Bending Without a Break

How Much Longer Can the Markets Hang Tough?

By Bryan Bottarelli
Tuesday, February 06, 2007 2:24 PM EST
Tue, 6 Feb 2007 19:24:00 GMT

Dear Bottarelli Research Member,

The markets remain surprisingly resilient today — as neither the bulls nor the bears have fostered any significant directional movement. As a result, we’re left trading within a tight range that is keeping most of our option plays muted — but how much longer can that last?

When I look at our put plays in Southern Copper (PCU — NYSE) and WebMD Health (WBMD – NASDAQ), I still feel that both stocks are due for a fall. As I noted when we opened these two plays — both PCU and WBMD have been rising at an unsustainable trajectory — which means it’s only a matter of time before each of them runs out of gas. And when that happens, the charts clearly indicate the full potential of the coming downside moves. Take WBMD…

WBMD

As noted yesterday, the stock could easily fall from current levels of $48.60 down to $42.00 — and perhaps even further if the 50-day moving average at $42 is penetrated. That’s why I’d like to maintain our WBMD March 50 Puts (QWB OJ), as I sure want to be positioned to profit off this pending downside move.

We’re seeing a similar situation in PCU…

PCU

Since the calendar has switched over to 2007, the stock has been engaged in an upside move that’s simply impossible to maintain for any extended period of time. That means the stock could fall as much as $10.00 before re-testing its 50-day moving average — and even that $10 down-move would still place PCU in the framework of an up-trend. Technically-speaking, our PCU March 50 Puts (PCU OL) hit our stop loss of $1.60, but I still feel PCU could move aggressively lower so I’ll continue to monitor the position for anyone who cares to maintain the play.

Over on the call side, we have Celgene Corporation (CELG – NASDAQ) and Transocean (RIG – NYSE) which are two stocks I’m not willing to bet against. With snow falling in the Midwest and temperatures hovering in the single-digits, I feel that oil will soon be back over $60 a barrel — which means RIG will extend its current up-trend. If RIG can break out of the tight trading range set by the 50-day and the 200-day moving averages, it could quickly shoot all the way up to $82.50 once again. The RIG March 80 Calls (RIG CP) that we entered for $2.25 have traded as high as $2.50 and as low as 1.75 today, which is a clear indication of the oil price volatility. Hold for more upside.

RIG

The same goes for CELG. I think the stock will once again re-test its 50-day moving average — and a breakout could push the stock back to late-December values just under $60. The CELG March 55 Calls (LQH CK) that we entered for $2.95 have traded as high as $2.75 today, so all it’ll take it one or two upside pushes and we’ll witness some nice gains.

CELG

The best news today is coming in the form of our longer-dated play on online game company CDC Corp. (CHINA – NASDAQ).

CHINA

This morning, CHINA upped their 2006 earnings from $32 to $33.3 million up to $34.3 to $35 million — which equates to a very strong 40% total increase over the previous year’s numbers. As you can see, this has pushed the stock to a new 52-week high, and your CHINA Janary 2008 7.5 Calls (WRW AU) have traded as high as $4.30. Hold for more upside — and as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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