X Could Fall $15.00

No Play Yet: Just a Set-Up

By Bryan Bottarelli
Friday, January 18, 2008 12:26 PM EST
Fri, 18 Jan 2008 17:26:00 GMT

Dear Bottarelli Research Member,

It’s always tricky to short an extremely oversold market — but that’s the situation we’re faced with right now. It’s clear as day that the bears are selling off any rally, but with President Bush promising a “quick and temporary” market stimulant package, the challenge is finding stocks that are not yet oversold (which are few and far between) and playing a very fast round of puts on these companies in anticipation of more weakness.

We already did this with APA and RIG, so I expanded my search of companies that could fall quickly enough to hand us a large enough gain, and one of the most promising names that appeared was United States Steel (X – NYSE).

As you can see from the chart below, we have yet another classic Head and Shoulders formation. The first shoulder occurred in mid-December at $110, the head occurred on the first day of 2008 at $120, and the second shoulder occurred around mid-January at $110. Today, the stock is trading below its 50-day and its 200-day moving averages, and this tells me that a move back down to the $85 level could be in the cards.

X

Now once again, I don’t think the time to enter a new play is today. Trust me, I’d love nothing more than to enter a new round of TSO calls and X puts, but the risks are just too high. Since we’re facing a three-day market weekend, your money is safer — and better utilized — sitting right where it is now. Therefore, I’d like you to think of this as an early head’s-up for a possible trade next week. After all, President Bush just set the table for a major market stimulant and Treasury Secretary Hank Paulson is now following up that announcement with an economic jumpstart plan of his own, so it’s anyone’s guess how the markets will close today (let alone open on Tuesday). With a backdrop like that, let’s be smart and outline our attack plan — and then execute it when the timing is right. For now, that means putting TSO and X on our watch list and looking to jump on each of them if the timing is right next week. As always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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