Transport Sector Set to Fall

Enter Puts on NSC

By Bryan Bottarelli
Monday, January 22, 2007 11:56 AM EST
Mon, 22 Jan 2007 16:56:00 GMT

Dear Bottarelli Research Member,

As we continue to work our sale of the MRO April 90 Calls (MRO DR), another interesting trading opportunity has surfaced in the Transportation sector.

A quick look at the Dow Transports ($TRAN) shows the formation of a double top — highlighted by a failure in mid-November to break the 4,900 level followed by another failure to penetrate this level over the last week.

TRAN

It’s no coincidence that the double top formation is coming at a time when oil prices appear to be making a new upside push — sparked by colder temperatures and falling snow across the entire country. If this trend continues — and it looks like it will — then I’d expect to see downside pressure in the Dow Transports, opening up a trading opportunity in Norfolk Southern (NSC – NYSE).

NSC

As a rail operator with nearly 21,300 route miles in 22 states, NSC has just formed a similar double-top formation as the Dow Transports, only NSC’s failure is establishing a lower-high — a strong sign of pending downside pressure. In mid-October, for example, NSC pushed above $54 a share before falling back down to $48 one month later. In today’s action, NCS’s failure is happening at the $53 level, which signals higher-odds of a $3-$4 fall over the next few weeks. Based on this downside formation, let’s enter into NSC puts. Here’s the trade:

PLAY: Buy the NSC March 50 Puts (NSC OJ) at or under $1.75, good for the day. Current bid/ask spread is $1.55 to $1.65. Place a protective stop loss at $0.80.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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