Two Bearish Formations

JCI and BHI Looking Weak

By Bryan Bottarelli
Friday, September 07, 2007 12:09 PM EDT
Fri, 7 Sep 2007 16:09:00 GMT

Dear Bottarelli Research Member,

Since our last alert, the markets have continued to deteriorate. The Dow is now off 230 points, and as a result, more and more bearish chart formations are popping up on my screen. Two of the very best downside technical formations are as follows:

Bearish Chart Formation #1: Johnson Controls (JCI – NYSE)

JCI

JCI is a company that produces and installs building operating & equipment systems — such as chillers, boilers, ventilators, and air conditioners. As you can see from the chart, the stock has clearly failed at the 50-day moving average, which indicates a move down to $105.00 or $100.00 in the near term. It looks to me like Wall Street is treating JCI as an indirect housing play, which could help push the stock lower.

Bearish Chart Formation #2: Baker Hughes (BHI – NYSE)

BHI

BHI supplies technology services to the oil and natural gas industries worldwide. We all know that oil prices just broke $75.00 with very minimal fanfare, but the chart formation on BHI clearly shows the stock setting (what appears to be) a lower-high. This is an indication that BHI is unable to penetrate its recent high at $90.00, which could lead to added selling pressure back under the $80.00 level.

Now Here’s the Thing: Coming from the CBOE trading floor, I know that traders are very hesitant to be long over the weekend, especially on such a tremendous market down-day like today. Therefore, I don’t think we’ll see any significant buying into the close of today’s trading (unless, of course, we get some crazy cash infusion from the Fed that triggers programmed computer buying — which is always a possibility). But barring this rare occurrence, we should experience weakness throughout the day, so let’s carefully add one additional put to our ledger on JCI. As much as I’d like to add puts on both BHI and JCI, let’s make the smart play and only add one. After all, we can always buy BHI puts next Monday if the market weakness continues, but for the purposes of today’s trading, let’s add JCI October puts.

PLAY: Buy the JCI October 110 Puts (JCI VB) at or under $5.30, good for the day. Current bid/ask spread is $5.00 to $5.20. Place a protective stop limit at $3.00.

One Final Note: If you’re still holding your GRMN October 105 Calls (RZJ JA), I’ll continue to follow the position. I still think the stock is strong as ever, so we should see upward movement again next week. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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Other Options Alerts From September 2007