Don’t Take the Bait

Downside Still the Prevailing Trend

By Bryan Bottarelli
Wednesday, February 20, 2008 2:46 PM EST
Wed, 20 Feb 2008 19:46:00 GMT

Dear Bottarelli Research Member,

I find today’s trading action surprising — if not a little suspicious.

After all, the Dow enjoyed a triple-digit gain for most of yesterday’s trading session, only to see that entire gain wiped out in the final hour of trading. This closing-day formation, as I pointed out in yesterday’s alert, set a lower high. And as you know, this is an ominous technical signal, and it indicates to me that the Dow will soon be trading below the 12,000 level — and possibly re-testing the January low under 11,750. If this plays out, then we have more than 600 points of downside before re-testing the 2008 lows.

INDU

That’s why today’s market action is so perplexing. For most of today’s trading day, the markets have been see-sawing back for forth between green and red. To my eye, it appears like today’s action is a trap, designed by the bears to give the bulls a feeling of calm and comfort before making their next crushing blow. Like a game of Texas Hold’em poker, the player sitting on pocket aces (the best starting hand in all of poker) wants to place a small bet to induce everyone else at the table to throw their chips into the pot. Once these other plays are “pot committed,” the player with pocket aces goes in for the kill shot, making a strong bet that crushes his opponents and ultimately wins the hand. On a day like today, I feel that the bears are holding the pocket aces and inducing the bulls to go long. And some unsuspecting bulls are pushing their chips into the center of the table.

If this is the case, we’re too smart to take the bait and go long. So, in the midst of an indecisive (and potentially trap-setting) day like today, the best advice I can offer you is to wait patiently on the sidelines. We took modest profits on our LVS March 85 Puts (LVS OQ) this morning, and this proved to be a good move. Now, we’re left holding only the NILE March 40 Puts (JWU OH), and if the market breaks down as I expect, shares of NILE could easily dip under the $40.00 level. Therefore, let’s plan to lock in a “sniper” gain if these puts trade at or above $3.30. And until tomorrow, that’s really the best course of action for the rest of the day.

NILE

Of course, I have a full list of stock candidates that could get hit hard if the selling pressure comes into play, and you better believe we’ll trade puts on them when this eventually happens. But until then, sit tight. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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