The Next Important Consideration

Add BEN & MCO Puts, Plus Other Possible Trades

By Bryan Bottarelli
Monday, August 20, 2007 12:45 PM EDT
Mon, 20 Aug 2007 16:45:00 GMT

Dear Bottarelli Research Member,

Coming off a market that just experienced a pretty textbook 10% correction, we’re left wondering if the tremendous intra-day volatility is now behind us. From the looks of today’s trading, the answer is “yes.” But the more important consideration pertains to the market’s next major move.

INDU

You see, today’s inability to build on last Friday’s gains (sparked by the Fed’s emergency rate cut) leads me to believe that we’ll most likely re-test the 200-day moving average, if not last week’s lows, before establishing a solid floor to rally off. The chart above offers you a look at today’s Dow action — and as you can see — a re-test of the 200-day MA would mean at least another 200 points of downside action. As a result, I’d like to establish a new downside position on Franklin Resources (BEN – NYSE).

BEN

As you can see by the BEN chart, the stock is putting in a major red tick today — right at its 50-day moving average. If this area is a resistance point, the stock could easily give up the $7.00 it gained last week, so let’s ride this downside momentum via September puts.

PLAY: Buy the BEN September 130 Puts (BEH UF) at or under $6.50, good for the day. Current bid/ask spread is $5.90 to $6.30. Place a protective stop limit at $3.50.

Another put candidate comes in the form of the Financial Select Sector SPDR (XLF). Acting as a basket of financial stocks like Citigroup, Bank of America, JPMorgan Chase, Wells Fargo, Goldman Sachs & Merrill Lynch, the XLF gives us broad-based exposure to the entire financial sector in one shot. If the market’s downside pressure begins to pick up momentum, we’ll add XLF puts as well.

XLF

Yet another put candidate comes in the form of Moody’s (MCO – NYSE). The credit rating, research, and debt instrument firm is under heavy bearish pressure as decaying credit quality has made it tougher to sell bonds. As a result, the pool of bonds that MCO rates dries up, thus halting the lifeblood the company’s services. As you can see by the chart, MCO could continue to move lower — as it is now under both its 50-day and 200-day moving averages without any sign of near-term support. In fact, let’s go ahead and add MCO puts now:

MCO

PLAY: Buy the MCO September 50 Puts (MCO UJ) at or under $5.50, good for the day. Current bid/ask spread is $5.20 to $5.40. Place a protective stop limit at $2.60.

Over on the bullish side, shares of Research In Motion (RIMM — NASDAQ) are popping today as the stock is schedules to split its shares 3 for 1 at the close of today’s trading. This could spark new investor interesting RIMM shares, so let’s keep this one ear-marked as a possible upside call play.

RIMM

Another bullish company that’s off the radar of everyday investors is CF Industries (CF – NYSE). Headquartered in Deerfield, Illinois, CF Industries engages in the manufacture and distribution of nitrogen and phosphate fertilizer products in North America, and as you can see by the chart, the stock is looking to break above its 50-day moving average. If this breakout occurs despite the recent market weakness, we’ll look to add CF calls to our ledger.

CF

Not to be outdone, Koppers Holdings (KOP – NYSE) is also looking very strong. The industrial goods company uses carbon compounds to treat wood products for the aluminum, railroad, specialty chemical, utility, rubber, and steel industries — and one look at their recent numbers and you’ll see why the stock is breaking out to the upside.

KOP

On August 9th, the company reported record Q2 sales — as net income increased from $5.0 million to $22.3 million. That helped KOP raise their guidance, and this helped pushed the stock up to a new 52-week high in today’s trading. Let’s look to add KOP calls on any pullback.

And finally, we have an interesting situation in Blue Nile (NILE – NASDAQ). The online retailer of diamonds and fine jewelry in the United States, Canada, and the United Kingdom has just witnessed 7 insiders sell over 380,000 shares last week, which amounts to proceeds in the area of $34 million. It’s interesting to me that this large sale comes right at the stock’s 50-day moving average. Do company insiders know that this level will not serve as a support point? Let’s keep a sharp eye on the stock, because if this level does not hold, a move from $70 down to $50 could be in the cards.

NILE

The moment something triggers, you’ll be the first to know. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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