Surviving the Sell-Off

Markets Close in a Sea of Red

By Bryan Bottarelli
Thursday, May 11, 2006 4:23 PM EST
Thu, 11 May 2006 21:23:00 GMT

Dear Bottarelli Research Member,

Today’s sell-off is what I’ve been warning about. The Dow Jones Industrial Average posted a 140 point haircut while the NASDAQ closed in a seven-week low.

This down-move is the reason I chose to own June calls instead of May calls — and it’s also the reason why I’ve stubbornly held onto our eBay June 32.5 Puts (XBA RZ). In the near-term, we must be protected against the downside — and that’s what these eBay puts do for you. The puts closed today at $1.55 after hitting a high of $1.65, and I still consider them a “hold” on the basis that the former high-flying tech stocks have officially run their course. As a result, my price forecast of eBay under $30.00 still stands.

EBAY

Not surprisingly, the only sector group making noise today is the metals. In fact, the rise in copper now means that one penny is inherently worth more than one cent. In fact, the raw value of copper in a penny means that four pennies are now worth five cents!

As far as our upside call positions, I’m confident that over the course of a month, these stocks will bounce and re-join their up-trends. That’s why it’s so important to own the June contracts. You see, a high-volume, triple-digit sell-off like this is what floor traders call a “distribution day.” In other words, the high volume signals that you have institutional selling — where the big investment houses equal out their ledgers by taking their profits (or losses) off the table to re-group and set up for the next round of trading.

When I look at all our upside positions, I must say that most of them are handling today’s extreme sell-off pretty well. In fact, ATPG hit a new 52-week high, CX closed the day in the green, and CHL spend most of the day hanging onto slight gains, while LMT is giving back only a little of its gains from yesterday.

The biggest mover today is Monsanto (MON – NYSE) which is down over $2.54 on the news that the U.S. courts have ruled that Swiss biotechnology company Syngenta did not infringe on one of Monsanto’s patents for the use and sale of genetically modified corn. This case is an ongoing lawsuit that Monsanto filed in May 2004 claiming the technique used in creating glyphosate-tolerant plants, including GA21 corn, had been infringed upon. Despite the ruling (which MON plans to appeal) nothing fundamentally has changed in terms of Monsanto’s earnings or revenue expectations.

MON

To be honest, today’s move is taking the stock right down to its 50-day moving average, which means that it may be time to add more MON July 85 Calls (MON GQ) to our position early next week.

As far as China Mobil (CHL – NYSE) goes, I can’t help but think that the BlackBerry news is anything but positive. Research in Motion reiterated that they’re teaming up with CHL to launch their mobile e-mail service across China next week, which could be the catalyst that drives more investment dollars into the stock. The stock caught some weakness towards the end of the day, so maintain your stops, but I still think we could have a double-down opportunity in the making on any subsequent strength.

I will be traveling tomorrow — so there will be no alerts. Be sure to maintain your stops, and we’ll look to fuel up the ledger with more exciting trading plays (including possible double downs on MON and CHL) next week. Until then…

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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