A Troubling Sign

Plus: BG, ICE, & IBKR

By Bryan Bottarelli
Thursday, January 31, 2008 11:21 AM EST
Thu, 31 Jan 2008 16:21:00 GMT

Dear Bottarelli Research Member,

I hate to say it, but I think the markets have once again set themselves up for trouble. As you can see from the Dow chart below, yesterday’s Fed rate cut sparked a brief rally that attempted to push the Blue Chip average up to its critical 50-day moving average. But it couldn’t even get that far before the bears took it down. As a result of this failure (combined with today’s weakness) it looks like we’re now set to re-test the mid-January lows below 11,750. And tomorrow’s January unemployment report, which is scheduled to hit the tape first thing in the morning, could be the catalyst that sparks the next downside push.

INDU

Now, like I’ve said before, there are many great companies that I’d love to play calls on. Bunge (BG – NYSE) is a prime example. They’re a wonderful combination of three red-hot market segments: agriculture, fertilizer, and food products, including the sale of agricultural commodities like soybeans, sunflower seeds, wheat, and corn. As you can see, the stock is clinging onto its 50-day moving average, but I fear that a re-test of the Dow’s mid-January lows would lead to much lower prices for BG stock. Therefore, I simply cannot pull the trigger on calls just yet. If the markets re-test the lows, we’ll have the opportunity for much more attractive pricing.

BG

Another stock that I’d love to play calls on is InterContinental Exchange (ICE – NYSE). Similar to the trading thesis for BG, ICE also finds themselves in a red-hot market sector. They’re an Internet-based global electronic futures trading marketplace, specializing in contracts based on crude and refined oil, natural gas and power, sugar, cotton, coffee, cocoa, and orange juice. With volatility off the charts, you better believe that trading volumes dictate strong revenues for ICE. Just today, for example, the NASDAQ Stock Market (NDAQ – NASDAQ), which is the largest U.S. electronic exchange, said that their quarterly profit rose 25% on strong trade revenue and lower costs. Based on the fact that ICE facilitates the trading of even more popular products, they should find themselves in an even better position come earnings time.

ICE

Chart-wise, the stock has moved down quite substantially — and is now testing the $130 level where it bounced earlier this month. If the stock can show signs of similar support, it would make sense to enter February of March calls.

Whatever we decide, it’s imperative that we continue to implement the trading strategy that I outlined easier this month. That is, until further notice, trade smaller contract sizes, be positioned on both sides of the market, and always lock in “sniper” gains the moment that the profit targets are achieved. In a market like this, we simply have no other choice.

Another important consideration that I’m doing internally on my end is choosing options plays that do not carry a lot of excessive premiums. Our plays in GILD and FRE, for example, were relatively cheap calls to own (each of them under $2.00 upon entry). Although each position closed down, the monetary loss (if you’re playing reduced contract numbers, as suggested) is certainly manageable. The thinking is that we can preserve our trading capital in these super-volatile times, and then once the dust settles, ratchet back up when the trading environment becomes more stable. Once again, this strategy makes the most sense to me in a market like this. So in that spirit, I’d like to highlight Interactive Brokers Group (IBKR – NASDAQ).

IBKR

The company is quickly establishing themselves as the premier automated global electronic market maker and broker. And earlier this week, the stock came to my attention when shares registered a new 52-week high. That’s quite a strong statement in a market like this. And what’s particularly appealing is that the IBKR March 35 Calls (QBO CG) are trading for only $1.30 per contract. This could be a very cheap (yet effective) way to be positioned for any sudden market rally, so I’ll certainly keep any eye on this one as well. Should we establish a new series of put plays, these IBKR calls could be a good upside insurance policy. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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