Uncertain Direction and an Easy Trade

8am EST The overall direction of the market is definitely becoming more uncertain. We are nearing some important support levels and there is some uncertainty with earnings season coming up. The Alcoa(AA) earnings announcement, as I predicted yesterday, was once again a miserable disappointment. They never fail.

There was a pretty positive earnings announcement from Bed Bath and Beyond (BBBY) last night that has been flying under the radar a little. Of course, (BBBY) benefited from the bankruptcy of Linens and Things but they have plenty of competitors out there. You can go to a lot of retailers and get a garbage can for your bathroom.

Earnings season begins with some real force next week with some larger companies who will be the true test for the market. You can certainly expect some highly volatile reactions to these announcements for 2 reasons.
1) There is a growing acceptability with not giving earnings guidance.
2) Most Wall St. analysts are completely clueless.
The companies who report strong numbers will be handsomely rewarded with a massive jump in stock price. I will be on vacation next week but I will certainly be putting on some options trades to take advantage of these moves.

One trade I am looking at for the next couple of days is Dreamworks Animation (DWA). Monday, they were downgraded by some schmuck analyst because their current movie didn't do as well at the box office as was expected. The technicals are mediocre for this one so I wouldn't put on a huge position but it did have a very high volume down day and the sellers may be exhausted for the short term. The trade is relatively simple. The stock closed at $19.45 yesterday. If you can buy the stock a little below there, your stop would be just below the recent low of $17.32. Your potential downside is about $2 and your potential upside is $3-$5. I always like a trade that has a greater than 1:1 risk/reward ratio. Again, this isn't a home run trade, but certainly something you can add to your portfolio with minimal risk.

At the end of the year, little trades like this can defintiely help your P&L. They can smooth out some of the bigger swings that can happen druing the year. Keep an eye on this and until next time, stay low risk..