Setting Up Next Week

If the Markets Fall, We’ll Be Ready

Dear Bottarelli Research Member,

Let’s not get too excited about today’s market rally. On the eve of a three-day market holiday, I suspect that most of the top floor traders will be taking off early — thus creating a low-volume day to close out the trading week. As you can see by today’s SPY chat, today’s upside tick is a nice little move — but it pails in comparison to the red candlestick formation that we witnessed yesterday.

I still feel that the next major market move will be to the downside, so if you have yet to enter the SPY June 150 Puts (SYH RT), I recommend that you take a position now. To give you some perspective on just how quickly these puts can move, we added to these puts yesterday for $0.85, and they closed the trading session by hitting a high of $1.65. That’s an intra-day move of 95%. As I write, these puts are back down to $1.15 per contract, so I’d use today’s slight upside move to enter these puts if you haven’t already done so.

If the markets are indeed set to fall, then let’s examine some specific names that are most susceptible for a big down-move. Highlighting this list are broker stocks like Merrill Lynch (MER – NYSE).

As you can see by the chart, MER looks vulnerable for a fall between the 50 and 200-day moving averages around $86. The last major market drop saw MER fall from $92 down to $80 in 8 trading days — so it’s clear that the broker stocks get hit very hard during times of market weakness.

Lehman Brothers (LEH – NYSE) is also a put-buying candidate — especially if the stock cannot break above the critical $74 level. Failure to break $74 would set a third lower-high, which is very bearish no matter how you look at it.

It also makes sense to look at stocks like Ctrip.com International (CTRP – NYSE) because they can really get punished alongside any market weakness.

As you can see, the stock could move down $7.00 just to re-test its 50-day moving average. In fact, a test of the 200-day moving average (which occurred during February’s correction) would equate to a $17 down-move in CTRP, so certainly keep this one on your short-list for upcoming puts.

Another one to watch is navigation-maker Garmin (GRMN – NASDAQ). The stock looks over-extended at current levels — and any market weakness could push the shares right back down to the 50-day moving average at $56.00.

What’s more, GRMN insiders have been selling stock at an incredible rate. CEO Min Hwan Kao sold 30,000 shares on May 16^th, which promoted me to look at all of the insider transactions. I was shocked to see that there has not been a single insider buying GRMN for over one year.

For the last 6 months, in fact, there have been a total of 42 insider sales versus 0 insider buys. The last insider buy came on May 12 of 2006 when Director Charles Peffer bought a whopping 250 shares. With such heavy insider selling, I can’t help but think that GRMN stock is overvalued — and perhaps priced to perfection. One negative news announcement — or market correction — and the stock could fall hard, so let’s keep this as a put candidate going forward as well.

Now don’t get me wrong: I’m certainly not opposed to playing calls if the market moves even higher next week, but yesterday’s candlestick formation indicated that the recent upside could soon be coming to an end. Therefore, it’s wise that we map out some of the best put-candidates so we’re ready to move once the selling pressure really kicks into high gear, and that’s exactly what we’re doing now. So enjoy your extended weekend and we’ll kick it into high gear come next Tuesday.

Now for a quick operational note…

*OPERATIONAL NOTE: You may have noticed that we’ve been experiencing recurring technical problems with the Bottarelli Research Web site and e-mail, and I’d like to take a quick moment and address this issue.

The hosting company we currently use (and have used for years) is no longer giving us the support we require to provide our services to you in a reliable manner. They are failing in every possible way to fulfill our expectations — and it performance is simply unacceptable to me. The down-times we experienced this week were the last straw.

As a result, my technical team has moved quickly to sign a contract with the premier hosting company in the industry, Rackspace. To give you some perspective, Rackspace hosts the Web sites of Fortune 500 companies like American Express, Verizon, Sony, Forbes, Sprint, and Nike — and they have not experienced a single second of down-time in the past 6 years.

These guys are the absolute top of the line, and come next Tuesday (after the extended holiday weekend) you can add our Bottarelli Research Web site to this elite list! For you, this will mean a significant improvement in your Bottarelli Research service, including the constant availability of the site and the instantaneous delivery of e-mail alerts.

In addition to making this switch, I’d like to apologize for any inconveniences this may have caused you. The source of the problem was our hosting company, and we were just as frustrated with these problems as you. That’s why we’re being proactive and taking the necessary steps to solve these problems for good

Bottarelli Research prides itself in outstanding customer service — and since you’re part of our small inner circle of investors, I strive to offer you a quality of service that’s unmatched anywhere else on the market. So as a token of my appreciation, I will be extending your membership for one full month to “make good” on any down-time or delayed/undelivered e-mail alerts you may have experienced. As of next week, consider your membership term extended one additional month, on the house!

And come next week, you can look forward to the availability and reliability of the Bottarelli Research service that you expect. We sincerely thank you for your continued support of Bottarelli Research, and you can rest assured that significant improvements are only a few days away. Until then, enjoy your long Memorial Day weekend, and as always…

Lock and load!

Sincerely,