PLAY: Buy the BNI October 70 Puts (BNI VN) at market, good for the day. Place a protective stop limit at $3.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
PLAY: Buy the PEP January 55 Calls (PEP AK) at market, good for the day. Place a protective stop limit at $1.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
PLAY: Buy the GPI October 22.5 Calls (GPI JX) at market, good for the day. Place a protective stop limit at $2.30 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
Dear Bottarelli Research Member,
If you believe in the “Head and Shoulders” pattern, then it’s time to sit up and take notice. After all, from a technical analyst perspective, the head-and-shoulders pattern is believed to be the most reliable trend-reversal pattern in existence. It occurs when prices rise to a peak and subsequently decline. Then, prices rise above the former peak, and once again decline. And finally, prices rise yet again (but not to the second peak), and then decline once more. The first and third peaks form the shoulders, while the second peak forms the head. As you can see below, both the Dow and the S&P 500 charts clearly display this pattern right now. See for yourself:
In order to confirm the H&S formation, the SPX must fall below the “neckline,” which falls right around the 875 level (noted in blue above). If this neckline breaks on heavy volume, we’ll know to enter an aggressive short position.
In terms of a downside target, a reliable calculation entails measuring the price variance between the peak of the head and the neckline. In the case of the SPX, the peak of the head is formed at 956, and the neckline was established right around 875. That’s a difference of 81 points. Therefore, the downside price target is calculated by subtracting the price at which the pattern breaks the neckline (SPX 875) by the difference between the head and the neckline (81). Based on this example, the new SPX price objective upon confirmation of a head-and-shoulders formation is SPX 794.
Doing a similar calculation for the Dow, the peak of the head is formed at 8,877, and the neckline was established right around 8,220. That’s a difference of 657 points. Therefore, the downside price target is calculated by subtracting the price at which the pattern breaks the neckline (Dow 8,220) by the difference between the head and the neckline (657). Based on this example, the new Dow price objective (again, upon confirmation of a head-and-shoulders formation) is Dow 7,563. See below:
NOW HERE’S THE THING: Despite these two concerning technical formations, small pockets of strength are quietly emerging in certain market sectors. To be perfectly honest with you, I was completely shocked when I discovered the strength that’s now being exhibited in these sectors. But nevertheless, you cannot argue with earnings, chart formations, and forward price projections. Therefore, in today’s alert, we’ll add three (3) new LEAPS positions to our ledger.
The first play will capitalize on the bearish head-and-shoulders formations that are now being confirmed on the major market averages. The next two positions are found in the two sectors that’ll emerge as winners even if the markets begin to retrace. Now let me warn you upfront. When you learn about these plays, you probably won’t believe it. But as you’ll see, the argument from both an earnings, technical, and logical standpoint is solid across the board. So on that note, let’s begin!
The first play capitalizes on the head-and-shoulders formations noted above by playing put options on Burlington Northern Santa Fe (BNI – NYSE).As you probably know, BNI operates 32,000 railroad miles in 28 states and 2 Canadian provinces. They transport motor vehicles, industrial products (such as construction materials, petroleum, chemicals, plastics, food and beverages, cotton, salt, rubber, tires, and coal) and agricultural products (such as wheat, corn, soybeans, oil seeds, feeds, barley, flour, ethanol, and fertilizers). If you look at the Dow Jones Transportation Average below, I’m sure you’ll recognize the pattern that’s now forming. That’s right, another Head and Shoulders! See below:
While the H&S on the Transports is not nearly as clear as the H&S on the Dow and the S&P 500, the Dow Transports are still exhibiting a technical formation that’s very weak. As you can see, the Transports have just pushed below their 50-day and their 200-day moving averages, which means that they do not have any support for quite some time. In fact, the Transportation sector does not have a safety net until the 2,600 level, which is about 500 points (or 17%) lower than current levels. As a result, this group could be in for a big-time drop. Therefore, it’s time to add put options on BNI.
Consistent with the bearish formation on the Dow, S&P 500, and Dow Transportation Index, BNI has just moved below the 50-day and the 200-day moving averages. This indicates that the stock could move down to $65.00, $60.00, and even re-test the March low at $52.50. To profit off this fall, let’s add BNI puts now!
PLAY: Buy the BNI October 70 Puts (BNI VN) at market, good for the day. Place a protective stop limit at $3.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
Switching gears, let’s now examine two market sectors that are actually exhibiting strength. Over the last three months, you know that the markets have been rallying in anticipation of improved business conditions. But now, the anticipation period is over. In order for any company to continue moving higher, they not only must meet earnings expectations but they must beat expectations (and raise their estimates going forward). In my view, not many companies out there right now will be able to do this. But if you look closely, you’ll notice that the consumer goods sector (specifically processed and packaged goods) are benefiting in this recessionary environment.
On July 1st, for example, General Mills (GIS – NYSE) reported that their fiscal fourth-quarter net income nearly doubled from the year-ago period. With commodity prices coming down, the maker of cereal, baking products, and yogurt upped their earnings guidance going forward. As a result, GIS stock has been steadily moving higher. But in the context of today’s alert, I’m not going to recommend call options on General Mills. Rather, we’re going to piggy-back the strength of GIS by playing upside calls on their top competitor, PepsiCo, Inc. (PEP – NYSE).
PepsiCo is much more than a soft drink company. They’re a global manufacturer of snacks, carbonated and non-carbonated beverages, and food. Their business segment is broken down into the following three (3) groupings:
- America Foods Unit: Offers salty and sweet snacks, such as Lay’s, Doritos, Cheetos, Tostitos, Fritos, Ruffles, Quaker Chewy granola bars, SunChips, Rold Gold pretzels, Santitas tortilla chips, Frito-Lay nuts, Grandma’s cookies, Quaker Quakes corn and rice snacks, Sabritas snacks, Smartfood popcorn, and Chester’s fries. They also sell cereals, rice, and pasta under the brand names Quaker oatmeal, Aunt Jemima, Cap’n Crunch, Life, and Rice-A-Roni.
- Americas Beverages Unit: Offers beverage concentrates, fountain syrups, and finished goods under the Pepsi, Mountain Dew, Gatorade, 7UP, Tropicana Pure Premium, Sierra Mist, Mirinda, Tropicana juice drinks, Propel, Dole, Amp Energy, SoBe Lifewater, Naked juice, and Izze beverage names. They also sell tea, coffee, and water products through joint ventures with Unilever and Starbucks.
- PepsiCo International Unit: As you would expect, this segment offers all of the above snack and beverage brands overseas.
On Wednesday July 8th, Pepsi Bottling Group (PepsiCo’s largest bottler), posted a 21% jump in second-quarter earnings, which beat Wall Street’s forecast. The soft drink bottler earned $211 million ($0.96 per share) versus $174 million ($0.78 per share) in the same quarter one year ago. They also said that yearly income will come in at the top end of their forecast. This strength, combined with recent earnings from General Mills, offers an early indication that PEP will follow suit and deliver strong numbers for the remainder of 2009.
Factor into the equation PEP’s forward annual dividend yield of 3.20%, and the case for adding PEP calls looks strong. From a daily chart perspective, the stock has now moved down to a nice support level between $54.00 and $52.00. Adding calls anywhere between these two levels looks like an ideal entry point. Therefore, as a way to own upside exposure within a sector that’s actually delivering strong earnings, let’s add PEP calls to our ledger now.
PLAY: Buy the PEP January 55 Calls (PEP AK) at market, good for the day. Place a protective stop limit at $1.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
As the final play in today’s alert, we’re also going to add calls on Group 1 Automotive (GPI – NYSE). GPI sells new and used cars and light trucks through 127 franchises at 97 dealership locations (plus 23 collision service centers) in Alabama, California, Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, Oklahoma, South Carolina, and Texas. They also sell replacement parts, warranty, vehicle service, insurance contracts, and maintenance/repair services.
Now I admit, this one was a shocker…
After all, I would’ve never guessed that an independent auto dealership would emerge as a winner in today’s troubled economy. With each passing day, you seem to hear more and more negative news surrounding the “Big Three” automakers. But in many respects, that’s where the opportunity lies. You see, while the big car makers continue to shut down their franchise dealerships across the country, this opens up a window for the smaller, independent dealers to absorb the vacated market share. At a time when car manufacturers are dramatically shuttering dealerships, this leaves the independent auto deals as the so-called “last man standing” in a number of critical markets.
Not only that, but the situation is especially promising for independent dealerships who also sell used cars, since the majority of consumers today are avoiding the commitment to buy a new car. And another trigger is the idea of perception. You see, the woes of Detroit’s Big Three carmakers have reduced earnings expectations for every single car dealership on Wall Street. But now, when the independent dealers are coming out and reporting numbers that are better than expected, the result is an upside surprise that sparks a strong rally. That’s why we now have a powerful opportunity to add calls on Group 1 Automotive.
But that’s not all. You also have a political catalyst working in your favor. You see, a federally sponsored $1 billion “cash for clunkers” program now provides a voucher up to $4,500 for any buyers who trade in their gas guzzlers (defined as vehicles that get less than 18 miles to a gallon of gas) for a more fuel-efficient model. This offers a powerful incentive for buyers to make a car deal right now, further supporting companies like GPI.
As you can see from the chart below, GPI has been steadily moving higher. With an earnings announcement scheduled for July 28th, I’d like to get positioned to ride an extended upside move.
PLAY: Buy the GPI October 22.5 Calls (GPI JX) at market, good for the day. Place a protective stop limit at $2.30 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
UPDATES
FPL January 55 Calls (YVL AK): FPL is getting close to a very strong support level, so maintain your calls for a coming bounce. Hold.
HL January 2.5 Calls (LHN AZ), KGC February 20 Calls (KGC BD), GG January 37 Calls (GAG AB) & CDE January 15 Calls (LGZ AC): The recent commodity sell-off has pushed all of our metals plays lower, but that’s why we own these positions with January and February expiration dates. Gold prices move in waves, and we’re simply setting up for the next upside run. Hold.
COF January 20 Puts (YFN MD) & MTB October 45 Puts (MTB VI): I still do not believe that the markets have resolved the financial situation, and the dismal chart formations on COF and MTB support this viewpoint. Maintain your bearish positions. Hold.
SELL CALLS TO OPEN: Last week, I instructed you to “buy to close” your MasterCard January 220 Calls (MAL AD) if they traded down to $2.55, which would represent a 50% return from our $5.10 sale price. On Friday, they dipped under $2.00 per contract, which officially locked in a gain above 50%. This position is now closed. At the same time, the Goldman Sachs January 190 Calls (GPY AR) that we “sold to open” for $4.60 also traded down to the mid-$3.00 levels. Go ahead and “buy to close” these calls if they hit $2.30. “Buy to close” GS at $2.30.
MOO November 40 Calls (MOO KN) & AGU January 50 Calls (AGU AJ): Unfortunately, it’s time to bid these two positions farewell. They’ll show you one day of upside momentum, and then they’ll revert back to even stronger selling pressure. Until the commodity decoupling ends, these two plays will remain weak. Therefore, if you haven’t already done so, close them both out now. Sell.
TBT December 56 Calls (TVT LD): For some reason, the mainstream media will report that Treasury auctions have gone well, despite the fact that they’ve been lukewarm at best. I continue to feel that Treasuries are in for a rude awakening. Therefore, maintain your TBT calls. Hold.
PKX November 85 Calls (PKX KQ) & XOM January 70 Calls (WXO AN): Although both of these plays have drifted lower, they’ll be two of the first companies to recover once the commodity-based selling comes to an end. Hold.
ABT January 45 Calls (WBT AI): Technically, the stock chart is closing in on a very strong support level. Perhaps a coming bounce will allow us to exit the second half of our position with a 50% gain. Sell remaining position at 50%.
FAZ October 5 Calls (FAY JA): On Thursday, Direxion announced a 1-for-10 reverse stock split for the FAZ. Under normal circumstances, a move like this simply means applying the split multiple to your option’s strike price, assigning new options codes, and adjusting the new position within your trading ledger. This is all handled by the exchange. For example, if you own two (2) January 100 calls on ABC company, and the stock splits 2-for-1, you will now own four (4) January 50 calls on ABC company. It’s just like turning a $100 bill into two $50 bills. That’s how a standard stock split is handled. But because this is a 1-for-10 reverse stock split on a 3x Ultra position, things get a lot trickier. I would imagine that we all get reassigned October 50 calls, but we’ll have to wait and see how the exchange sorts this out. We should know more come Monday. Until then, hold your calls. Hold.
RTH October 75 Puts (RTH VO) & UPS October 50 Puts (UPS VJ): I know that I sound like a broken record, but both of these stock charts continue to look miserable. Things are getting so bad in the retail sector that Sears and Kmart have opened Christmas boutiques at hundreds of stores. How desperate bringing out Christmas items in July! Not only that, but they’re attempting to revive their lay-a-way program, which allows shoppers to pay for items over an extended period before they actually take the merchandise home. That sure sounds like a Depression-era strategy to me. Maintain both plays for more weakness. Hold.
UNG October 15 Calls (UNE JO): Natural gas just can’t get its act together. Despite all the promise, and a severely over-sold price, the UNG keeps drifting lower. Let’s close out our calls and put our money to work in better opportunities. Sell.
GERN January 2010 7.5 Calls (WNM AU): This story is only beginning. Last week, we learned that General Electric (GE – NYSE) has unveiled an exclusive alliance with Geron that could lead to the first significant commercial application of stem cells. Since Geron became the first company to win U.S. regulatory approval for a clinical trial examining stem-cell treatment in humans with severe spinal cord injuries, the upside potential of this partnership is immense. Hold.
Sincerely,
