Play BHP and X Calls

Use Afternoon Weakness to Buy

By Bryan Bottarelli
Wednesday, September 19, 2007 2:56 PM EDT
Wed, 19 Sep 2007 18:56:00 GMT

Dear Bottarelli Research Member,

Contrary to what former Fed chief Alan Greenspan would lead you to believe, it looks like the U.S. economy will be able to withstand the housing and credit troubles and advance higher to close out the 2007 calendar year. Case in point, the ratio of stocks hitting 52-week highs in today’s trading session versus stocks hitting 52-week lows is more than 10 to 1. Recession…what recession? (*Side Note: It’s no shock that Alan Greenspan has a new-found interest in doing high profile interviews and giving his thoughts on the economy. After all, he has a new book sitting on Barnes & Noble shelves!)

One look at the Dow chart shows that yesterday’s upside move was no fluke, as we’ve advanced another 100-points in today’s session. Sure, we’ve given back some of the gains throughout the day, but to come off yesterday’s 330-point advance with another strong day is a great sign. Take a look:

INDU

The strongest gainers today are coming in the metals sector — and nobody is better than BHP Billiton (BHP – NYSE). Founded in 1885 and is headquartered in Melbourne, Australia, BHP offers you a fully-diversified company exposed to seven operating segments in petroleum, aluminum, base metals, carbon steel materials, diamonds, coal, and stainless steel. As you can see from the chart, the stock is breaking out to new 52-week highs, and when BHP gets momentum on its side, history shows that it moves up over a series of 7 to 10-day increments. Look at the stock’s advance from late June to early July and you’ll see the parallel:

BHP

Today’s breakout could see more gains leading into October, so let’s use today’s slight afternoon pullback to get positioned to ride BHP higher upside using October 70 Calls. Here’s the play:

PLAY: Buy the BHP October 70 Calls (BHP JN) at or under $3.90, good for the day. Current bid/ask spread is $3.60 to $3.80. Place a stop limit at $2.00.

Staying within the same basic sector, we’re seeing a very bullish chart formation today in shares of United States Steel (X – NYSE). If you look at the chart below, you’ll see that the stock has just busted above both its 50-day and its 200-day moving averages in one solid shot — a strong indication that the bulls have now taken control of the stock. Considering that X was trading for $125.00 a share in June, the stock could easily move up $10.00 in short order, so let’s also use today’s afternoon pullback to get positioned to profit off this continued upside momentum going into October.

X

PLAY: Buy the X October 105 Calls (X JA) 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.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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