Two Important Factors

Will Markets Find Support Here?

By Bryan Bottarelli
Tuesday, December 18, 2007 10:18 AM EST
Tue, 18 Dec 2007 15:18:00 GMT

Dear Bottarelli Research Member,

I have a sneaky suspicion that over the last two days, the markets have attempted to flush out every weak hand in the attempt to drop stock prices just low enough to set the table for a strong end-of-year rally. As you can see from the Dow chart below, today’s opening-session tick is attempting to do two important things. First, its’ trying to pop back above the 200-day moving average. And second, it’s trying to establish a higher-low. The combination of these two could be a very important to finally getting our end-of-year rally.

INDU

Now, at the same time, a failure at these levels could be very troublesome – and that’s why I’d like to maintain downside exposure in the form of our CMI January 120 Puts (CDM MD). As you know, we entered these puts yesterday for $7.20 and attempted to lock in a nice 20% gain at yesterday’s close, but our sell prices did not trigger. Therefore, we’re still holding this play. As always, I’ll continue to monitor this position and issue the proper sell instructions when appropriate. Right now, these puts have traded as high as $8.20, so we could get another opportunity to lock in profits later today.

In terms of our two call plays, our BG January 120 Calls (BG AD) are also trading right at break-even this morning – as the stock is trying to extend upon yesterday’s strong upward move. Continue to hold this position for more upside.

BG

And then there’s the position that’s been giving me a headache lately, which is our PBR January 115 Calls (PMJ AZ).As I’m sure you know, we’re holding these calls with an average entry price of $5.85, and they dropped past our designated stop loss yesterday. So if you closed out this position, I understand. But if you’re still holding it (as I mentioned that I’d like to do), then I will continue to follow it. After all, I have a feeling that PBR will snap back into shape very soon, and then we’ll be glad that we held onto these puts throughout this volatility.

The reason I’m so bullish is summarized very well in the recent issue of Time Magazine. According to Time, one of the most under-reported stories of 2007 was “Brazil’s Big Oil Find,” where a newly-discovered offshore oil field could transform Brazil into a major exporter. According to the article, this one find could make Brazil “similar to Saudi Arabia.” This is major news, yet you haven’t heard a thing about it. To me, this supports maintaining an upside position in Petroleo Brasileiro (PBR – NYSE) into January.

Looking at today’s chart, you’ll notice that the stock is up $4.00 and trying to re-establish its upside trend. If this upside continues, I think we’ll actually be in position to take a rather nice gainer on this play, so if you’re still in, maintain your PBR January 115 Calls (PMJ AZ). And if you feel so inclined, you may consider adding to your position once again at current levels!

PBR

I also mentioned playing calls options on DryShips (DRYS – AMEX) in yesterday’s alert. The stock is up over $4.00 today and could be showing signs of support at $70.00, as I suspected. But I’d like to wait a little longer, just to be sure the upside momentum will continue. Along the same lines, we could also have a call play on Excel Maritime Carriers (EXM – NYSE).

EXM

As you can see from the chart, EXM was an $80.00 stock in late-October, and after a brutal 50% sell-off it’s now trading in the low $40.00’s. Just a simple re-test of the 50-day moving average could tack on $10.00 very quickly, so I’ll also be watching this one for a possible upside call play as well. The moment something 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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