Back in Black

SUN Moving Lower

By Bryan Bottarelli
Monday, September 11, 2006 11:09 AM EST
Mon, 11 Sep 2006 16:09:00 GMT

Dear Bottarelli Research Member,

I’m back from Orlando refreshed and ready to dial it up for the last four months of trading in 2006. The timing of the Orlando trip was wonderful. Since school started, we breezed through Disney World in one day — hitting ride after ride without a single wait! And most importantly, by daughter Julia absolutely loved the rides. So all told, the trip was a rousing success! But enough about that — because we must dive into the biggest news item of the day, the wild trading in the Oil Services HOLDRs (OIH).

I must admit, I frequently shot over to the business center throughout the week to check the status of the OIH, and I watched in amazement as it got absolutely crushed. In fact, it’s down another $4.00 today to $127.50, breaking under by forecasted downside target of $130. Just look at this crushing blow:

OIH

I really think it’s a shame that this down-move didn’t happen sooner — especially since I knew in my heart it was going to happen. Looking back, it was just that freak two-day pop that stopped an otherwise dead-on trade. And to be honest, I think the pop was fueled by oil insiders who learned of the Chevron find before the news became public. The buying we witnessed was these guys trying to get positioned ahead of the crowd (at least that’s my educated guess). Either way, for all of you who took the additional risk and held onto the OIH puts, I congratulate you on your intestinal fortitude. I’m sure it paid off big time! Certainly use today’s drop to close out any puts you still may be holding, as they’re now trading for $7.90. Amazing!

Now here’s the thing. Our trading based on the reduction of oil and gas prices may not be over. Reduced oil and gas prices could result in more losses for independent refiners such as Valero Energy (VLO – NYSE), Sunoco (SUN – NYSE) and Frotier Oil (FTO – NYSE).Add into the equation the end of the summer driving season, and it’s easy to see why AAA estimates that gas prices could come down to $2.20 by the end of October!

Out of the three candidates listed above, I think the SUN chart offers the most downside action. Currently trading at $64.04, a move down to the recent support level at $62.50 with a follow-on move down to $60.00 could easily be in the cards. Just look at the chart:

SUN

Based on this downside forecast, let’s get positioned in some October 65 puts in SUN, using the recent rash of oil-induced bearishness to target a quick hit winner.

PLAY: Buy the SUN October 65 Puts (SUN VM) at or under $3.80, good for the day. Current bid/ask spread is $3.50 to $3.70. Place a protective stop loss at $2.50.

After a relaxing week off, I must say that it’s great to be back in action. Above all, I’m sincerely glad you’re part of my elite group of Charter Members. As always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

© 2012 CSR Group, LLC. All rights reserved. Published in USA.

Information, opinion, research, and commentary contained herein is obtained from sources believed to be reliable; their reliability, however, cannot be guaranteed. The maxim of Caveat Emptor applies — let the buyer beware. Bottarelli Research does not provide individual investment advice, act as an investment advisor, or individually advocate the purchase or sale of any security or investment.

Investments recommended in this service should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Bottarelli Research reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscriber’s initials will be used unless express written permission has been granted to the contrary.

CSR Group, LLC expressly forbids its writers from having a financial interest in any security recommended to readers. Furthermore, all employees and agents of CSR Group, LLC and its affiliate companies must wait 24 hours before following a published recommendation.

Bottarelli Research alerts contain time-sensitive information, and are published and distributed to members with urgency. Because of this, not all published materials can be adequately proofread, and an occasional spelling or grammar error may exist.


Other Options Alerts From September 2006