Put Balancing

APOL and AFFX Make the Downside List

Dear Bottarelli Research Member,

We have a few important points to address before getting into today’s new trades.

The first is a follow-up on what I revealed yesterday about the trading practices in the CHE pits. Charter Member Steven L. writes in to say, “Just to follow up on CHEDK. I followed up with my broker and here’s the result — ‘Sir, the market improved one contract to 2.90 yesterday. As a courtesy to you, I am going to improve the other 3 contracts at 1.50 to 2.90. This will take effect over night.’ So tell everyone to fight this kind of robbery with their brokers”

This response proves to me that there was indeed unethical dealings in the CHE trading pits — so if you were one of the members who was exposed to this, please contact your broker and insist they correct this in a similar fashion to Steven’s broker.

Now, onto the second important point on current status of the major market averages. Charter Member Alex T. writes, “May be I’m wrong, but the market looks like topping out and going down from now. One of the charts I saw said that a head and shoulder has formed in the NASDAQ. I may consider using some of today or tomorrows strength to exit some of the calls, but then it put me into a position of not following your advice. I know there are always two sides of the coin. I don’t want to impact the view of what you see on the market because you got a lot more experience. What do you think the market is heading from here after yesterday’s action?”

This is a very good question — and a sharp observation. As you can see by the NASDAQ 100 Trust (QQQQ) chart below, there is indeed a “Head and Shoulders” formation taking shape on the NASDAQ, which could point to weakness in the tech-heavy index.

But when you look at the charts of the Dow and the S&P 500, a very different picture is being painted. Each of these indices have recently established new 52-week highs.

Neither the Dow or the S&P 500 are showing similar downside warning signals in their chart formations, which offers chart-hawks an extremely conflicting signal. How can the NASDAQ appear weak while the Dow and the S&P 500 look strong? Well, to be honest, that isn’t our problem — that’s for the talking heads on CNBC to yap about. You see, the trick is to be positioned on each side of the markets to combat whatever trading action the day brings. Most investors don’t even understand that one point. But in BottarelliResearch, we’ve taken it one step further.

I’m not sure if you’ve noticed, but all of your current call plays are stocks trading on the Dow (arguably the strongest index right now). Not only that, but one out of your two put positions is on Intel, a company trading on the NASDAQ. Not only are we positioned for each side of the markets, but we’re also positioned in a strategic way that plays the upside on the strongest index and the downside on the weakest index.

Of course, that still means that we need to withstand the ups and downs in the markets — action that was very apparent over the past three days (note the big down day Tuesday, the big recovery Wednesday, and early weakness thus far in today’s session). But maintaining a balanced call and put position between the weak and the strong indices gives you the best possible chances for success.

Having said that, we’re currently holding four calls (EV, MCO, BDX, CHE) to two puts (INTC, MDC). So it’s time to enter two new downside put plays on NASDAQ stocks. As it turns out, two plays are perfectly primed for further weakness.

The first company is Apollo (APOL – NASDAQ) which offers adult education programs through their University of Phoenix program. The company takes in about $2 billion in annual revenue but they just lowered their second quarter forecast by three cents a share. This lowered estimate was due to lowered enrollment and heavy advertising spending. On that news, the stock was downgraded by Banc of America on March 1^st.

I admit, you look at a chart like that and think, “how much lower can it go?” And the answer is, “a lot lower.” Now that the stock has breached both moving averages and set a series of new 52-week lows, there’s no real support point. So the downside could continue for the next few weeks.

PLAY: Buy the APOL May 50 Puts (OAQ QJ) at or under $4.00, good for the day. Current bid/ask spread is $3.70 to $3.80. Place a protective stop limit at $2.00.

The second company is Affymetrix (AFFX – NASDAQ).They sell gene chips that analyze genetic data to drug-makers, and the stock just new a new 52-week low. In a recent healthcare conference, AFFX CFO Gregory Schiffman said that the demand for their genome mapping products has temporarily slowed, but the company did not lower their sales forecast of $87 million. This could prove to hurt AFFX if they don’t meet those estimates. Since this is a biotech play, it could be a little more volatile, but it’s still a solid downside candidate to play.

PLAY: Buy the AFFX May 35 Puts (FIQ QG) at or under $3.00, good for the day. Current bid/ask spread is $2.65 to $2.70. Place a protective stop limit at $1.50.

Lock and load!

Sincerely,