Unseasonably Warm

SUN Looking to Push Lower

By Bryan Bottarelli
Monday, December 18, 2006 12:11 PM EST
Mon, 18 Dec 2006 17:11:00 GMT

Dear Bottarelli Research Member,

Back in early November, I highlighted the fact that Sunoco (SUN – NYSE) was an under-performer in the oil sector. While names like Exxon Mobil (XOM), ConocoPhillips (COP – NYSE), and Chevron (CVX – NYSE) are hitting a series of new 52-week highs, SUN has been unable to mount any sort of upside momentum for the past three months. In fact, the very tight range created by the 50-day and 200-day moving averages make SUN the weakest component (chart-wise) of the major oil names. In other words, on the days that oil stocks are rallying, SUN’s upside is lagging behind the others. And on days that oil stocks are falling (like today), SUN’s downside is heavier than the others. That’s a classic definition of a “laggard” stock, which is why I’d like to initiate new put options on SUN.

SUN

As you can see by the chart, SUN has fallen over $2.00 in today’s trading — putting the stock right at the 50-day moving average. The last time that SUN broke underneath the 50-day average in early September, it fell from $70 down to $57 in less than a month. If the shares break below the 50-day moving average, we could be looking at a similar downside move. Plus, when you consider the unseasonably warm temperatures that are forecasted over the next week leading to Christmas, I wouldn’t be surprised to see oil prices dip back down to $60 a barrel. Let’s play this laggard oil thesis using SUN January 65 Puts. Here’s the play:

PLAY: Buy the SUN January 65 Puts (SUN MM) at or under $2.05, good for the day. Current bid/ask spread is $1.80 to $1.90. Place a protective stop loss at $1.10.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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