Re-Visiting Our Trading Tactics

Defining “Sniper” Positions

Dear Bottarelli Research Member,

In light of today’s weak market, I’d like to revisit some of our standing tactical ground rules for trading in toady’s market environment. If you’ve been a Bottarelli Research member since last year, then you know that the beginning of the 2008 trading year promoted some changes to our trading methods. For example, volatile intra-day price swings in 2008 gave birth to our “sniper” trading strategy. This strategy is a special trading tactic that’s designed to use intra-day market volatility to our advantage.

For example, one of the standing rules for “sniper” trading is to set a sell order 15% to 20% above your entry price right after entering a trade. This way, you give yourself the advantage of locking in a profit no matter if you’re at your computer screen or not. And you also gain the advantage of locking in profits off any quick intra-day swings in volatility. For example, instead of waiting for prices to hit and then logging in and manually placing your order, this “sniper” tactic of pre-setting your sell targets saves valuable time when it comes to locking in profits. Of course, pre-setting a sell order limits your total profit potential, but in a market like this, picking off a series of quick winners is the only way to maintain a market edge. Trust me, I will certainly not implement this tactic forever. There will soon come a time when we can hit home run trades (perhaps starting in April or May), but for now the smart strategy is to lock in these quick gainers.

Another important aspect of sniper trading is picking your entry and exit points. As you know, making your sell decisions is the most critical aspect of trading. Therefore, any sell price comes with a standing rule that gives you the flexibility to sell if prices get anywhere between 10 and 20 cents of our posted exit price. This morning’s trade on BIDU puts, for example, triggered both of these sniper trading rules. For one, the morning high of $4.90 represented a 28.94% gain from our $3.80 entry price. This more than accounted for our standing rule of 15% to 20% profits. Furthermore, even though these puts didn’t hit $5.00 (as I speculated they would in pre-market), they did get within 10 to 20 cents of our posted sell price. And when it comes to taking profits, I don’t want you messing around with nickels and dimes. Take your money and run!

So, as we move forward in our trading journey together, be sure to keep these rules in mind for any forthcoming play that I designate as a “sniper” position. Of course, I’ll follow up on each and every play using our intra-day trading alerts, but I just wanted to reiterate our tactical strategy so we’re all on the same page.

Now, looking at today’s market action, the Dow is once again putting in a big red candlestick formation. In fact, we’re now touching the same levels that we used as a support point in early February. The question is, will these levels hold as support once again? If not, we’ll most likely re-test the January 2008 lows. And that could easily mean another 450 points of downside on the Blue Chips.

Therefore, I will continue to retain a downside bias when issuing forthcoming plays. But on the same hand, we must also be nimble enough to stay one step ahead of the market. After all, today’s selling pressure has every so-called “analyst” calling for a re-test of the January lows. Therefore, I want to set the table on two stocks that could experience major upside moves if the markets fool everyone and engage in a short-covering rally. I want to alert you of these stocks now, because if & when it’s time to act, I’ll just issue the play without lengthy commentary.

The first possible upside call play is my old favorite DryShips (DRYS – NASDAQ). As you can see from the chart below, the dry-bulk shipper is down over $4.00 today, and this has brought the stock right down to the crossing of the 50-day and the 200-day moving averages. This is one of the strongest support levels that I scan for, so any upside market moves and DRYS could really experience a pop. I’ll certainly watch this one for a possible upside call play.

Also strong are steel and coal stocks, highlighted by Fording Canadian Coal Trust (FDG – NYSE).Fording Canadian Coal Trust is an open-ended mutual fund in Canada with owns a 60% interest six operating coal mines. As you can see from the chart, the stock has performed remarkably well in 2008’s weak market environment. And the options string is quite cheap. I’ll keep this one on the radar as well.

Over on the put side, the Dow Transport index could be setting itself up for quite a fall. Both the Dow Industrials and the Dow Utilities have broken well below their 50-day moving averages. But as you can see below, the Dow Transports have yet to penetrate this level. Therefore, if the Transports follow suit and break below this level, they could be in for quite a major downside move. Therefore, stocks like Burlington Northern Santa Fe (BNI – NYSE), Union Pacific (UNP – NYSE), FedEx Corporation (FDX – NYSE), and Overseas Shipholding Group (OSG – NYSE) could seen be downside put candidates.

Also weak are China-based stocks, as noted by the iShares FTSE/Xinhua China 25 Index (FXI – NYSE). Unlike the DRYS chart, which is attempting to find support at the critical crossing of the 50-day and the 200-day moving averages, FXI has called this key area a level of resistance. This could spark quite a downside move. With stocks on the Shanghai Exchange carrying an average trailing P/E ratio of 59 (more than 3x the average on the S&P 500!), you can see just how over-valued this group appears to be. Therefore, I’ll continue to watch this collection of stocks for downside put opportunities.

Going into the afternoon, let’s watch closely to see how the Dow reacts to the early-February support point noted above. Armed with this information, we’ll be able to make any number of directional-biased plays outlined above. Until then…

Lock and load!

Sincerely,