Dow Drops 200

Failure at 50-Day Looks Troubling

By Bryan Bottarelli
Friday, September 07, 2007 10:55 AM EDT
Fri, 7 Sep 2007 14:55:00 GMT

Dear Bottarelli Research Member,

I’m not going to lie.

Today’s technical formation on the Dow does not look good.

As you can see from the chart below, the Dow appears to have very strong resistance at the 50-day moving average. If the Dow is unable to break through this 50-day level, then a move back down to re-test the 200-day moving average at 12,900 is a lock. That’s about 300 points below the Dow’s current levels, and that’s why we should continue to deploy a downside bias to our active trading ledger.

INDU

As I write, we have three active trading positions: the FCX October 90 Calls (FCX JR), the MCO September 50 Puts (MCO UJ), and the PTR September 140 Puts (PTR UH).To be honest, I’m comfortable holding call on a Freeport-McMoRan Copper & Gold (FCX – NYSE) because gold prices are breaking out, and this will eventually lead to price advances for FCX into October. So continue to hold this position.

FCX

In terms of our puts, Moody’s (MCO – NYSE) is about to hit a new 52-week low sparked by news today that the SEC will review the role credit-rating agencies played in the sub-prime mortgage debacle. The argument is that MCO failed to give investors adequate warning of the risk posed by mortgage securities — and adding fuel the SEC’s argument is the fact that credit agencies face major conflicts of interest because they are paid by the very companies whose bonds they rate. As a result, continue to hold your MCO September 50 Puts (MCO UJ) for more gains.

MCO

In terms of PetroChina (PTR – NYSE), I’ve maintained that the stock’s inability to break through the 50-day moving average will soon lead to a sharp drop — which is why I’ve continued to follow the movements of the PTR September 140 Puts (PTR UH). As you can see from the chart below, today’s market weakness could finally trigger the down-move I’ve been looking for, so I’ll continue to follow this position leading into next week.

PTR

Looking at some new play candidates, Itron (ITRI – NASDAQ) is a company that’s on a very short list of stocks showing upside strength today. As you can see below, the stock continues to gradually march higher — undaunted by the movements of the major market averages. If we should witness an intra-day reversal, I just might recommend ITRI calls. But most likely, this play will come early next week.

ITRI

On the flipside, we could have a classic double-top formation in biotech Celgene Corporation (CELG- NASDAQ).

CELG

As you can see, the stock has been on a major upside run lately, but it has now reached the exact same level where it experienced major resistance back in May. The result of hitting these prices three months ago was a $10.00 drop in less than a month, so let’s keep an eye on CELG for any coming weakness. If a double-top formation is confirmed, I’ll be out with a new October put play. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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