A Troubling Sign

Are the Bears Taking Control of the Blue Chips?

By Bryan Bottarelli
Monday, September 10, 2007 2:00 PM EDT
Mon, 10 Sep 2007 18:00:00 GMT

Dear Bottarelli Research Member,

After last Friday’s major sell-off on the Dow (which occurred under its 50-day moving average), it’s troubling to see a continued round of selling pressure again today.

Based on this afternoon’s chart formation, it looks like the Dow will most certainly re-test its 200-day moving average, which falls at least 150 points below current levels. Whether or not the Dow will find support — or fail — at this critical 200-day moving average is the next major directional test. Take a look:

INDU

Based on this bearish technical reading, I think it’s a good idea that we establish a new series of puts. I specially scanned for stocks failing at critical technical levels (or trading underneath their critical technical levels) and the result was a nice batch of put opportunities. But first thing’s first: Let’s lock in gains on our MCO September 50 Puts (MCO UJ).These puts have traded as high as $6.10 today, so let’s take this winner off the table and make room for the next series of put trades.

PLAY: Sell your MCO September 50 Puts (MCO UJ) at or above $6.00, good for the day.

Once you’ve locked in that winner, I’d like to get positioned in two new stocks that look ready to fall in the coming days — and the first play is Cleveland-Cliffs (CLF – NYSE).

CLF

As you can clearly see, CLF is failing right at its 50-day moving average, which signals that a move back down to $65.00 is in the cards. Let’s get positioned to profit off this downside action:

PLAY: Buy the CLF October 70 Puts (CLF VN) at or under $3.80, good for the day. Current bid/ask spread is $3.50 to $3.70. Place a protective stop limit at $2.00.

Another bearish formation comes from Public Storage (PSA – NYSE). With most of the U.S. housing stocks setting fresh 52-week lows, it’s easy to understand why PSA could follow suit at set new a 52-week low itself. Chart-wise, the 50-day failure means the stock will soon dip under the $70.00 level, which is more than enough downside to grab a very nice put gainer. So let’s get positioned!

PSA

PLAY: Buy the PSA October 75 Puts (PSA VO) at or under $5.20, good for the day. Current bid/ask spread is $4.60 to $5.10. Place a protective stop limit at $3.00.

Also noteworthy are two retail stocks that are getting pummeled: Sears Holdings Corporation (SHLD – NASDAQ) and AutoZone (AZO – NYSE). Looking first at AZO, the stock is trading well below both its 50-day and 200-day moving averages, which officially puts the stock in “no man’s land.” With a chart formation like this, it’s anyone’s guess where the next support level will come.

AZO

On the same hand, SHLD is also threatening to break below its last support level at $130.00, which could quickly lead to another $10.00 to $15.00 of downside in short order.

SHLD

Let’s hold off on adding AZO or SHLD puts, at least for now. If the Dow breaks underneath its 200-day moving average, we’ll get positioned in either of these two. But until then, CLF and PSA should offer us enough downside exposure. As always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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