Dow Drops 200

Bite Down & Stand Pat

By Bryan Bottarelli
Friday, October 19, 2007 11:10 AM EDT
Fri, 19 Oct 2007 15:10:00 GMT

Dear Bottarelli Research Member,

This past Wednesday, I sent you an alert titled, “Can 14,000 Hold?”

So far today, that answer appears to be “No.”

As I write, the Dow is down over 200 points, fueled primarily by big down-days on Blue Chip components like 3M (MMM – NYSE) and Caterpillar (CAT – NYSE). This powerful MMM and CAT combination has sparked a sell-off that’s taking the Dow very close to a critical support level at the 50-day moving average. Check it out:

INDU

Because the Dow is so close to this support level, I’d like to bite down and maintain all of our call plays. You see, despite today’s market weakness, the combination of FCX November 115 Calls (FCX KC), FWLT November 155 Calls (UFG KK), and HES November 70 Calls (IGG KN) offers us a diversified mix of metals, oil, and engineering. I want to remain long all three market segments going into next week, so maintain each position. In fact, we might add to these call plays early next week.

Over on the put side, we have our X November 105 Puts (X WA). It’s too bad that the stock is not off more than $2.85 in today’s session, but continue to hold these puts for additional bearish pressure in U.S. Steel. I still feel that a move down to the $97 level will be the X’s next move, so maintain your puts to profit off this extended fall.

X

Remember: As we’ve seen before, this market is extremely resilient. But starting with this Monday’s surprise end-of-day sell off, we’ve now encountered some additional bearishness. In fact, today marks the 7th out of the last 8 trading days showing a loss. Since this losing streak has moved the Dow down to its critical 50-day moving average, this appears to be nothing more than a healthy corrective phase within he parameters of an established up-trend. So until another technical move rejects this thesis, we’ll use the established trends to dictate our trading decisions. If things really get ugly, I may decide to issue a new intra-day put play — but my plan for now is to stand pat and see how the Dow reacts to its 50-day MA. If we see a bounce, we’ll be in fine shape on all of our November call positions. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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