One New Play

PCU Looking to Bounce

By Bryan Bottarelli
Tuesday, December 26, 2006 10:44 AM EST
Tue, 26 Dec 2006 15:44:00 GMT

Dear Bottarelli Research Member,

The more I look at this market, the more I feel we could be in for a near-term correction in January. The Dow Transports, as I noted last week, are off 6% in one month (see FedEx). The small cap sector has now turned from a leader to a laggard. And even the high-flying brokerage stocks are stalling (see Goldman). Throw in a weak durable goods number and the Dow’s inability to maintain its highs — and I’m continuing to advocate holding a protective position via the DIA February 120 Puts (DAW NP).

DIA

These puts will serve as portfolio insurance if the DIA decided to fall back and test its 50-day moving average. If the losses compound on themselves — and the Dow break under the 50-day moving average — we could be in for quite a fall. Just look at the seperation between the 50-day and 200-day moving averages over the last four months. This cannot last forever. That’s why it’s always smart to hold a small position in these protective put contracts — which remain a “hold” in our trading ledger.

In the meantime, we have a good upside chart formation Southern Copper (PCU – NYSE).As you can see, the stock just got walloped as copper prices touched 6-month lows, but it appears this sell-off was over-done. After all, PCU isn’t just a copper play — they’re also heavily engaged in molybdenum, zinc, silver, gold, and lead. Many experts consider them the best all-around metals play in the entire market — which is why we have such a great opportunity right now.

PCU

As you can see, the recovery has begun. The stock just dipped under the 50-day moving average then quickly bounced back above it — proving that this is a solid support level. Based on this “dip and bounce” at the 50-day moving average, I’d like to get positioned in upside February calls to capitalize on any relief rally on the horizon in shares of PCU. Here’s the play:

PLAY: Buy the PCU February 55 Calls (PCU BK) at or under $2.65, good for the day. Current bid/ask spread is $2.45 to $2.60. Place a protective stop loss at $1.50.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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