A Big Week

The Fed & Brokers Will Shape the Next Move

By Bryan Bottarelli
Monday, September 17, 2007 10:17 AM EDT
Mon, 17 Sep 2007 14:17:00 GMT

Dear Bottarelli Research Member,

Buckle up for a big trading week.

Starting tomorrow, a series of market-moving events will take place — and the trading reaction to these events could very well shape the next few months of directional bias.

Most importantly, the Federal Reserve will announce their interest rate decision on tomorrow. Economists have made arguments from no cuts to 75-basis point cuts, so no matter what happens, someone will be disappointed.

Now, it’s interesting to note that since 1970, the S&P 500 has increased an average of 5.5% in the three months after the central bank first cut interest rates — and tomorrow could be the start of this next rate-cutting cycle. But on the same hand, I personally believe that the market has already priced in a 50-basis point cut — so anything less than could lead to selling pressure.

INDU

Chart-wise, it’s no coincidence that the Dow is waiting to hear the Fed’s decision before deciding how it’ll react to its critical 50-day moving average. As I write, the Dow could call this level resistance and re-test the August low. Or, it could call this level support and re-test the all-time July high. That’s how critical tomorrow’s Fed announcement will be.

At the same time, we’re also faced with a series of high-end broker earnings. Starting tomorrow, Lehman Brothers (LEH – NYSE) will announce their earnings, followed by Morgan Stanley (MS – NYSE) on Wednesday and Goldman Sachs (GS – NYSE) and Bear Stearns (BSC – NYSE) on Thursday.

GS

Bear and Lehman are considered the most vulnerable to the credit crisis, since they derive 50% of their revenue from fixed-income markets. But Goldman, on the other hand, could offset credit weakness with strong trading and investment banking revenues, so we might see a nice volatility-driven trading opportunity depending on how the market moves the entire sector. Similar to the Dow’s chart, Goldman is sitting right at its critical 50-day moving average, so we could see a strong directional move either way off this week’s economic news.

Another stock I’d like to highlight is Foster Wheeler (FWLT – NASDAQ). As I’ve mentioned before, the engineering and construction company manages power plants for refiners, and their earnings are expected to advance 105% this year and double again in 2008! As you can see from the chart, the stock continues to advance despite a volatile market, so don’t be surprised if we use any near-term weakness to add October calls.

FWLT

Looking at our current positions, I’d like to stand pat with our CHL October 70 Calls (CHL JN), UA October 65 Calls (UA JM), and PSA October 75 Puts (PSA VO). As I mentioned last week, I want to maintain a downside position in PSA to profit off any downside weakness. At the same time, CHL and UA offer us upside exposure should the Fed’s comments spark a short-covering rally that blasts the market higher. Armed with this balanced attack, we should be in position to lock in profit no matter what the market throws our way. As always, I’ll continue to monitor situations in GS and FWLT for new trading opportunities — and the moment anything triggers — you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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