Play the Knee-Jerk Selling

The Catalysts are Fundamentally Different

By Bryan Bottarelli
Thursday, April 19, 2007 10:27 AM EDT
Thu, 19 Apr 2007 14:27:00 GMT

Dear Bottarelli Research Member,

The U.S. markets are opening lower this morning on the news that the Chinese markets fell as much as 7% overnight. As you know, it was only February that a Chinese market sell-off sparked one of the biggest U.S. down-days in recent memory — and today’s situation is reviving those memories.

At the open of today’s trading, 25 of the 30 Dow components were trading down, which is exactly why we’re holding a protective position in the SPY June 150 Puts (SYH RT). Let’s certainly continue to hold these puts, but at the same time let’s also take a moment and put today’s situation into perspective.

SPX

Back in February, the violent market downside was based on a Chinese economic official characterizing their powerful stock market as “a bubble.” But today, the sell-off was due to stronger-than-forecasted economic growth, as China’s economy in the first quarter shot up a whopping 11.1%. Of course, explosive growth like this always induces rate-hike fears, which is why we’re seeing a knee-jerk sell-off this morning. But in no way can February’s downside trigger and today’s downside trigger be correlated. In my view, today’s sell-off is fundamentally different from the last sell-off, which could open up a window of opportunity for us. As I write, two of our call positions are trading below our entry prices, and I’d like to take full advantage of this momentary dip and add to each position.

First off, iShares MSCI Emerging Markets Index (EEM – AMEX) is taking a hit today, but I think we’ll see a swift recovery in the following days. In fact, playing these momentary dips is why I recommended June contracts — because the extended expiration date gives you the flexibility to add to your position on dips like this. Let’s use today’s $2.00 drop to lower our cost basis and play a continued upside move into June.

EEM

PLAY: Buy more EEM June 125 Calls (EEM FE) at or under $3.10, good for the day. Lower your stop loss to $2.00.

I also think it’s a good time to add to NYSE Euronext (NYX – NYSE). As you know, this stock moves quite fast — both to the upside and to the downside. If you can stomach the volatility, I’ve learned that taking advantage of any momentary dips can eventually pay off — so let’s add to your NYX May 95 Calls (NYX ES) as well.

NYX

PLAY: Buy more NYX May 95 Calls (NYX ES) at or under $3.90, good for the day. Lower your stop loss to $2.20.

*Trading Note: If you have yet to enter any of the positions mentioned above (SPY puts, EEM calls, or NYX calls) then do so today!

Lock and load.

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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