Add LEH Puts
Plus, AAPL, EXQ, & VMW
Dear Bottarelli Research Member,
I’d like to kick off the last trading week in November by discussing the directional metrics of Dow Theory. But first, let’s enter a new defensive put position in shares of Lehman Brothers (LEH – NYSE).
As you can see, LEH is finding resistance at the 50-day moving average, which could trigger a move back down to $50.00 over the next 1-2 weeks. Let’s profit off this move by adding a December put on LEH to our ledger. Here’s the play:
PLAY: Buy the LEH December 60 Puts (LES XL) at or under $4.60, good for the day. Current bid/ask spread is $4.20 to $4.40. Place a protective stop limit at $2.40.
Now back to Dow Theory. As you know, Dow Theory says that the market is in an up-trend if either the Dow Industrials or the Dow Transports advance above a previous important high, and then this upward move is accompanied by a confirming upward move in the other index. And on the same hand, Dow Theory also says that the market is in a down-trend if both the Industrial and Transport averages dip below previous important lows — and that’s the topic of today’s discussion.
As you can see from the two charts below, the Dow Transports have definitely established an important new low. And to confirm this move, some market watchers have said that the Dow Industrials have also set an important new low since they closed below the closing levels that we witnessed during the August sell-off. As a result, some market watchers have said that both the Dow Transports and Dow Industrials have triggered a Dow Theory sell signal.
But here’s what I find interesting. From October 2006 to present, the Baltic Exchange Dry Index (which is a measure of spot cargo demand) has moved from 3,800 up to 10,148. That’s a 167% gain, making this index the 21st century transport average. Since today’s business operations are global, perhaps the Dow Transports are no longer relevant? If that’s the case, then the phenomenal growth of the Baltic Exchange Dry Index does not register a Dow Theory sell signal, setting the way for an upside advance into the close of the 2007 calendar year. So here’s how I’d like to play it.
Currently, we’re holding Apple December 175 Calls (APV LO) for an average entry price of $7.45. These calls have traded as high as $9.40 today, good for a nice 26% gainer, but I still think Apple has a lot more upside left in the tank. Let’s continue to hold these Apple calls, targeting a move up to at least $10.00 per contract before thinking about profit-taking.
We’re also long the EXQ December 150 Calls (EXQ LJ). Now, I realize that the $5.70 entry prices moved fast. This is a thinly-traded options string, which means that floor traders move their bid/ask spread around quite a bit. Since I’m rather bullish on the publicly-traded exchanges, I’ll continue to follow this position, but I don’t want you to case prices if you have yet to enter.
In terms of our VMware December 90 Calls (VMW LR), we attempted to take our profits off the table on Tuesday, November 20th. If you were unable to lock in this sale, then it’s time to close out this position now. VMW is unable to rally alongside the rest of the markets, so our trading capital can be better used in other plays. Close this one out now.
Also, don’t lose track of Deere (DE – NYSE) which registered a new 52-week high off strong earnings leading up to their December 4th stock split.
Excel Maritime Carriers (EXM – NYSE) is another stock that’s come way down in recent action. With any strong upside market tailwinds, EXM could pop aggressively higher, so I’ll be watching this one closely as well.
As soon as the time comes for a new play, you’ll be the first to know. But in the meantime, add the LEH puts and lets’ see how the market settles in before making our next move. And as always…
Lock and load!
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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