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While it is tempting to ignore this week's action as low-volume holiday trading, there's actually a lot of stuff going on and "attention must be paid."

Iran told us to stuff it over the weekend, and said they will, in fact, speed up their enrichment program in the face of sanctions (which are beyond lame anyway). Iran's President Ahmadinejad pulls out the pop culture quote-of-the-year award right at the last minute with this gem: "Give up this Muppet show. You cannot send secret friendly messages to us and at the same time show your teeth and claws."

The white house immediately escalated the rhetoric by stating that clearly Iran is desperate if they are willing to blur the line between puppets and Muppets.

Also supporting oil prices this week is the NY weather forecast for Jan 4th where the low is projected to be 29 degrees! That's a two-week low -- the long-range forecast is for mid 40s all the way through the 9th, but watch how much they try to make out of an actual cold day projected next week. Meanwhile, it's 50 degrees today in NYC and I have a theory as to why:

Inflatable Lawn Ornaments 26 12 06Inflatable Lawn Ornaments!

Inflatable lawn ornaments are an epidemic in the United States, particularly in the Northeast where they cover almost every square inch of some people's yards. The fact that over 10 million of them were sold in the U.S. this year alone seems innocent enough until you think about how they work:

"Many inflatables are lighted within and equipped with motorized fans to keep them inflated, so an extravagant display can set a homeowner back as much as $1,000 a month in electric bills."

A note to my international readers -- I am not joking! This is a true and appalling fact of American life; while we worry about the price of gas we are busy lighting up millions of blow-up lawn ornaments pretty much straight from Halloween through New Year's Eve, all of which require (get this!) the constant operation of a fan that is the equivalent of a 1,400 watt hair dryer!

So aside from the amazing amount of energy being consumed, think about the amount of heat that tens of millions of these things, running all night long, must throw off! Does advertising your dream of a white Christmas make a white Christmas much less likely to happen?

So with Iran back on the warpath and the U.S. continuing to consume 25% of the world's energy supply and a government that vows to stay the course -- the international community was bailing on the U.S. market.

China's growing a little slower but still enough to stoke inflation fears over there. That means Beijing cannot afford to prop up the dollar indefinitely, so we can expect some dollar weakness and gold strength today -- oil is the only wildcard as a genuinely slowing U.S. economy outweighs any Chinese energy gains. The world's 3rd biggest economy, Japan, is also facing very sluggish consumer growth, also a downer for oil (in my fantasy world where the laws of supply and demand actually affect energy prices). The yen is unlikely to move up against the dollar, so both will drop against the Euro this week.

Asian markets were up across the board, with India leading the charge with a 2% gain -- effectively erasing last week's 600 point drop. That brings the BSE back to 13,708 (not reflected in this chart), just 327 points shy of closing the year at a record high and up 50% for the second year in a row!

The EU is projected to grow 2.7% in 2007, but anticipate the U.S. economy dragging them down to 2% in 2008.

Taiwan just (8am) got hit with a 7.2 earthquake and a confirmed, but small, tsunami is heading for the Phillipines so we'll see how that plays out. As I said over the weekend, I'm bullish long-term but wary of a short-term correction down to 11,500.

We need to watch our failure zones (and we are closing in!) on the various indices:

On the Dow, 12,220 is the 50 DMA and we do not want to even visit there, especially with other markets doing so much better than ours. If we can avoid 12,300 and close the week at 12,400 or better we can get back in rally mode.

Literally the S&P cannot go one point below where it is now. 1,410 represents the bottom of a channel that has held since the July bottom (1,225) and 50 DMA support is way down at 1,395 and will be weak there as it's untested!

The NYSE can drop to 9,000 without breaking an uptrend and will be our first sign of trouble as it breaks 9,050. The "January effect" when it happens is a small-cap mover, so the NYSE and the Russell should lead the way (if such a thing is to happen at all).

The Nasdaq is sitting right on its 50 DMA at 2,400 -- below that is a gaping hole all the way to the 200 DMA at 2,250, a 6% drop that is probably/hopefully a worst case scenario. 2,350 must be held or this rally is over in the short run! 2,350 must be held or this rally is over in the short run!

Of course the Nasdaq has been held down by its feet, and without a SOX recovery there is no hope of a winter rally. If the SOX can't draw 460 as a line in the sand, 20 points BELOW the year's open, equal to the '05 open and 40 points below the '04 open -- well, I don't think I need to paint that picture, do I?

The transports also have elected to sit out this rally and need to hold 2,500, just 50 points above the year's open, to prove there is something there.

US Markets 12 26 06

Not a very pretty picture is it? Remember all those earthly problems we weren't worried about as the markets flew off into space? It's funny how the sudden pull of gravity suddenly brings them all into very sharp focus as they form nasty looking spikes on the ground that don't look anything like a soft landing!

Oil has cranked back up to $63, but, despite the runaway appetite of the American consumers, there is still too much of it being produced and it will be interesting to see if they can actually hold it this week. We have another inventory report (maybe Thursday due to the holiday) which will also be affected by the ship channel problem.

More so than a glut of oil, there is a glut of money ($4T) in oil stocks! The Oil Service HOLDRs ETF (NYSEARCA:OIH) and Energy Select Sector SPDR ETF (NYSEARCA:XLE) are up over 200% from their 2005 open with $2.5T of new roach money trapped in the same motel that held just $1T for the first half of this decade. In just 2 years, ExxonMobil Corp. (NYSE:XOM) alone has put over $50B (4%) of that new roach money in buy buying their own stock "hand over fist." They must be Cramer fans...

Exxon "only" makes $6 per share, and every time you buy a share for $75 they have to set aside $7.50 to keep up the buying pace they've been on for 2 years. The more you buy, the more they buy, putting over $8B of cash into purchasing their own stock in Q3 alone! Since the company "only" claimed a net income of $10B last quarter, truth in advertising laws seem to dictate that their mission statement needs to be changed to" "Exxon... the Exxon Stock Buying Company!"

Oh and mega-kudos to Exxon for avoiding payment on that little oil spill for 17 years and getting it cut down $2.5B on an appeal. It's not so much that spilling 11M gallons of oil across 1,500 miles of coastland and causing irreparable damage to the lives of 34,000 fisherman and their families should be given more than a slap on the wrist ($134K per family, less clean-up costs, moving expenses, legal fees etc,) -- what bothers me is that the strategy of large corporations being able to appeal until most of the plaintiffs are dead and there have been 6 mid-term elections is a validated strategy.

There is no reason a large corporation should ever pay any damage award. The legal fees, although incredible, are finite and once the interest on the potential damages exceeds $10M a year, it becomes cost effective to fight forever rather than pay. Chances are the plaintiffs will run out of money long before final judgment is passed, and additional earnings off the money that is set aside go to pump up the balance sheet and fund additional election campaigns until the right judge can be found.

Ah, good times!

Anyway, gold and the dollar will do whatever, but we're still looking at 82.5 to firm up as a dollar floor and $630 to be a gold ceiling.

US Markets 12 26 06 1

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No trading -- just watching today unless something amazing happens.

Telik Inc.'s (OTCQB:TELK) lead (only?) drug just flunked out of trial school and kudos to Lehman Brothers' analyst Jim Birchenough who downgraded them on 11/15, and saved his clients from a "house of pain." That's 3 biotech meltdowns this month!

Read all of Phil Davis's articles on Seeking Alpha

Source: Options Trader: Tuesday Morning Ideas