Dow Now Up 300

50-Day MA: Resistance to Support?

By Bryan Bottarelli
Tuesday, April 01, 2008 1:06 PM EDT
Tue, 1 Apr 2008 17:06:00 GMT

PLAY: Buy the TSO May 30 Calls (TSO EF) at or under $4.10, good for the day.

Dear Bottarelli Research Member,

We’re approaching mid-day, and the major market averages have extended their gains on the session. The Dow has now posted a 300-point gain, and this is causing everyone on the floor to ask the same question: “Has the bottom been set?”

Based on my analysis, I expected to see the markets once again experience weakness at the 50-day moving average and probe lower. After all, this has been the 4-month trend. And from this point, if a support level was reached, this would have established a higher-low (a bullish signal moving forward). But as it turned out, the major market averages blasted through this 50-day moving average in today’s trading without seeing your classic re-test. As I come to grips with this trading action, I’m realizing that we have a Fed chief, a President, and a Treasury Secretary who are all doing everything in their power to keep the markets moving up. Therefore, the technical readings are skewed by the outside actions of this “working group,” and this is something we cannot fight despite what the charts say.

DIA

So, from this point, I would have to say this: Using the DIA as a metric, we could now face a situation where the 50-day moving average has switched over from a resistance level to a support level. Today’s strong upside move could be money flowing out of gold (or oil) and back into the major market averages in fear of “missing” the bottom. But before jumping on board that train, I would like to see the markets re-trace back and re-test the 50-day moving average. If we see a successful re-test (one where we move back down to the 50-day moving average — or even slightly underneath it — and hold at these levels) then I’d be inclined to concede the bearish bias and move over to an upside bias. But until we witness a successful 50-day moving average re-test, I’m inclined to maintain a light trading ledger and let the markets battle it out.

Just so we’re all clear, our BNI April 90 Put (BNI PR) hit our pre-determined stop at $1.20. This position is now closed. This leaves us holding only the DIA April 114 Puts (DIA PJ), and as you know they’re getting clobbered today. At this point, the best approach is to do whatever we can to reduce our loss and use any forthcoming selling pressure to close this position out. I’ll give these instructions when the timing is right.

It’s also a smart idea to re-establish some level of upside exposure in case the rally extends itself and keeps rolling higher. And as I look over all my charts today, the one stock that has gotten beaten down hard (which also possesses the ability to bounce) is Tesoro Corporation (TSO – NYSE).

TSO

As you can see, the stock has established a floor around the $30.00 level and is now looking to make a move up to its 50-day moving average at $35.00. Based on this upside move, I’d like to add a cheap position that offers us exposure on TSO into May. Here’s the play:

PLAY: Buy the TSO May 30 Calls (TSO EF) at or under $4.10, good for the day. Place a protective stop limit at $2.50 and a pre-determined sniper sell at $4.90.

*ADMINISTRATION NOTE: In coming weeks, we’ll be re-formatting the look of your trading alerts so that you’ll always get the particular “trading action” posted right at the top in its own separate box. In the process of making these new changes, our RSS system accidentally sent out an old BNI alert. If you received this alert via RSS, please disregard it with my apologies. Everything is now corrected.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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