Re-Testing the Lows?

Dow Gaps Down 200

By Bryan Bottarelli
Tuesday, February 05, 2008 10:16 AM EST
Tue, 5 Feb 2008 15:16:00 GMT

PLAY: Buy the FXI February 149 Puts (FFP NS) at or under $6.80, good for the day. Place a protective stop limit at $3.10

Dear Bottarelli Research Member,

Here we go again. As I fully expected, bears are once again flexing their muscle and selling into last week’s market rally. As I write, the broad-based markets are red across the board, and this full spectrum of selling pressure sets the stage for a re-test of our January lows. This is exactly why I insisted that we maintain our DIA February 122 Puts (DAW NR). As you know, we entered these puts on January 31st and then added to them again on February 1st, lowering our total cost basis down to $1.13. With the Dow off over 175 points, these puts have traded as high as $1.45 in today’s action, good for a respectable 28.31% gainer. But since the markets can fall a lot further, I prefer that we hold into these puts without using our sniper approach. In other words, I think we should hold into these puts while the market falls — and then we’ll make a selling decision as the trading week progresses. So for now, maintain your DIA puts until further notice.

DIA

At the same time, let’s also add puts on the iShares FTSE/Xinhua China 25 Index (FXI – NYSE).As you can see from the chart, the FXI just put in a three-day rally that launched the shares from $135.00 up to $155.00, but now it looks like the U.S. selling pressure could very well take these shares right back down. Therefore, let’s get positioned to profit off any downside via February puts. Here’s the trade:

FXI

PLAY: Buy the FXI February 149 Puts (FFP NS) at or under $6.80, good for the day. Place a protective stop limit at $3.10.

Also moving lower today are shares of NYSE Euronext (NYX – NYSE). In a classic case of “selling on the news,” NYX shares are down over $4.00 despite reporting profits that more than tripled. Business is hitting on all cylinders at NYX, as they reported record transaction volumes across virtually every one of their business segments. In fact, seven of the NYX’s 10 busiest-ever trading days occurred in 2007, including the single-busiest trading session on record: August 16th, when 5.8 billion shares traded. These massive trading volumes helped the company report earnings of $156 million ($0.59 per share) versus $45 million ($0.29 per share) in the final three months of 2006. Excluding transaction costs, adjusted profits for the quarter hit $0.66 cents a share, which matched the analyst forecasts. And since they only “matched” forecasts, that’s why I suspect that the shares are trading lower. After all, in a weak market like this, Wall Street will only cheer if a company beats forecasts and raises guidance. Absent of that, the shares will fall on earnings day. Since the NYSE Euronext added 428 new listings, which accounted for $80 billion in new shares on its exchanges last year (including adding more IPO’s than any other index), I thought that NYX had the chance to wow Wall Street with their earnings. But unfortunately, their great numbers were not spectacular, so the shares are trading lower today. That’s a good reason why I recommended taking half (if not all) of your profits on the NYX February 90 Calls (NYX BR) during yesterday’s pre-earnings run-up. If you still own these calls, there’s really no sense in selling them now the $0.17, so you might as well hold onto them and sell on any forthcoming NYX strength.

NYX

And now that we have a ledger that’s biased to the downside (via DIA and FXI puts), our SII March 60 calls (SIK CL) that we entered yesterday for $3.20 now become our upside call hedge in the midst of a weak market environment.

SII

As you can see from the chart, SII is down today, but the loss is certainly a manageable one. Plus, our March expiration will give us time to let the oil servers hammer out a near-term bottom. Therefore, continue to hold these calls as an upside hedge.

I’ll follow up later in the day, but until then:

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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