50-Day MA Test Coming Soon

Watch MO & FCX for Possible Plays

By Bryan Bottarelli
Monday, August 27, 2007 11:48 AM EDT
Mon, 27 Aug 2007 15:48:00 GMT

Dear Bottarelli Research Member,

As we kick off the last full trading week of August, we have some rather important considerations that are happening in the markets right now. First of all, with all the credit worries still looming out there, it’s easy to overlook the fact that the S&P 500 and the NASDAQ just came off their best trading weeks in five months. And not to be outdone, last week was even better for the Dow, which registered its best trading week in four months. This rally brought the blue-chip index back to a very critical technical level. Take a look:

INDU

Technically-speaking, the Dow is getting ready to test the critical 50-day moving average. In today’s early action, the Dow is finding resistance 100 points below this level, but its’ still too early to call this a solid resistance level. After last week’s impressive rebound, I would expect to see a test at the 50-day MA, and depending on what occurs here, we’ll have the directional bias for our next series of plays.

Aside from the coming 50-day MA test, another important consideration is the September 18th Fed meeting. This will undoubtedly be the most important meeting since Ben Bernanke took over for Alan Greenspan, and there is already heated debate about whether the Fed will cut rates by a quarter or a half-point. Adding fuel to the fire is further talk that the Fed will not cut rates at all. While some economists feel the economy is doomed without this cut — others feel completely opposite — and this divergence of views could have a rather significant market impact leading into mid-September. As a result, the markets might react more aggressively to economic news coming out this week (notably existing home sales, factory orders, GDP, and consumer confidence) because this information will have the strongest impact on the Fed’s decision making.

So, in times of possible Fed cutting, it’s smart to look closely at the consumer staples. After all, this group has historically performed well during interest rate cutting cycles, and three of my favorites are Altria (MO – NYSE), Pepsico (PEP – NYSE), and Diageo (DEO – NYSE). Among this group, the best-looking chart is MO.

MO

The stock is making a strong move above its 50-day moving average today on news that the company plans to split its U.S. and international businesses into two separate companies. Philip Morris USA produces more than half of all cigarettes smoked in the country — including Marlboro and Parliament. This segment faces lawsuits, government intervention and shrinking sales, so spinning off Philip Morris International will extricate the rest of the company from any tobacco constraints and allow faster growth. Look for a possible upside call play on MO if the market technicals support an upside bias.

Another company facing a critical test at its 50-day moving average is Freeport-McMoRan Copper & Gold (FCX – NYSE). As you can see from the chart below, FCX is deciding right now whether to blast above or break below this important level, so once the verdict is in, we could have an explosive play on our hands.

FCX

Another powerful stock comes in the form of Yanzhou Coal Mining (YZC — NYSE). Many investors are not aware of this company because they’re located in the People’s Republic of China — but they offer an ADR that is traded here in the U.S.

YZC

China consumes more coal than Europe, Japan, and the U.S. combined — and since 66% of Asia’s power plants run on coal, the investment thesis here is a no-brainer. Unfortunately YZC does not offer an options string, but I wanted to bring it to your attention as a possible stock play for your consideration.

As the markets continue to sort out their next move, let’s maintain our balance of call and put positions — and then trade accordingly once we get an indication of the next directional move. The moment something happens, you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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