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Internet's lead sector gainers

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Last week I had my eye on the CBOE Internet Index (INX.X), thinking the Internet group might be poised for a powerful move higher if they could break above the $146 level. Today we're seeing the INX.X move above that level, but trader's should be cautious and ease into positions ahead of today's FOMC meeting and pending interest rate announcement.

CBOE Internet Index Chart -

A couple of weeks ago, we turned bullish on shares of Yahoo! Inc. (NASDAQ:YHOO) for a tradable rally when the stock was trading $11.50. The stock surged from there and has taken the CBOE Internet Index (INX.X) higher. Today's break above the $145 level is a near-term relative high since the late-September low. A short-term trader can look for action here with a stop just under the $138 level of retracement. A swing trader willing to give the index some room to the $125 level, might find this index up near the $200 level in coming weeks on further broader market and sector bullishness. A good strategy would be to start out with a 1/4 or 1/2 bullish position, then add as levels of resistance are broken to the upside. First test will come at the 200-day MA near $150.

Bulls looking for some Internet exposure may want to take a look at the Internet HOLDRS (AMEX:HHH) as bullish. Using the CBOE Internet Index (INX.X) as the trigger to go long the HHH.

Covered call if long Kroger

On November 21st, in the 09:00 EST Update, I thought share of Kroger (NYSE:KR) might be attractive for a bullish trade on a move above the $25.30 level. I had been chatting about the stock in the "market monitor" prior to that writing and that day's bullish action in Whole Foods Market (NASDAQ:WFMI) had us looking to perhaps play "domino theory" in the grocer group. Eventually the stock did trade above the $25.30, but today's guidance lower based on what the company sees as a "recessionary environment" has the stock lower. Here's what I'd be looking to do.

Kroger - $0.50 and $1 box

Today's trade at $21 most definitely has "supply" in control for Kroger (NYSE:KR) and bullish traders should be taking defensive action. The stock turned sharply lower the past two sessions and today's guidance doesn't look to be a surprise. With a longer- term bearish vertical count indicated a potential decline to $16, I'd be looking to either cut the position from a portfolio or writing covered calls. One option would be to write the deeper in the money covered calls and the Jan02 $15 (KRAC) for $6.00 to give sell some protection to the $15 level, and work down cost basis to approximately $19.40. Selling of this covered call would be a decision that basically has the trader selling the stock at $21.00 (excluding commission on sale of call) on January option expiration. At that time, the trader/investor is in a "new tax year" and can then make a decision as to the stock fitting into the portfolio on a longer-term basis.

Personally, I think today's reaction to the company saying it sees next quarter's earnings in the 46-48 cent range, when consensus was for the company to earn 50 cents is a bit of a knee-jerk reaction. I would most definitely look to hedge this position if this morning's low trade of $20.50 were violated to the downside, but a trader might look for a rally above the $22 level to implement the covered call strategy and try and get a little more money for the sale of a covered call.

Jeff Bailey
Senior Market Technician
Option Investor

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