Dear Bottarelli Research Member,
Today could be an interesting day. As I write, an opening-session gain of 135 points on the Dow has been trimmed down to a gain of only 65. That’s right, the rally is being sold into. I cannot remember the last time that this has occurred. Now that all of the cards from the stress test are finally on the table, we just might see that classic “sell on news” scenario. As you can see from the Dow chart below, if the Blue Chips set a temporary top at the 8,500 level, we’ll then have to re-test the 50-day moving average at 7,750. If the bulls believe that we’re truly in a recovery phase, then they’ll want to see the Dow re-test this level and hold.
If this re-test is coming, then we’re certainly positioned to capitalize on the downside. Heck, we’ve been ready for this move for quite some time. Our best position right now is our SMH May 22 Puts (SMH QJ), which just broke into profitability. As you can see, two substantial red candlestick formations paints a strong picture for more downside. Hold for more gains.
Also maintain your speculative play on the ESI May 85 Puts (ENJ QQ). As you can see below, ESI remains underneath its 200-day moving average, which signals more downside ahead. One powerful down-move and we’ll be in the money.
In terms of our two “Ultra” plays, continue to hold your SRS June 25 Calls (SAK FE), which can pop back above our original $4.60 entry price in no time. But when it comes to our FAZ June 8 Calls (FAY FH), I would like to get aggressive for one last and final time. As you know, we entered these calls on April 22nd for $3.00, and despite triggering a stop, I maintained the position. As of today, these calls are trading for $0.70. If we witness a re-test of the 50-day moving average, as I expect, then these calls could shoot up very quickly.
Since we have June expiration, we still have plenty of time to witness this move. Therefore, as a super speculative play, I’d like to lower our cost basis and add to this position for one last time. Adding at current levels would lower our total cost basis down to $1.85, which is a very achievable price by June. Heck, I would not be surprised if these calls surpass our original $3.00 entry price. All it’ll take is some profit-taking in the financial sector, and we’ll be back in business.
PLAY: Buy more FAZ June 8 Calls (FAY FH) at market, good for the day.
In terms of our IBM June 105 Calls (IBM FA), I’m not liking the chart set-up that’s on display today. The major market averages are higher, yet shares of IBM are looking to test the $95.00 level. Let’s go ahead and sell this position now before the losses get worse. Sell.
In terms of new trades, I’d like to keep our ledger on the lighter side right now. It’s very clear that the markets are trading on nothing but pure emotion right now, fueled by daily policy actions coming out of the Fed, Treasury, and U.S. government. Therefore, let’s simply sit back and watch the week come to a close. Hold your current positions going into next week, and let’s hope that the markets can get back to rational trading.
On a personal note, I have never in my lifetime seen such an orchestrated market environment. The only period that comes close was when policymakers attempted to curb selling pressure when the markets re-opened after the horrific terrorism events on September 11th. In that case, the market actions of the U.S. government were aimed to help average investors withstand the fear and uncertainty of terrorists. That is something I can stomach. But now, today’s events are aimed to protect the reckless and ruthless behavior of the financial elite, which is something that I cannot stomach (especially when the burden of their actions falls on taxpayers like you and me). And what’s worse, the burden falls even more squarely on our children. Generation upon generation is now being saddled with mountains of suffocating debt — all right before our eyes. I apologize for the rant, but orchestrating a market rally to hide the truth about what’s happening right now just does not sit right with me.
Combine this with the fact that yesterday’s Treasury auction did not go well, and it’s clear that powerful and wealthy nations around the world are slowing inching away from adding more exposure to the U.S. I could go on and on, but I think you get the picture. Above all, I’m glad you’re part of our elite trading group.
Going forward, I’ll continue to try my best to navigate this market in the best way possible. And as always…
Lock and load!