Maintain 2 to 1 Short/Long Ratio

Hold GILD, APA, and RIG Positions

By Bryan Bottarelli
Thursday, January 17, 2008 10:10 AM EST
Thu, 17 Jan 2008 15:10:00 GMT

Dear Bottarelli Research Member,

As I’m sure you know, there are two key ways to stimulate a faltering economy. The first way is using monetary policy governed by the Federal Reserve. The second way is using fiscal policy governed by Congress and the President.

The Fed’s way works by putting more money in circulation through cuts in the cost of credit, and this typically takes at least 6 months to trickle down and have any measurable effect (this 6-month lead time is why so many market followers have been pounding the table, saying that Ben Bernanke is way behind the curve).

The governmental way works by sending citizens (typically in the lower income bracket) rebates on taxes, which provides more spending money for designer blue jeans, flat screen TV’s, and so forth. And this stimulated up-tick in spending is thought to kick-start the economy.

Apply each of these situations to today’s market, and it’s easy to see that the governmental and Federal Reserve policymakers find themselves in a pickle. Sure, the Fed can make a half-percentage point cut at their next meeting, but that meeting doesn’t take place until January 30th.And after that, their next meeting isn’t until March! Given the fragile state of the U.S. economy, that’s way too long. The economy needs help now.

Add into this troubling equation the fact that we’re in an election year, and this could result in some very desperate moves. After all, it’s difficult to stop a politician who is backed into a corner — with both their job and their all-important reputation at stake — and this could lead to ill-informed and wasteful stimulant plans as well.

Add it all up, and that’s one of the reasons we’re seeing such massive intra-day volatility. Oh, and don’t forget about the Middle Eastern oil money that’s helping to keep our banks alive. Every time I take $100 out of my bank’s ATM machine, I can’t help but feel that some Saudi investment firm owns $50 of my withdrawal.

Perhaps I woke up on the wrong side of the bed this morning, but things just don’t look good. In fact, I just drew up this Dow chart (which shows weekly ticks) and I can’t help but notice a classic “Head and Shoulders” formation. If this formation holds true to its definition, the next Dow move will be underneath the 12,000 level, most likely finding support around 11,890. That’s still 610 points below current levels.Take a look:

INDU

For this reason, I want to maintain all of our current positions. Although both APA and RIG have opened the day higher, remember the trading mantra of 2008: Short Any Rally. Maybe this will cause some momentary nail biting, like what happened with Monday’s 177 point rally. But the bears have always come in and sold these rallies off hard, like what happened with Tuesday’s 277 point fall. Therefore, let’s maintain our light trading position of RIG February 125 Put (RIG NE), APA February 100 Puts (APA NT), and GILD February 50 Calls (GDQ BJ). Be sure to use our “sniper” trading tactic and take profits on any position the moment they reach our designated profit targets. I’ll be out with further updates as the trading day gets going, but until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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