Two Strong Set-Ups

PEP and CELG Each Look Promising

By Bryan Bottarelli
Tuesday, June 06, 2006 4:52 PM EST
Tue, 6 Jun 2006 21:52:00 GMT

Dear Bottarelli Research Member,

In yesterday’s alert, I wrote, “Over the last few days, the moment the DJX hit the 50-day moving average, a steep fall ensued. What this tells me is that the Dow could give up another 100-poitns or so before it finds any sort of support point.”

Today, the Dow did — in fact — lose another 100-points, dropping the index below 11,000 for the first time since March 10th. This downside move helped you take a solid gain on your DJX July 110 Puts (SJV SF). With the Dow under 11,000 and all asset classes in the red, it was truly an ugly market to behold.

But as the trading day came to a close, it was rather interesting to see that the Dow trimmed that 100-point loss into a closing loss of only 45 points. This late-session up-tick allowed the Dow to close the day above the 11,000 level at 11,002, and we actually witnessed small pockets of strength in certain market sectors. This signals that we could be seeing the early signs of bullish support, as investors are beginning to pick up attractively valued shares at these low valuations.

One stock that’s been performing exceptionally well in this market environment is Pepsico (PEP – NYSE). Fueled by management buying back its own stock when the S&P 500 knocks it down, you’ll notice that PEP remained very strong in the brutal month of May — and it’s looking to continue that trend here in June.

PEP

When it comes time to make the first round of new upside call plays on a market rebound, I’d expect PEP to be topping the list. Another more speculative upside play comes in the form of Celgene (CELG – NASDAQ), a company that’s creating a tremendous buzz at the annual American Society of Clinical Oncology in Atlanta.

CELG

The New Jersey-based biotech company is one of the fastest-growing tech companies in the drug industry thanks to promising new drugs Thalomid and Revlimid.

Celgene just presented new data that showed that cancer drug Revlimid improves the overall survival in relapsed/refractory multiple myeloma (which is a specific type of blood cancer which does not have a cure and kills 12,000 Americans each year). The FDA is set to give a decision on Revlimid on June 30th, which means we could have a potentially explosive play on our hands.

As you can see by the chart, the stock just hit a new 52-week high above $44.00 and then quickly retreated back down thanks to overall market weakness. The play could be to buy calls in the stock and ride any upside momentum leading up to the FDA’s June 30th decision. Or, a second strategy would be to buy straddles (which is the simultaneous purchase of a call and a put) and hold them through the FDA’s announcement to capitalize on a sudden jump OR fall in CELG based on the FDA’s news. The theory of a straddle is that a big enough move would make a profit on the call or put side large enough to negate the loss on the other option.

When it’s time to act on these, or any of the other candidates I’ve been monitoring, you’ll be the first to know. We could also have a superb opportunity to add to some of our longer-term positions from the “Aftermath Report,” specifically CAT and DNA. So be sure to keep these on your radar as well. Until then…

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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