Not So Fast

The Selling Pressure Isn’t Over

By Bryan Bottarelli
Thursday, January 24, 2008 11:03 AM EST
Thu, 24 Jan 2008 16:03:00 GMT

Dear Bottarelli Research Member,

At the open of trading this morning, the market breathed a massive sign of relief. The bottom was in! The rebound is underway! Hurray!

Not so fast…

Yesterday’s 600-point reversal was amazing — no question about it. But the market is still way too dangerous to let our guard down. As you can see, today’s Dow chart shows that the markets are struggling to extend upon yesterday’s gains, and this could lead to more choppy trading action.

INDU

Therefore, as much as I’m tempted to jump into calls on stocks like Freeport-McMoRan Copper & Gold (FCX – NYSE), Southern Copper (PCU – NYSE), Apple (AAPL – NASDAQ), there’s a little voice of reason in my head saying “don’t jump yet.” As you can see below, PCU is making a very nice bounce today (which could very easily extend much higher) but the timing just isn’t right to enter calls. The bears may want to re-test the recent bottom for a third time — and we need to see the bulls defend these levels.

PCU

Therefore, the smart trading tactic is to continue making our “sniper” trades, which utilize the market volatility by carefully balancing both calls and puts. Our recent combination of X puts and TSO calls worked beautifully (leading to gains of 30% and 50% respectively) so continuing to follow this model is really the only way to grab quick winners in this market environment.

So with that mindset, I’d like to follow up on a comment I made this morning about the financial sector. As you know, I love Goldman Sachs (GS – NYSE). Unlike your standard bankers and brokers, they think like traders. They do their due diligence. They take risk.And more often than not, they’re right on the money. Case in point, not only did they side-step the sub-prime mess, but they actually shorted these risky loans — and thus profited off the mistakes of virtually every other broker, bank, and financial institution who got involved in them. Brilliant. But as you can see from the chart below, GS has actually gotten pushed low alongside the rest of the financial sector. It has put in a nice recovery over the last two days, but now it is dipping back down again today. And that leads into the opportunity.

GS

You see, if GS trades lower, I think that adding the GS February 210 Calls (GPY BB) to our ledger would offer a dynamite risk/reward scenario. Why? Well for one, they’re only trading for $2.10 per contract. That’s very cheap. Sure, they’re $15.00 out of the money, but GS can make up that gain in one afternoon. Secondly (and most importantly) we have another Fed meeting coming up next Wednesday, January 30th. Should “Helicopter Ben” cut rates anther 50-basis points (or even flex his muscle and cut another 75), the financial sector could get a major shot in the arm, and our GS February 210 calls could blast higher.

With this backdrop, I can justify adding this GS call position to our ledger, but let’s see if GS can fall further in today’s trading before jumping on board. In the meantime, I’ll also look out for an attractive put position — which could be issued later today. 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