Playing “The Day After”

Will We Pop? Or Fall? The Verdict is Still Out

By Bryan Bottarelli
Wednesday, February 28, 2007 9:27 AM EST
Wed, 28 Feb 2007 14:27:00 GMT

Dear Bottarelli Research Member,

They’re calling yesterday “the day of global fallout,” and it’s a day we won’t likely forget. In one trading session, the Dow dropped 416 points, making yesterday’s loss the single worst one-day drop since the terrorist attacks of September 11th.

And don’t believe the news reports that a “computer glitch” caused the fall. What happened was that the incredibly heavy trading volume was backing up sell orders — causing them to not get executed quickly enough. In response, stock market operators activated their back-up system to help facilitate order flow — and when this back-up system helped the markets “catch up” on executing all the backed-up sell orders, that’s when the Dow dropped 200 points in a matter of minutes — bringing the index down a total of over 500 points! So in reality, yesterday’s drop wasn’t a glitch at all — rather it was a true reaction to the sell orders that were just waiting to get filled.

Luckily we were holding protective put options on the DIA — which handed us an explosive single-day return. We also used put plays on Cognizant Technology (CTSH – NASDAQ) and Landstar (LSTR – NASDAQ) to profit off the fall. But that’s yesterday’s news.

What’s in store for the markets today?

To be honest, I’m not convinced that the downside is over. Sure, the U.S. futures are indicating a higher open, but it’s imperative that we see how the first hour of trading goes before making any new plays. Remember: The last time the markets fell this violently was May of 2006, and the downside pressure lasted a number of days — not just one. So if we do see continued weakness, we could finally see the fall-outs in high-flying stocks like Southern Copper (PCU – NYSE) and Research In Motion (RIMM – NASDAQ).

RIMM

PCU

But again, in speaking with a number of my contacts yesterday and again this morning — it’s difficult to get any strong technical readings when everything is mired in a sea of red. In cases like this, the markets are trading more on emotion than technicals (or even rational thought), so I need to see how the opening of today’s trading goes before making our next move. And unfortunately, we’re not getting any help from overseas. The Shanghai Composite, for example, rallied 3.9% on news that the Chinese government won’t tax stock-market gains. But Japan’s Nikkei dropped 2.9% and Hong Kong’s Hang Seng dropped 2.5%, so we’re getting a very mixed bag.

Of course, if the markets call yesterday’s drop a one-day event, I’m all for playing call options on stocks that got overly punished — as I already have a list worked up on my top candidates. But again, the smart thing to do right now is sit back, see how things open, and make rational trading decisions from there. As always, I’ll be watching tick by tick, guiding you every step of the way. And until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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