Tug of War

Plus: X and DE

By Bryan Bottarelli
Monday, February 11, 2008 10:53 AM EST
Mon, 11 Feb 2008 15:53:00 GMT

Dear Bottarelli Research Member,

Two weeks ago, the Dow jumped 4.4%. It was the Blue Chip average’s best week in nearly five years. But then last week, the Dow lost this same 4.4%, bringing us right back to where we started. Its’ a classic case of “tug of war” between the bulls and the bears. And now this morning, the Dow is kicking off the week with another 100-point loss. But if you look at the current Dow chart below, you’ll notice that this struggle between the bulls and the bears is occurring at higher levels than mid-January. This gives the bulls comfort that we’re hammering out a possible support point above the recent low points — and this is why you’re seeing a lot of stocks trading higher despite today’s downside action.

INDU

Because of this formation, I’d like to continue holding our FLR March 120 calls (FLR CD) and our SII March 60 calls (SIK CL). Both stock charts show extreme low points, and any market up-tick could result in a strong advance in both FLR and SII. Therefore, maintain each position for more upside. But in the meantime, here are some additional things I’m reviewing this morning.

FLR

Similar to the upside play that we just made on Arch Coal (ACI – NYSE), we could have a matching situation in the steel sector. You see, steel production was 2.134 million tons in the week ended February 2nd, which is the most steel production since October 8th of 2007. This shows you that strong global activity continues to drive steel demand, making steel stocks a nice buffer against any U.S. economic slowdowns. Therefore, we could witness shares of United States Steel (X – NYSE) pop quickly above its 50-day and 200-day moving averages. I’ll be keeping an eye on this one for a possible upside call play.

X

Also on the watch list is Deere (DE – NYSE).This Wednesday, DE is scheduled to report earnings — and these results are widely viewed as a benchmark for the entire agriculture sector. From what I can tell, their numbers appear to be very strong, as DE is looking for $0.78 versus $0.52 one year ago.

DE

If Wall Street embraces these numbers, you’ll easily see shares of DE pop back above its 50-day moving average. In fact, we may witness a run-up leading into Wednesday’s announcement (which is scheduled for 10:00 EST), so I’ll be watching for a possible DE earnings-based play as well. Should any market action trigger an immediate trade opportunity, you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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