied to budgetary constraints. The Dow shed 0.22% for the day.

The more than 60-year-old conflict between the two Koreas heated up again Tuesday when North Korea shelled a South Korean island and the South returned fire. There's nothing like a shooting war between Cold War proxies to take the starch out of Wall Street. The geopolitical tensions overshadowed an upbeat gross domestic product report, which showed the economy grew 2.5% during the third quarter, up from the initial estimate of 2%. The minutes from the early-November Federal Open Market Committee meeting also weighed on traders. Fed officials lowered their expectations for economic growth and warned that a return to normal unemployment levels could be years away. The Dow sank 1.27%.

First-time jobless claims came in at 407,000 early Wednesday, far lower than expected and the lowest level in more than two years, and the bulls were off to the races. The University of Michigan reported that its consumer sentiment index was 71.6, another better-than-expected reading as the holiday approached. The Dow soared 150 points, or 1.37%, erasing Tuesday's losses.

Wall Street took Thanksgiving Day off, of course, but returned from the feasting in a sour mood. Renewed worries about sovereign debt in Portugal and Spain were not assuaged by those countries' tough new budgetary measures. In a shortened post-holiday session that ended at 1 p.m., the Dow fell 0.85%. For the week, the Dow fell about 1% and the S&P 500 Index slipped 0.8%. The Nasdaq Composite, meanwhile was in positive territory last week, gaining 0.6%. Furthermore, although the Dow is down for the month to date, the SPX and Nasdaq are still on track for gains in November.

S&P 500

"The range (in the S&P 500) is starting to tighten and there's going to be some resolution next week. The question is are these strong tech stocks going to power us higher into the New Year, or are traders finally not going to want the overnight risk that seems to be on the table every night," said Scott Redler, of T3Live.com.

"For two weeks, the market's been trying to figure out whether the move from 1227 to 1173 is enough of a correction," he said. Deutsche Bank chief U.S. equities strategist Binky Chadha said he maintains his view that the S&P could reach 1275 by year end, and he expects stronger U.S. economic news to drive it. He said just as the market had declined on weaker than expected numbers in the summer, it should now see a catalyst from upside surprises in the data.

European Debt

He also does not expect the European sovereign situation to block the stock market's ascent. "My view is they'll cause a lot of headline risk. They'll cause angst," he said, adding ultimately there is low risk to U.S. equities.

European sovereign debt was under pressure in the past week, and the cost of insuring the weakest of the peripheral sovereign debt climbed to record levels. A push by Germany to have private investors share the burden in restructurings added to the concerns.

"I think we've gone from a situation where there was confidence that the funding would be available for Ireland to one where, if the political rhetoric continues on this issue of burden sharing, and the private markets have concerns about the longer term value of existing and certainly future debt of the periphery, they've created a whole new level of uncertainty. That's very hard to undo," said Robert Sinche, head of global foreign exchange strategy at RBS.

The Dollar & the Euro

The dollar gained in the past week in part on a flight-to-quality trade, triggered by uncertainties after North Korea's artillery attack on a South Korean island. It also gained strength on concerns about the euro zone. As the dollar rose, risk assets, like commodities, sold off. Gold and oil gained on the week, but copper, silver and palladium ended lower.

"In our view, the fall of the euro in the last week or so is a catch up move in the rate to reflect the stresses that have been around. So, it's not terribly surprising, although we don't see the catalyst for another move lower," said Sinche. "...I don't think we're going to see major developments in the dollar (in the next week). It will be choppy."

The Week Ahead

Tuesday should see the focus swing back to U.S. politics. Congressional leaders are expected to meet with President Obama, and tax cuts and budget cuts are among the topics expected to be on the table. Markets have been hoping for a compromise from Democrats that would allow all Bush tax cuts to be extended before they expire at year end.

"We've seen some of the worst of the European policy dilemmas as Congress is back in session this week, and it's not clear they're going to distinguish themselves in a positive way either. In a sense, the U.S. has benefited from a lack of political commentary," said Sinche.

Chadha also noted that Washington has gone "silent" since the mid-term election.

"The question is if the Administration and Congress are going to move collectively toward the center. My view is that is likely to happen. I'm not sure that the different constituencies really have much choice in the matter," he said.

Expectations for this Week

Trading Range Limited

Introduction

Last week's holiday-shortened week was dominated by overseas headlines ranging from escalating tensions between North and South Korea, anticipation that Portugal and Spain could be the next to seek bailouts and, albeit on a smaller scale, continued speculation that a Chinese rate hike is imminent. Amid the negative headlines, mean-reversion best defines the resultant price action on the S&P 500 Index (SPX) last week, as the index found itself strangled between 1,180 and 1,200 during the week, with sharp moves to these levels driven by overnight news that created significant movement at the opening bell. At the end of the week, the SPX found itself exactly between support at 1,180 and resistance at 1,200.

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It is looking more and more like the price action of the broader market is vulnerable to the trading range behavior that occurred between mid-November and mid-December 2009, when longer-term resistance levels also capped market rallies. In fact, except for the brief breakout above 1,200 immediately following QE2 and the midterm elections, the SPX has experienced little net movement since mid-October.

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The sideways price action, while frustrating for anyone with a time frame beyond a few weeks, might be considered a win for market bulls, considering that:

  • 1. News stories from overseas (China, Europe, North and South Korea) have not been positive drivers.

  • 2. Yields on the 10-year Treasury note have surged 50 basis points since mid-October, from 2.40% to last week's highs around 2.90%.

  • 3. We are seeing evidence that hedge funds are no longer in accumulation mode.

  • 4. There is no support from retail investors, who continue to pull money out of domestic stock mutual funds (they pulled $2.8 billion from domestic equity funds in the latest week, according to the Investment Company Institute).

Above being said, a lesson learned in early May is that when the high-frequency players are the only game in town -- as they appear to be now -- things can get quite ugly if "surprises" emerge and these players abruptly depart the playing field.

It is therefore a sensible move to use cheap put premiums to protect your long positions, especially in instances where implied volatility on individual stock options has plummeted after a company announces earnings. We have noticed that option premiums have reached multi-month lows on some stocks.

Or, another strategy is to buy call options in lieu of purchasing shares of a stock that you expect to make an upside move. Given that options give you control over a specified number of shares at a fraction of the cost to own the shares outright, you can position yourself to profit handsomely if the underlying moves in your expected direction, while simultaneously putting less capital at risk during these tenuous times.

A sector that will gather much attention during the next several weeks will be the consumer discretionary group, particularly retailers. Despite concerns about the health of the consumer, retail stocks, as measured by the SPDR S&P Retail Trust (XRT – 47.33), are among the strongest performers year to date. The exchange-traded fund, in fact, was positive while the broader market traded lower on Friday. Several earnings reports in the group are due in December, while holiday sales will be carefully monitored by investors. How this group does relative to expectations will dictate near-term price action in this group and could even influence broad market sentiment.

According to a Bloomberg article on Friday, "estimates for holiday sales vary from little changed to increases of as much as 4.5 percent. The retail federation predicts a gain of 2.3 percent to $447.1 billion after an uptick of 0.4 percent last year and a 3.9 percent drop in 2008... Same-store sales for November and December may advance as much as 3.5 percent, the largest increase since 2006, according to the International Council of Shopping Centers."

Put buying is apparent on XRT amid strong price action in recent weeks, a sign that hedged buyers may be accumulating these equities, which we tend to view as bullish. Moreover, buy-to-open option volume has increased on XRT in recent weeks, and such activity has tended to foreshadow rallies in the sector dating back to April 2009. Therefore there is continued support for the consumer discretionary group, which includes some retail and restaurant stocks.

If you want to hedge long stock exposure to this group, XRT options are cheap. The January 46 put, for example, is trading at 27.5% implied volatility, and protects you on downside movement below 46 through December expiration. Implied volatility on XRT options is slightly above April 2010's low of 20%, which was a three-year low. For perspective, XRT options were trading at 30% at this time last year, and 37% at the end of June.

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"Black Friday"

Early evidence suggests holiday shopping got off to a good start. The S&P retail index .RLX rose more than 5 percent in the run up to "Black Friday," the day after Thanksgiving, when Americans traditionally take shopping malls by storm.

Retail stocks' gains are a sign of an increasingly bullish view of the U.S. consumer after a string of stronger indicators on jobs, sentiment and spending.

"The consumer is more confident and they are spending a bit more money, and I think retail as a whole is perking up," said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, adding that retail stocks "look relatively cheap to us, and I think sales are going to surprise to the upside."

Early anecdotal evidence from Black Friday suggested shoppers were spending and that discounts were not as deep this year as last, potentially helping to lift retailers' margins as they look for the best holiday season in three years.

Black Friday marks the start of the holiday spending when U.S. retailers traditionally turn a profit, or go into the black for the year.

The National Retail Federation said that nearly 60 million Americans plan to hit the stores over the weekend, while another 78 million might join the crowds of shoppers. The NRF will provide an update on Sunday.

Retailers on the front lines will publish same-store sales data on Thursday when they will likely comment on the weekend's events.

"It seems the American consumer is back with a vengeance," said Kim Caughey Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh. "If we are to believe CEOs of retailers, they feel they can support margins with prices that are attracting consumers."

Shares of Amazon.com (AMZN.O), a favorite online retailer, have run up 12 percent since mid-November, and hit an all-time high of $177.25 mid-week.

ComScore, a digital marketplace research firm, expects online sales for the 2010 holiday season will reach $32.4 billion, marking an 11% increase over the previous year for the combined November-December gift-buying period.

Sales for that two-month period rose 4% over the prior year, the firm said.

"The beginning of the online holiday shopping season has gotten off to an extremely positive start, outperforming our earlier expectations," ComScore chairman Gian Fulgoni said in a statement.

"Despite continued high unemployment rates and other economic concerns, consumers seem to be more willing to open up their wallets," he said, adding that deep sales have spurred much of that spending momentum.

Implications of Europe’s Debt

Europe's debt crisis could be the fly in the ointment, though. Pundits predicting the euro's demise are getting serious attention.

European Commission President Jose Manuel Barroso denied on Friday that a financial rescue plan was in the works for Portugal and called a newspaper's report that Portugal was under pressure to seek a bailout "absolutely false," while Spain said it did not need help to manage its finances. But the market was less sanguine and stocks took a nose dive.

Kate Schapiro, who runs an international equity fund out of San Francisco, said the declines in European stocks this week had looked "really, really ugly."

Her fund owns the New York-listed stock of Spain's Banco Santander (STD.N), which has fallen 15 percent this week.

Schapiro says Santander and other European stocks may be getting hit too hard and that strong companies are getting caught up in the general selling.

"At the end of the day," she said, "I think we are going to muddle through this, and this could be a buying opportunity -- that's my gut" feeling, she added.

The S&P 500

Periods of decline in November have worked off the S&P 500's overbought condition. The index has been finding support at around 1,180 and resistance at 1,200. That may serve as a short-term trading range.

Manny Weintraub, president of Integre Advisors in New York, said low volume is likely to mark trading in the near term, keeping stocks in their recent range.

"We're entering a period with a lot of days of very weak volume," he said.

Bullish sentiment has been on the rise again, a factor that may worry contrarian investors who see bullishness as a "sell" signal.

Bullish sentiment rose 7.4 percentage points to 47.4 percent, according to the latest sentiment survey by the American Association of Individual Investors. Bullish sentiment has now spent 12 consecutive weeks above its historical average of 39 percent despite some drops in November.

Cyber Monday

Online sellers kick off the coming week with one of their biggest sales days of the year - Cyber Monday.

E-tailers consider it their version of Black Friday. It is the day that Web merchants furiously push big discounts, free gift cards, free shipping and any other gimmick they can think of to entice consumers to spend even more of their holiday shopping dollars online.

If pre-Black Friday sales are an indication, consumers are shopping more enthusiastically both in stores and online.

Online payment service Paypal said Friday it saw a 25% increase in payment volume on Thanksgiving Day this year versus last year. PayPal also noted a 297% jump in mobile payment volume on Thanksgiving Day versus last year.

The National Retail Federation estimates that Cyber Monday deals will be much more aggressive this year.

The group said 88% of retailers will have a special promotion for Cyber Monday this year, up from 72% in 2007.

But since Monday is a working day, many consumers will try to sneak in some shopping while at work.

According to the NRF, 54.5% of workers with Internet access, or 70.1 million people, will shop for holiday gifts from the office, with the majority of those being men and young adults.

The Euro and European Debt

The euro should extend losses against the dollar in the near term after its worst week in over three months on fears Portugal and Spain will be next to need bailouts after Ireland.

Technical charts and option trading also suggest increasing bearishness on the euro. The euro slid to a two-month low at $1.32 on Friday and was down 3.5 percent this week, on pace for its biggest weekly percentage drop since mid-August.

Concerns over a deepening debt crisis in the euro zone and escalating tensions in the Korean peninsula could lift the safe-haven U.S. dollar. The greenback could get an added boost if a key U.S. jobs report next Friday beats expectations.

"The bigger question is will Spain and Portugal remain immune and I would look and say, 'no'," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

"The situation in the euro zone will continue to deteriorate," he said, adding the euro could drop "below $1.30 and perhaps as low as $1.25 by year-end."

The premium investors demand to hold Irish and Spanish government bonds rather than German benchmark Bunds hit new euro lifetime highs on Friday. Portuguese bonds also underperformed after a report said the majority of euro zone states and the European Central Bank were urging Portugal to apply for a bailout.

European officials said reports Portugal was under pressure to seek a bailout were "absolutely false". Spain on Friday ruled out that it needs help to manage its finances.

Nomura currency strategists Jens Nordvig and Charles St-Arnaud said the outlook on Spain, which accounts for 11.8 percent of euro zone economy, will be a primary driver of the euro in the coming weeks.

"In a scenario where Spanish spreads widen to Portugal's current levels, we see the risk premium on the euro increasing from around 10 percent to above 20 percent, and this could see the euro trade all the way to 1.23 against the U.S. dollar," they wrote to clients. "The big question is whether this is the central case."

On Friday, the euro last traded at $1.3239 EUR=EBS, down 0.9 percent on the day, after falling as low as $1.3200 on trading platform EBS. The euro hit a four-year low of $1.1876 in June in the wake of the Greek debt crisis.

Bearish momentum in the euro will likely continue after the currency breached several key support levels last week, including its August high at $1.3334 and the 61.8 percent retracement of its August to November rise at $1.3232.

Next support comes in around the 200-day moving average at $1.3131, followed by $1.3080, the 50 percent retracement of the euro's June to November rally.

Ashraf Laidi, chief market strategist at CMC Markets in London, said a close below the important $1.3250/60 trendline support could see the euro/dollar slide towards $1.27.

In the options market, risk reversals have showed increasingly bearish sentiment on the euro, while analysts at Credit Suisse noted "significant buying of bearish euro structures against the dollar, yen and the Swiss franc."

On Friday, one-month euro/dollar risk reversals traded at -2.3 EUR1MRR=GFI, with a bias toward euro puts, suggesting more investors are betting the euro will fall than rise. That was down from -1.6 on Monday. In mid-October, euro/dollar risk reversals traded near neutral levels at -0.55.

Investors will also closely watch developments in the Korean peninsula, which will likely benefit the dollar as safe-haven demand rises.

Analysts said the dollar should also benefit if U.S. housing and jobs data next week comes in stronger than expected, which would reinforce expectations the U.S. economy is outperforming that of Europe.

Economic News

Economic Reports

In the coming week, there is important data on manufacturing and housing, in addition to jobs data and the consumer-oriented reports.

With lots of economic data this week for investors to mull, none is more important perhaps than last month’s labor numbers. The November employment report will be released next Friday.

"Obviously jobs is going to be the key," said Sharon Stark, chief market strategist at Sterne Agee and Leach. "I would look for more like 175,000 (nonfarm payrolls) with stronger growth on the private sector side." In October, the economy created 151,000 jobs, much more than expected.

Stark says an improvement in corporate spending should help. "What I call more cap ex, as opposed to software and equipment. I think companies are making more capital expenditures and that will push the labor market higher," Stark said. "It's progress but it's not anything to get real excited about. We're still going to need more stimulus in the form of either fiscal programs. QE2 (quantitative easing) needs to stay in place, as long as possible so we can lift these housing numbers."

Tuesday

More solid job growth is lifting consumer attitudes. That improvement should be reflected in the Conference Board's confidence index. The index is expected to have increased to 52.3 in November, from 50.2. The Reuters/University of Michigan consumer sentiment index, reported before Thanksgiving, showed a gain for November.

Wednesday

Two readings on November business activity from the Institute for Supply Management will also merit focus this week. The ISM's factory survey will be released Wednesday.

Economists expect the purchasing managers' indexwill be little changed from its high reading of October. The PMI is projected to edge up to 57.0 from 56.9.

Friday

The non-manufacturing PMI, is expected to rise to 55.0 this month, from 54.3 in October.

Nonfarm Payrolls

Economists surveyed by Dow Jones Newswires project that nonfarm payrolls increased by 150,000 jobs this month, about the same as the gain of 151,000 in October.

Among those forecasting private payrolls, the median forecast is a 158,000 gain in November, just shy of the 159,000 private-sector jobs added in October.

The November jobless rate is expected to remain at 9.6%. If that forecast proves correct, it would be the fourth-consecutive month that the rate was 9.6%.

INDICATORS AND MARKET CONDITIONS

Implications of Black Friday Reactions

Introduction

Friday, the day after Thanksgiving, was Black Friday, the beginning of the holiday shopping season. There will be plenty of media attention this week as Black Friday sales data is disclosed. Economists will be analyzing the data and suggesting what it reveals about the condition of the economy. Since Black Friday is considered to be so significant, it might be useful to keep a close eye on the market's reaction this week. In the analysis below, shows the last 20 years, to see if the market's one-week reaction to Black Friday told us anything about what to expect from the stock market going forward.

Analysis

First step is to look at the performance of the S&P 500 Index (SPX) in the week after Black Friday. Then, recording the returns for the rest of the year following that week, and breaking down those returns depending on whether the week after Black Friday was positive or negative. The table shows the reaction to Black Friday has been a pretty good indicator for the rest of the year. In the last 20 years, the week after Black Friday has been positive 12 times. In those years the rest of the year has averaged a pretty impressive return of 2.01%. Furthermore, 10 out of 12 times (83%) the return for the rest of the year was positive. In the eight years that the week after was negative, the average return was only 0.69%.

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The difference is even more prominent when you look farther out. Rather than looking at returns until the end of the year (approximately one month), the table below looks at returns over the next three months. When the market is up in the week following Black Friday, the SPX was up on average more than 4% in the next three months. If the week after Black Friday is down, then the market goes down on average by 1.86%.

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Conclusion

The consumer’s willingness to spend money is considered vital to this market. Sales data from last week will be highly scrutinized, and there will be plenty of articles on what the data tells us about economy. It might be a good idea to note the market's reaction. The analysis above shows it could be a good indication of what's in store going forward.

***Further evidence of market conditions can be seen in representations of charts below.

Tracking of SPY, DIA, IWM and QQQQ

Introduction

The markets continued to consolidate over the short holiday trading week. There was some volatility last week with several gaps in both directions, although the most important development was a clear show of support near last week’s lows. This was a positive especially when coupled with a complete lack of participation from the financials and escalating tensions with South and North Korea. Now that the lower range has been tested a couple of times, traders have a clear level to watch in the case of more weakness.

S&P 500 SPDRS (NYSE:SPY) ETF

The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, was the clear laggard this week, as it was hampered by the financial sector. Despite lagging its peers, SPY did manage to find support near $118 and has now settled into a range between $118 and $120. This is positive as it takes time to have a healthy consolidation. Traders should monitor these two levels as a move in either direction could easily gain momentum.

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The Powershares QQQ ETF (Nasdaq:QQQQ) The Powershares QQQ ETF (Nasdaq:QQQQ) fared a little better than SPY, but in effect it is also still in a consolidation. QQQQ created some space from last week’s bounce near $50-$51 and this is the clear level to watch if the markets pull back some more. On the upside, last month's high near $54 is the area in focus.

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The Diamonds Trust, Series 1 (NYSE:DIA) ETF

Much like SPY, the Diamonds Trust, Series 1 (NYSE:DIA) ETF has started to form a narrow range, trading between $110 and $112. The past two months have shown clear support on pullbacks to $110. Its 50-day moving average is now rising above this level and could offer another level of support. This would be the key area to focus on, with $112 being the area to watch on strength. A move above this level would likely lead to a retest of recent highs near $114.

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The iShares Russell 2000 Index (NYSE:IWM)

The iShares Russell 2000 Index (NYSE:IWM) has quietly been taking a leadership role, and it is much more apparent after this week. IWM closed well above its low for the week and beyond this, this week's low failed to come close to those of last week, leaving this index looking much stronger than its peers. IWM is not too far from last month's highs near $74, which is a significant level for IWM. A move above this area is likely to lead to a strong breakout. This continues to be a key index to monitor as we head into the year's final month. This is typically a strong period for small caps and the recent strength may be hinting at a rotation back into this group.

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Implications

Last week we mentioned how the lows formed during the week would be critical to monitor, and this week ushered in a successful test of these lows. Because these lows have been tested again, they now take on an increased importance for traders. If these levels fail in the near future, it would mean two groups of buyers would be under water, which could spur even more selling.

The markets needed to pause, but the question remains of whether more consolidation is in order or if the markets are ready to make a choice. While the odds likely still favor a continuation move higher, traders need to monitor the levels being shown for confirmation.



5 Black Friday Stocks To Watch

Introduction

The day after Thanksgiving has evolved into the official kick-off for the holiday shopping season. Black Friday, as it has become to be known, has turned into a spectacle, with shoppers camping out in front of the stores for days in the hope of getting their hands on an ever-elusive “door buster” item. Every year it seems that retailers compete to out-do each other.

This year, Sears Holdings Corporation (Nasdaq:SHLD) took things up another notch by announcing it will open stores on Thanksgiving day for the first time in its 124-year history. With Black Friday increasing in popularity and magnitude each year, it has become even more important for these retailers to capture a larger slice of the pie. While the retail sector has seen a run the past couple of weeks, many of these “door duster” stocks are worth monitoring into Black Friday and next week to see how the markets react to the turnout.

Wal-Mart Stores (NYSE:WMT)

The discussion of Black Friday retailers has to begin with Wal-Mart Stores (NYSE:WMT). This is the store that typically sees the most traffic and is the scene of some of the largest Black Friday camp outs. WMT's stock is in a position where its reaction to Black Friday could make or break it this season. WMT is very close to an important resistance level near $56, and with a strong reaction it could easily clear this level and head higher. However, a poor reaction could send WMT under $53, which would signal further consolidation, or possibly even a reversal.

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Amazon.com (Nasdaq:AMZN )

The online equivalent to WMT would have to be considered Amazon.com (Nasdaq:AMZN ). This online retailer provides a great alternative to shoppers who don’t want to brave the mobs at the brick and mortar stores on Black Friday. AMZN has already cleared resistance and is currently at all-time highs. While AMZN is probably too extended right now, this remains one of the strongest stocks and should be monitored by traders.

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Best Buy Co. (NYSE:BBY)

Electronics giant Best Buy Co. (NYSE:BBY) is another door-buster stock that traders should keep an eye on. It has had a fantastic rally from its September lows, and is in the process of consolidating those gains. While it may need a little more time, BBY has already revealed a critical area for traders to monitor. If it can close above the $46 level, this could signal an end to the consolidation and continuation move higher. Traders should be on guard for a break below the $42 level, as losing this level would imply a deeper correction.

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Target Corporation (NYSE:TGT)

Target Corporation (NYSE:TGT) is another stock that has gradually become quite popular as a Black Friday destination. TGT, much like AMZN, has already broken out ahead of the holidays and is likely too extended for initiating new positions. However, traders should monitor the $55 level in the case of a pullback as this area could provide some support. TGT could also struggle at the $58 level, which is where it peaked in May.

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Sears Holdings Corporation (Nasdaq:SHLD)

We mentioned that Sears Holdings Corporation was opening a day early on Thanksgiving this year, and as a trader you have to wonder if the stock's dismal performance has anything to do with it. SHLD dropped 50% from May to July and has stayed near this level for the past five months. While it has formed a clearly defined trading channel, this stock is underperforming its sector. The most important level for traders to watch here is the $60 floor underneath its current base. A drop below this level could send current stockholders into a panic.

shld112510



Conclusion

While it’s difficult to guess the impact that a single shopping day will have on these stocks, Black Friday is certainly a driver and these stocks will likely see some movement on both the holiday Friday session, and then again early next week as market participants digest the weekend shopping results. Each of these stocks has important levels to monitor, and traders should be ready in case they move as a result of Black Friday. Preparation is the key for traders, and knowing where buyers and sellers may lie in wait is half the battle.

Conclusion

As scary as the volatility has been from, say Nov. 8 through Nov. 18, it really doesn't matter much to you as an investor -- as long as the trend that, in retrospect, began in July 2009 stays intact. (It took the rally that began in March 2009 until July to reverse the downward trend and establish a new upward trend.) In fact, the volatility of the recent 10 days hardly registers on even a three-month chart of the S&P 500.

Second, as long as that upward trend in the 200-day moving average stays intact -- and on Nov. 19, the S&P 500 stood near 1,200 and its 200-day moving average around 1,125 -- then this volatility can help you. If you're a short-term trader, it's an opportunity to get trading. If you have a longer time frame, it's an opportunity to trim overweight positions (by selling) or to establish new positions or add to existing positions (by buying).

The more predictable these periods of short-term volatility are, the better the opportunities they create. If an investor knows that a stronger dollar/weaker euro will lead to a drop in the U.S. market, then that's volatility that can be exploited. If an investor knows that worry over a tighter money supply in China and higher interest rates there will lead to a drop in China's stock markets, a tumble in other emerging-country stock markets and to a retreat in commodity and materials stocks in the U.S. market, then that's volatility that can be exploited.

When you have something fairly concrete to track -- the euro, Chinese monetary policies (or actually, the rumors surrounding them), Korean tension -- then you aren't just left with immobilizing fear. I would note that to exploit these opportunities, you do need to keep control of the size of positions you want to build in any particular stock. The point isn't to wind up with a huge position in a company just because its shares keep getting killed in short-term dips.

Volatility carried to an extreme can itself become a triggering event, so not all volatility can be shrugged off. It's one thing to say, “Here's an excess of fear over the Irish debt crisis that I can exploit because the odds are really good that the crisis will be over in a week or 10 days and the fear will recede within that time span. It's another thing entirely to look at Portugal spiraling into default, triggering huge 3% daily drops in the S&P 500 that send everybody screaming for the exits as fear begets more fear, and try to dive in.” Trade sensibly!

Use volatility that you find predictable as your friend to increase profits (by trading) and to control risk (by buying low and selling high).

OR YOU....

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