Add FXI Puts

Playing a Quick Chinese Correction

By Bryan Bottarelli
Tuesday, August 28, 2007 10:12 AM EDT
Tue, 28 Aug 2007 14:12:00 GMT

Dear Bottarelli Research Member,

At the open of today’s trading, the markets are once again moving lower. As you can see from the chart below, today’s early action appears to establish a failure at the Dow’s 50-day moving average, but let’s see how the day’s trading session progresses before making any concrete directional conclusions.

INDU

In the meantime, maintain all of your current positions. As you very well know, this market has the tendency to make volatile intra-day moves, so we want to be positioned on each side of the ledger (via calls and puts) to participate in both moves. And in the spirit of playing each side, I think we have a short term put-buying opportunity on iShares FTSE/Xinhua China 25 Index (FXI – NYSE).

In yesterday’s trading, literally every Chinese-traded stock that I follow traded at absurdly-high levels. China Life, for example, gapped up $10.93 (a one-day move of 16%) on five times normal volume. Aluminum Corp. of China gained $13.33, a one-day move of 25%. And the list goes on and on. As a result, you have a chart formation on the FXI that’s due for a profit-taking pullback. Perhaps today, we’re seeing the first sign of this down-move taking place. See for yourself:

FXI

What I’d like to do is offer a speculative put play on the FXI — taking on the trading thesis that that index has simply moved up too far, too fast.A re-test of the 50-day moving average, for example, would be a $10.00 down-move from current levels. And considering how the FXI trades, we could see a move of this magnitude in a mater of days. To profit off this move, let’s make a quick September put play on the FXI.

PLAY: Buy the FXI September 146 Puts (FFP UP) at or under $9.10, good for the day. Current bid/ask spread is $8.60 to $8.90. Place a protective stop limit at $5.30.

Also maintain your MCO September 50 Puts (MCO UJ), which are now breaking into the profit zone.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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