Another Important Impact

Heavy Trading Bodes Well for Exchanges

Dear Bottarelli Research Member,

Talk on the exchange floor today surrounds on the Dow’s closing day level — because this will be a key determinant in deciding the direction of next week’s trading action.

For example, the Dow closed Monday at a level of 12,632. And by the time the Dow closed on Tuesday, it was trading down at the level of 12,216. Poof! 416 points gone in one single session. Now here’s the important part.

Over the next three days (including today), we’ve basically traded sideways. Neither the bulls nor the bears have done anything to indicate their next move — and that’s why today’s closing levels are so important. As I write, the Dow is trading for 12,205. Now remember, the Dow closed on Tuesday at 12,216. So right now, we’re just 11 points lower than Tuesday’s closing price.

If we end the trading day today lower than Tuesday’s close, then I would expect to see even more downside selling pressure next week. If we end today higher than Tuesday’s close, I would expect to see a rebound effect taking place next week. But until we know today’s closing prices, the next major market move remains up in the air. And for that reason, I still think it’s a good idea to carefully play both sides of the volatility curve with positions like our PTR April 110 Puts (PTR PB) and our VLO June 60 Calls (VLO FL). Both trades are slightly above our entry prices, so let’s continue to hold each play for further gains.

Looking specifically at PetroChina (PTR – NYSE), if the stock cannot find support at the 200-day moving average, it could fall rather quickly. And that supports the case for maintaining our put position.

At the same time, Valero Energy (VLO – NYSE) has held up remarkably well in the midst of this week’s intense selling pressure, which makes me comfortable holding June calls — and adding to them on any significant price dips.

I also remain bullish on Allergan (AGN – NYSE). As you can see by the chart, the last time AGN dipped under its 200-day moving average was back in November of 2006 — and the result was a substantial upside bounce that pushed the stock $14.00 higher in less than a month. Now that we’re getting a similar chart signal, I’d like to maintain our AGN April 115 Calls (AGN DC) and try our best to participate in any coming upside pop.

Aside from our current positions, I’d like to highlight a rather important impact of this week’s incredible trading volumes — and possibly set the table for some potential trades next week. As you know, the world-wide market sell-offs have caused a major headache for most individual investors, but the exploding trading volumes caused by this week’s intense downside have actually created a windfall for the exchanges — both in the U.S. and abroad.

In fact, February 28^th was the busiest trading day EVER for both Euronext and Deutsche Boerse, as 2.1 million trades were registered (which is nearly double the 1.1 million average for the month) en route to February trading volumes increasing between 54% and 58%. This is important because Euronext is closely tied to the NYSE Group (NYX – NYSE) after agreeing to a buyout worth around $14 billion.

As you know, we’ve successfully played NYX both to the upside and to the downside recently, and the new surge in trading volumes could be the catalyst that once again pushes shares higher. Let’s keep a close eye on NYX for a possible new trade next week.

Also in that same boat is NASDAQ Stock Market (NDAQ – NASDAQ). Similar to NYX, we’ve successfully played NDAQ in the past — and now it looks like the stock is severely over-sold. A simple re-test of the 200-day moving average could mean a $5.00 upside jump — so let’s monitor NDAQ for a pending volume-based move as well.

Aside from that, let’s close off a wild week by giving ourselves a pat on the back for using one of the most violent downside days in recent history to take great profits on our put plays. As always, we’ll look to keep the profits rolling next week! Until then…

Lock and load!

Sincerely,