We Could Pull Back

WBMD and PCU Look Too High

By Bryan Bottarelli
Friday, February 02, 2007 12:26 PM EST
Fri, 2 Feb 2007 17:26:00 GMT

Dear Bottarelli Research Member,

Two stocks are exhibiting major over-bought signals today, and given the markets’ apparent lack of upside momentum, it’s certainly a good idea to get positioned in some downside puts.

The first stock due for a breather is Southern Copper (PCU – NYSE).Don’t get me wrong, I love the stock. As a miner and processor of copper, molybdenum, zinc, silver, gold, and lead, PCU offers you broad-based exposure to the metals sector.

PCU

But as you can see, the stock has been recently engaged in a tremendous upside run — and from the looks of today’s red candlestick formation, it appears like that run is due for a pullback. Technically-speaking, any weakness should push the stock back to re-test its 50-day moving average right around the $55 level, which would be an $8.00 haircut from current levels. Considering that gold is down $13 in today’s trading, we could be seeing the beginning stages of a precious-metal decline, and we want to be positioned to profit off any coming downside. Here’s the play:

PLAY: Buy the PCU March 50 Puts (PCU OL) at or under $2.60, good for the day. Current bid/ask spread is $2.40 to $2.45. Place a protective stop loss at $1.60.

The second stock due for a breather is WebMD Health (WBMD – NASDAQ).

WBMD

WebMD is an online healthcare operation — which provides health information services to consumers, physicians, healthcare professionals, and employers. I’ve successfully played WBMD puts before based on their outrageous price multiples of 12.68 Price/Sales and a whopping 131.35 forward P/E ratio (by the way, if you’re a student of proper stock price evaluation, you’ll know that a P/E ratio of 10 represents a fairly-valued stock. WBMD’s 131.35 is what you’ll consider “off the charts”)

Now here’s the thing: If the markets are set for a pullback, then you typically see the most over-valued stocks getting hit the hardest. And to me, that means WBMD could re-trace from $48.70 all the way back to at least $42 on any signs of market downside. As you can see, there’s no safety-net for WBMD to find support at until $42, so let’s get positioned to capitalize on any upcoming downside.

PLAY: Buy the WBMD March 50 Puts (QWB OJ) at or under $4.10, good for the day. Current bid/ask spread is a winder-than-normal $3.50 to $4.00, so try to get filled around $3.80 or $3.90 before submitting a $4.00 or $4.10 buy order. Place a protective stop loss at $2.10.

I still like what I see in Celgene (CELG – NASDAQ). As you know, the stock continued to push to the upside after we entered the March 55 Calls (LQH CK) yesterday for $2.95. And even with today’s slight pullback, these calls are still in the profit zone — currently trading between $3.20 and $3.30. All we need is for CELG to break past its 50-day moving average and it’s off to the races, so maintain your calls for more gains.

CELG

And finally, I continue to like the downside indications in the Dow Utilities, and especially in TXU Corp. (TXU – NYSE). As you can see by the chart, TXU is exhibiting no concerning signs of upside momentum — which means that I continue to like the TXU February 55 Puts (TXF NK). Currently trading between $1.30 and $1.40 per contract, let’s go ahead and add to our position to lower our cost basis.

TXU

PLAY: Buy more TXU February 55 Puts (TXF NK) at or under $1.45, good for the day. Re-set your protective stop loss to $0.90.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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