Bear Market Chess

Tactical Positioning Under Intense Attack

By Bryan Bottarelli
Wednesday, January 23, 2008 2:35 PM EST
Wed, 23 Jan 2008 19:35:00 GMT

Dear Bottarelli Research Member,

With the market changing every minute, I wanted to give you an up-to-date look at today’s Dow chart. As you can see below, the Blue Chip averages have found a support level over the past two days right underneath the 11,750 level. Could this be the near-term support point? It’s impossible to say, but nevertheless, it is somewhat encouraging that the last two days of intense downside pressure are bouncing around the exact same levels. So as always, we’ll continue to monitor the situation with unrelenting vigilance.

INDU

At the same time, I’d like to offer you a market analogy that surrounds around the game of chess. You see, just like trading, chess involves a high level of tactics and strategy, so it’s a natural fit for market traders like myself.

Now, in any game of chess, you begin by positioning your pieces on the board in a way that grants you control of the major strategic landmarks. Controlling the center of the board, for example, is critical. Then, after you feel like you’ve properly secured these important pieces of chess real estate, you begin to exploit your opponent’s position and attack their King. This involves carefully placing your power pieces (knight, bishop, ect) in places that could offensively threaten your opponent.

This is the part of the game that takes precision and patience. And inevitably, while planning your own attack, your opponent will find a seam in your defense that actually turns the table and puts your King under attack. When this happens, you must abandon your offensive assault and focus entirely on defending your King. Otherwise the game is over, and you lose.

This leads to the most important part of this “bear market chess” analogy.

Defending your King is essential to success. Sometimes it takes 3-4 moves. Other times it takes 10-20 moves. Either way, it must be done. And once you’ve successfully defended your King and thwarted your opponent’s threat, you can then re-visit your offensive pieces (which are still in place on the other side of the board) and re-ignite your attack of your opponent’s King.

Right now, as I look at this market, we are in the process of defending our own King. The markets are under pressure, so we must take precautionary measures and make quick moves on the X February 95 Puts (X NS), for example, to maintain our position in this dangerous market environment. So long as the threat is out there, I’ll continue to adhere to this policy. But at the same time, we also must be properly positioned to revisit our own offensive attack — and that’s where our GILD February 50 Calls (GDQ BJ) and our TSO February 40 Calls (TSO BH) come into play.

As much as these positions look useless (which is what our offensive chess pieces look like when we’re defending our King), these positions will actually prove to be essential to our victory. That’s why I’m urging you to maintain these call positions throughout the bearishness. Nobody knows when the markets will bounce, but when they do, you’ll be glad that you own these positions. In fact, as I’m writing this note, the Dow is on the verge of turning positive (it was down over 300 earlier this afternoon). So, you can see why maintaining these types of positions is a such good idea!

I don’t plan to make any more trades today, so maintain our call plays and we’ll look to lock in gains on any forthcoming market bounces. And on a side note, give yourself a pat on the back. This market has been incredibly volatile (understatement, huh?) and I have every intention of getting you through it in the best way possible. I’m glad we’re on the same team. And as always…

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