Handicapping the Next Move

We’ll Know Soon!

By Bryan Bottarelli
Monday, July 09, 2007 10:54 AM EDT
Mon, 9 Jul 2007 14:54:00 GMT

Dear Bottarelli Research Member,

We currently have two significant technical developments battling themselves out on the Dow chart. First off, we have a double-top formation. The first top occurred in early June 13,690 and the second top occurred later that same month at 13,688. Secondly, we have a double bottom formation. The first bottom occurred June 7th at 13,259 and the second bottom occurred June 26th at (amazingly) the exact same 13,259 level.

Since establishing that double bottom formation, the Dow has once again rallied — and it’s now approaching the magical 13,690 level that has already acted as a resistance point on two occasions on June. As I write, the Dow traded as high as 13,657 and looks to have failed again, so we’re literally points away from seeing the reaction to this critical double top level.

INDU

Here’s What I’d Like To Do: If the markets can break through this level, we’re in for yet another upside push that’ll establish new highs. If the markets cannot break this level, that’ll set a triple top formation — and that means we’re in for another pullback that’ll most likely break through the previous two support points at 13,259. So the prudent thing here is to keep a close eye on today’s action and see how the Dow reacts to these critical levels.

Adding fuel to the fire, we’re about to kick off Q2 earnings season — and the early numbers could very well be a catalyst for the next upside or downside push. Right now, I would be biased more towards the upside scenario versus the downside scenario — simply because the upside is the strongest prevailing trend. Also supporting the upside thesis is the fact that 61% of stocks on the NYSE are trading above their 200-day moving averages. This is a rather neutral statistic when you consider that 86% of NYSE stocks where trading above their 200-day moving averages in February. In other words, the market internals could very well support a higher market, so I’m certainly not opposed to playing a rash of new upside calls on a strong technical breakout.

Speaking of strong breakouts, Cummins (CMI – NYSE) is up huge today after Bear Stearns upgraded the stock, saying many of Cummins’ competitors won’t be able to meet new emissions regulations. But another beneficiary of this news is Paccar (PCAR – NASDAQ), the worldwide manufacturer of light, medium, and heavy duty trucks. As you can see by the PCAR chart, the stock could be breaking out as well, so let’s keep an eye on it for a possible call play.

PCAR

I’m also watching shares of Parker-Hannifin (PH – NYSE). The worldwide industrial equipment company manufactures fluid power systems and electromechanical controls — and it could engage in a move up past $102.50 very soon, and the calls look cheap compared to other $100-stocks.

PH

Good news today for Harvest Energy Trust (THE – NYSE), as the stock set a new 52-week high at $32.50. This has finally allowed the HTE August 30 Calls (HTE HF) that we entered on June 19th for $2.55 to trade for $2.65, putting us on the black. Continue to hold for more upside gains.

HTE

Let’s continue to watch the levels here — and then we’ll know the strategy for our next series of plays. But until then, please don’t forget about the special offer that’s good until Sunday July 15th. Check it out below!

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Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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