Dow Gaps 200 at Open

Can It Hold?

By Bryan Bottarelli
Tuesday, April 01, 2008 10:18 AM EDT
Tue, 1 Apr 2008 14:18:00 GMT

Dear Bottarelli Research Member,

U.S. stocks just closed out their worst quarter since 2002. And this morning, it was reported that the chairman at UBS is leaving after his company took a $19 billion hit. UBS must now raise $15 billion just to bolster their capital.

Yet despite all of this news, the markets are opening the day with a 200-point move to the upside. In response to this move, Charter Member J.L. writes in this morning to talk about our DIA puts. He says, “We’re gonna have to get a 400 pt drop in the Dow. You think there’s one coming??”

My answer to his question was short and sweet. I replied, “Yes, I do think it could happen. But whether or not it will is a different story.”

For instance, consider today’s DIA chart. As you can see below, the DIA has called its 50-day moving average (blue line) a strong level of resistance dating back to December of 2007. In late February, the DIA attempted to penetrate this resistance level — and ended up getting rejected. The response was a down-move close to 900 points. Then in March, the DIA attempted to penetrate this 50-day level — and it ended up selling off into the end of the month. This leads us into today.

DIA

Once again, the major market averages are attempting to break through the 50-day moving average. If today’s rally fails, we could see a down-move from 125 on the DIA down to 117. That would equate to around 800 points on the Dow. But the sticky part of this scenario revolves around the April expiration of our puts. Not only do we need to see a down-move, but we need to see it fast.

Now, as I’ve said many times before, I’m very skeptical of big moves (either up or down) right at the open of a new trading day. With the high levels of market volatility that we’ve been seeing lately, you often times see these big moves reverse course at some point throughout the session. Another interesting aspect of today’s up-move is that many of the “high-flyers” that I follow, like POT, MOS, X, FLR, or DRYS, are not participating in the rally. Combine that with weakness in oil stocks and gold stocks, and it appears like this rally is being fueled solely by financials. This doesn’t make me confident about adding a new series of upside call positions, as I’m not quite sure how long this upside strength can last. As always, I’ll continue to closely monitor this situation, but for now let’s sit tight. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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