A 200-Day Rupture?

The Critical Question: Will the Dow Find Support H

By Bryan Bottarelli
Thursday, August 16, 2007 10:44 AM EDT
Thu, 16 Aug 2007 14:44:00 GMT

Dear Bottarelli Research Member,

I just watched an interview with Warren Buffet where he said that volatile times like this get him excited because they open up new areas of opportunity. When I look at the chart of the Dow, I can see what he means:

INDU

As you can see, the Dow just dipped underneath its 200-day moving average. This 200-day average is important because it’s a level that we haven’t approached since September of 2006. In fact, the Dow has called the 200-day MA a level a support over the last 48 months — and the fact that we’ve now ruptured this level on an intra-day basis tells me that the major market averages are forcing us to make a critical decision. That is, we are at the beginning stages of a new bear market — or is this simply a corrective phase within the parameters of an extended bull market?

From my perspective, we’re witnessing a corrective phase.

Sure, the credit and housing markets are in terrible shape, but I believe that both of these bearish triggers are near-term problems that simply must flush themselves out and run their course. In other words, I do not believe that the credit and housing markets will put us into an extended bear-market. Rather, we’re witnessing a classic Wall Street over-reaction that is triggered by too many homes (that should have never been built in the first place) sitting unsold and too many bad loans (that should have never been issued in the first place) going bad. The result of this “flush out” has investors selling everything as fast as they possibly can. And like Warren Buffet said, this creates new opportunity. But first thing’s first — let’s take profits on our KSS September 60 Puts (KSS UL).

KSS

Although Wal-Mart and Macys reported terrible numbers, J.C. Penney (JCP – NYSE) came out today and beat expectations — and this clouds the picture going into Kohl’s (KSS – NYSE) earnings call tomorrow. With a profit in hand, let’s eliminate the earnings-risk and lock in our gains now.

PLAY: Sell your KSS September 60 Puts (KSS UL) at or above $5.70, good for the day.

Looking at our other positions, the MRO September 55 Calls (MRO IK) have taken a hit while the GPRO September 60 Calls (PSU IL) are doing their best to hold their water. Let’s go ahead and trim down our upside exposure by closing out the MRO calls and maintaining our GPRO calls. I’ll be out later with further updates. But until then:

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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