Back in the Saddle

Gear Up for Another Exciting Week

PLAY: Buy the ADM June 35 Calls (ADM FG) at or under $4.50, good for the day. Place a protective stop loss at $3.00.

PLAY: Buy the PDS May 35 Calls (PDS EG) at or under $1.35, good for the day. Place a protective stop loss at $0.60.

PLAY: Buy the FCL May 50 Calls (FCL EJ) at or under $3.60, good for the day. Place a protective stop loss at $2.00.

PLAY: Buy the Dell June 30 Puts (DLQ RF) at or under $3.70, good for the day. Place a protective stop loss at $2.10.

PLAY: Buy the SPY June 129 Puts (SPY RY) at or under $1.45, good for the day. Place a protective stop loss at $0.95.

Dear Bottarelli Research Member,

Just how vulnerable do I think the markets are? Well, just look at the massive hit taken by Asia/Pacific’s top two exchanges overnight:

The Nikkei 225 was down a whopping -489.56 points to 16,914.40

The Hang Seng was down an equally whopping -206.48 points to 16,705.67

With these downside moves happening overseas, I remain very cautions that a one-day sell-off of this magnitude could soon find its way to the U.S. indices. Therefore, I’ll continue to tread cautiously — placing upside calls on only those stocks exhibiting strength in the midst of weak market fundamentals while equaling out the ledger with downside puts on both indices and weak stocks.

The first upside play I’d like to add is Archer Daniels Midland (ADM – NYSE).

ADM is an agricultural & commodities company that engages in Oilseeds Processing, Corn Processing, and Agricultural Services. The Oilseed Processing segment processes soybeans, cottonseed, sunflower seeds, canola, and peanuts for both human food and livestock feed. The Corn Processing segment produces syrup, starch, glucose, dextrose, and sweeteners, while the Agricultural segment sells oilseeds, corn, wheat, milo, oats and barley to the agricultural processing industry.

The big play here is that the Decatur, Illinois company produces 29% of the country’s ethanol. How strong is that position? When you consider that the next-largest player has less than a 5% share, it shows you that ADM literally dominates the ethanol market. That’s why Barron’s projects the stock to rise another 20% in 2006, saying that “Wall Street is underestimating the coming price increases for the new fuel.” Just look at the chart:

The company has a scheduled earnings call on Tuesday May 2^nd, so I’d like to enter into a round of calls to capitalize on any run-up prior to this announcement.

PLAY: Buy the ADM June 35 Calls (ADM FG) at or under $4.50, good for the day. Current bid/ask spread is $4.20 to $4.30. Place a protective stop loss at $3.00.

Another upside play I’d like to enter today is Precision Drilling Trust (PDS – NYSE).

PDS is an open-ended investment trust that operates a fleet of 230 drilling rigs and 237 service rigs in Canada. The company offers services such as land drilling, procurement and distribution of oilfield supplies, and the manufacture of drilling and rig equipment. As you can see by the chart, the stock just broke out of the $35.00 price ceiling that acted as a double-top on two occasions in January of this year. This should signal a series of subsequent new highs for PDS.

The calls I’m recommending here are a little cheaper than I’d normally choose, but I figured I’d offer up something that has triple-digit earnings potential.

PLAY: Buy the PDS May 35 Calls (PDS EG) at or under $1.35, good for the day. Current bid/ask spread is $1.05 to $1.25. Place a protective stop loss at $0.60.

SPECULATIVE: The final upside play is a very speculative play based on an upcoming earnings report. If you consider yourself a conservative trader, I’d shy away from this one. But if you can tolerate the accelerated risk of a loss in return for a huge gainer, then this play is especially for you.

The play is on a company called Foundation Coal Holdings (FCL – NYSE).The company plans to report its 2006 first quarter results before the market opens this Wednesday, so the time to make this play is now.

Foundation Coal engages in extracting, cleaning, and selling coal to electric utilities, steel companies, coal brokers, and industrial users primarily in the United States. As of December 2005, the company had approximately 1.7 billion tons of proven and probable coal reserves.

You know the story with coal. Power companies don’t have enough coal to meet the rising energy demand, which is helping the coal companies enjoy incredible gains. Take the recent price action of Arch Coal (ACI – NYSE), who just reported a blockbuster quarter where sales rose 45% higher than the analysts’ average estimate. This could be the same situation with FCL this Wednesday.

As you can see by the chart, the stock is in rally mode today — which could continue into tomorrow as speculators bid up the shares in anticipation of Wednesday’s report.

PLAY: Buy the FCL May 50 Calls (FCL EJ) at or under $3.60, good for the day. Current bid/ask spread is $3.30 to $3.50. Place a protective stop loss at $2.00.

As for the downside candidates, I’d like to offer two ways to protect yourself against a large-scale sell-off. Please understand — I consider both of the following put plays nothing more than portfolio insurance against a big-time sell-off. So when it comes to positioning management, I’d like you to “underweight” these two protective put plays.

The first downside play comes in the form of Dell Computer (DELL – NASDAQ). I was absolutely shocked to see Dell pop up on my downside screen today, but the chart tells the whole story. In the blink of an eye, Dell has suddenly established a fresh series of 52-week lows. What’s shocking is that this weakness has come at a time where the markets are hitting 5-year highs. Similar to Intel’s struggles, I think the downside in Dell will continue.

By recommending Dell puts, you can establish a downside position that covers you against any sort of technology-induced sell-off. So let’s get positioned now:

PLAY: Buy the Dell June 30 Puts (DLQ RF) at or under $3.70, good for the day. Current bid/ask spread is $3.50 to $3.60. Place a protective stop loss at $2.10.

And finally, I’d also like to add a second protective put on the S&P Spiders (SPY).That way, you are covered from both a technology standpoint and from an overall-market sector standpoint.

Like I said above, be sure to underweight this position, as the intention is to act only as downside protection. In other words, you’re buying car insurance for your portfolio. To keep your costs down, I chose a cheaper put that’s slightly out of the money. This way, the position could double on a big downside move — but still not lose too much with continued market gains.

PLAY: Buy the SPY June 129 Puts (SPY RY) at or under $1.45, good for the day. Current bid/ask spread is $1.30 to $1.35. Place a protective stop loss at $0.95.

TOPPING THE WATCH LIST: I’ve told you before about my position on Monsanto (MON – NYSE), the genetically modified food giant who owns a 51% share in the U.S. corn market. Although they regularly encounter controversy over their genetically-modified foods, you simply cannot argue with the company’s 3-year stock.

As you can see, Monsanto is one of the top-performing stocks on the S&P 500. I’ve been looking for an ideal entry price, so be sure to keep MON on your radar screen.

Lock and load,

Sincerely,