Two New Plays

Plus the Strategy on JOE

Dear Bottarelli Research Member,

As we kick off trading in the last week of September 2006, some new opportunities have presented themselves and I’d like to take full advantage. So let’s get right into it!

First off, my thesis of transferring from oil into tech has been right on the money. As I write, oil prices have dipped under $60 a barrel which continues to act as a bearish catalyst for virtually every oil stock on the market. Two of the names I’m watching very closely, Marathon Oil (MRO – NYSE) and Valero Energy (VLO – NYSE) continue to get pummeled – which has taken each stock down towards their 2006 lows. These two charts tell the whole story:

When you witness extreme price action like this, it’s wise to keep a close eye on these names because I’m sure that we will see some sort of upside correction soon. The trick is timing the move in a way that you’re not catching a falling knife. The solution, in my eyes, is to look at a company like Transocean (RIG – NYSE).

As a top deepwater and harsh environment offshore drilling contractor, RIG isn’t as sensitive to oil prices as some of the names listed above. Of course, lower oil prices do appear negative to RIG’s business operations, but drilling and exploration services must continue despite everyday price fluctuations. The fact that RIG has encountered bearishness alongside the overall oil sector declines offers us a nice entry point for some longer-term RIG calls. The thesis is that RIG’s forward drilling operations – stemming from their partnership with Chevron’s massive find – could be the catalyst that allows RIG to out-perform other oil names even if the weakness continues. As a result, I’d like to make a speculative upside play on RIG using the RIG November 70 Calls (RIG KN).

Currently trading between $3.70 and $3.90 per contract, I consider them a good buy anywhere under the $4.00 level. If RIG bounces from its current levels of $68.45 back up to $75.00 by mid-November, we could have a clean double on our hands. Based on what I’m seeing within the oil sector, this is a speculation worth taking. Here’s the play:

PLAY: Buy the RIG November 70 Calls (RIG KN) at or under $4.00, good for the day. Place a protective stop loss at $2.00.

On the flipside, I think we have a downside opportunity on Nike (NKE – NYSE).

Nike just reported strong earnings, which helped the stock jump up over $3.50 in last week’s trading. But if you study the chart, you’ll notice two things. The first is that the $88 to $90 level has represented a strong ceiling for NKE over the last 12 months. On three different occasions (January of 2005, early March of 2005, and late June of 2006) NKE has traded up to these levels and subsequently sold off. We could be seeing this pattern play out once again.

Secondly, the chart shows that NKE’s upside run could be losing steam as investors “sell on the news,” which tells me that we could soon be filling the gap set by last week’s upside jump. Even if NKE comes back down to fill that gap at $83.00, that’s a $2.50 down-move. Let’s get positioned to profit from this action.

PLAY: Buy the NKE October 85 Puts (NKE VQ) at or under $1,45, good for the day. Current bid/ask spread is $1.20 to $1.30. Place a protective stop loss at $0.75.

I’d also like to comment on the movements of St. Joe (JOE – NYSE).

I admit, it would have been nice to take profits when our JOE October 55 Puts (JOE VK) traded as high as $5.60 last week, but the stock quickly bounced back from those levels in intra-day trading thus requiring super-fast action. As I watched the recovery, I decided to hold off on the sell alert and simply maintain the position as to not forgo future profits – because all signs point to continued downside action.

Just today, in fact, the National Association of Realtors said that median sales prices of existing homes fell from year-ago levels in August for the first time in 11 years – and just the sixth time in the past 38 years. The median price of an existing home fell 1.7% year-over-year to $225,000. This marks the first time since April 1995 that median prices have fallen on a year-over-year basis – and this drop is the second largest decline in the 30-year history of the realtors’ survey! Not only that, but sales are now down 12.6% in the past year, hitting the lowest sales pace since January 2004.

Amazingly, the market is seeing this as a positive development – as price reductions will spark more buying interest. While this could help to pad the poor numbers, lower prices are certainly not a good sign for homebuilders. Anyone buying homebuilding stocks on today’s news of reduced prices will not see any improvement until mid 2007, at the earliest. In fact, a Bottarelli Research Charter Member who is a homebuilder in Virginia told me just today that Toll, BZH and Winchester Homes have all pulled the plug on new projects “until further notice.” To me, that simply cannot be a bullish catalyst. As you can see, JOE has been unable to break the 200-day moving average, so I think we should use today’s up-move to add to the position:

PLAY: Buy more JOE October 55 Puts (JOE VK) at or under $3.60, good for the day. Adjust your stop loss to $2.70.

Until then…

Lock and load!

Sincerely,