Dow Theory Signals a New Bull

This Hasn’t Happened Since 1998

Dear Bottarelli Research Member,

Last week, one of the most important triggers in the history of technical analysis quietly occurred without much fanfare or notability, and if you’re a disciple of Dow Theory, then welcome to the new bull market.

You see, according to Dow Theory, a new bull market is not confirmed until a new high is established in both the Dow Industrial and the Dow Transportation averages (and recently, some analysts have also included the Dow Utilities in this metric as well). Well, guess what? Last Wednesday, the Dow Jones Industrial, Transportation, and Utility averages all established record closes for the first time since 1998.

This is very important because historically speaking, whenever these three indices hit simultaneous peaks, the Dow has gone on to increase 2.5% over the next three months and 6% over the next six months. Now that all three averages have established significant new highs, the historical odds are squarely in our favor that the recent upward market momentum will continue. And as a result, I’d like to establish two new upside plays today. The first comes in the form of Precision Castparts (PCP – NYSE).

Similar to our recent trading thesis (and subsequent wining plays) on both Allegheny Technologies (ATI – NYSE) and Titanium Metals (TIE – NYSE), PCP is a prime beneficiary of the aerospace resurgence. As the manufacturer of metal components and industrial gas turbine applications, PCP looks to continue its strong financial performance thanks to drivers such as increased defense spending and the continued rebound in aviation. And the chart is absolutely a thing of beauty:

Based on a continued upside move in PCP that should break the stock into the $100 level, let’s establish a new upside call in PCP. Here’s the trade:

PLAY: Buy the PCP April 100 Calls (PCP DT) at or under $2.60, good for the day. Place a protective stop loss at $1.70.

Also looking to trade higher is NYSE Group (NYX – NYSE). As you know, we just made 20.75% playing NYX March 90 Puts (NYX OR), but now it’s time to switch gears and play the stock higher.

As you know, NYSE Group operates the New York Stock Exchange and NYSE Arca, where investors can meet directly to buy and sell listed companies’ common stock and other securities. One of the biggest technological challenges for NYX is to remain competitive with other exchanges like the NASDAQ, and that means breaking their “old-economy” business model of open outcry trading and switching to an automated trading system. This transition has just started to happen — and it’s already cutting costs and increasing order flow for the NYX. For example, the average time to complete a trade has fallen from nine seconds to about three-tenths of a second — allowing for many more transactions to be processed during “fast market” conditions.

Not only that, but the number of people on the exchange floor has dropped from 3,000 to 2,100 in a matter of months — which is a major operational cost savings for the NYX. Sure, the transition period will take some time to sort itself out, but it looks like the short-term weakness in the NYX is over and the stock is once again ready to make an upside jump. Case in point, the chart shows that the stock experienced a standard retrenchment that took the shares down to the mid-point between the 50-day and the 200-day moving averages — which is an acceptable retrenchment in the context of an upside trending market. As a result, let’s play this coming up-move with NYX calls — here’s the trade:

PLAY: Buy the NYX April 95 Calls (NYX DS) at or under $3.70, good for the day. Place a protective stop loss at $2.00.

Lock and load!

Sincerely,