The Smartest Advice Right Now

Clearing the Ledger

By Bryan Bottarelli
Monday, January 07, 2008 1:16 PM EST
Mon, 7 Jan 2008 18:16:00 GMT

Dear Bottarelli Research Member,

To follow up on what I mentioned this morning, the markets have continued to exhibit intra-day price swings driven entirely by the worst human emotion you can see on Wall Street: Fear. And when you have a market responding entirely to fear-based decision-making, you have a market situation that is completely un-tradable. Placing any new trade right now, whether it’s call or puts, is a coin-flip at best — and that’s not a recipe for extended success rates.

Now let me tell you this: Recognizing when it’s time to trade — and when it’s time not to trade — is one of the most critical and overlooked aspects of successful speculation. And right now, the best decision that we can possibly make is NOT placing any new trades.

Don’t get me wrong. I’d love to trade this market full throttle. CME Group (CME – NYSE), for example, took three and a half months to move from $600 up to $710, yet it only took 10 days to give it all back. That’s a $110 loss, good for an 18% decline! And it’s not only CME that’s witnessing this sort of action. This same pattern is being exhibited, in one form or another, in virtually every momentum stock that I monitor.

CME

Even the best stock on the market today, Apple Computer (AAPL – NASDAQ) is vulnerable. It took AAPL two months to climb from $170 up to their historic high of $200, yet it only took four trading days to give it all back.

AAPL

Make No Mistake: 2008 has gotten off to a rough start — and what’ll happen over the next 24 to 48 hours will frustrate and confuse even the savviest of traders. The Dow could very well rally 100 points by today’s close — and then give it all back before 9:00 am tomorrow morning. So in this case, let’s be smart and safe. Let’s bide our time and preserve our trading capital in the best way possible — by closing out all of our short-term trading positions and have a zero ledger. If you’re still holding the WYNN January 105 Puts (UWY MA), for example, close it down. In times like this, its’ best to start with a clean slate and attack the markets with a no positions pending. The only position that I’d like to maintain is our DHI January 2010 10 Calls (YRI AB), which we could be adding to upon any further market deterioration.

Another Important Point: We’ve certainly seen situations like this in the past, and we’ve gotten through them with profits in hand. August of 2007 was the last time that we witnessed similar fear-based selling action, and after that month, we went on to post 80% trading accuracy over the next 3 months. So once again, it’s imperative that we all keep a level head and recognize that this emotion-based trading will not last forever. Its’ a temporary phenomenon — it always is. And from a tactical standpoint, the best strategy going forward is to let the emotional fear run its course, and then we’ll once again begin placing carefully-selected trades on the best companies on the market. Often times, situations like this lead to incredible opportunities on stocks that have gotten over-sold, and I plan to take full advantage of every one of them. But as a precaution, I’ll be giving all of our forthcoming trades extra time, via February of March options, so that we can successfully withstand any intra-day volatility.

So for the rest of the trading day, let’s close it down and simply monitor the actions of the market — especially leading into the close. We’ll re-evaluate the entire situation first thing tomorrow. Until then…

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

© 2012 CSR Group, LLC. All rights reserved. Published in USA.

Information, opinion, research, and commentary contained herein is obtained from sources believed to be reliable; their reliability, however, cannot be guaranteed. The maxim of Caveat Emptor applies — let the buyer beware. Bottarelli Research does not provide individual investment advice, act as an investment advisor, or individually advocate the purchase or sale of any security or investment.

Investments recommended in this service should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Bottarelli Research reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscriber’s initials will be used unless express written permission has been granted to the contrary.

CSR Group, LLC expressly forbids its writers from having a financial interest in any security recommended to readers. Furthermore, all employees and agents of CSR Group, LLC and its affiliate companies must wait 24 hours before following a published recommendation.

Bottarelli Research alerts contain time-sensitive information, and are published and distributed to members with urgency. Because of this, not all published materials can be adequately proofread, and an occasional spelling or grammar error may exist.


Other Options Alerts From January 2008