Will They Buy the Dip?

Plus: Position Update

By Bryan Bottarelli
Friday, April 04, 2008 10:34 AM EDT
Fri, 4 Apr 2008 14:34:00 GMT

Dear Bottarelli Research Member,

After a flat opening, the major market averages are pushing slightly lower in today’s action. This early trading pattern was quite interesting, simply because the pre-market newswire reported a 5.1% jump in the unemployment rate. This news could very well signal that we’re headed towards a more severe economic downturn (or longer-term recession), but nevertheless, the markets remained amazingly calm at the open. As you can see below, the DIA is holding strong well above its 50-day moving average — so even if we trade lower today, the bullish thesis still looks to be the predominant bias.

DIA

Now, while we’re seeing some market weakness, we might as well take our lumps and close out our DIA April 114 Puts (DIA PJ). If you recall, this position was the second half of our DIA April Strangle position — which was supposed to show us a profit off any volatile intra-day moves to the downside. But as you know, the major markets averages did not put in one single 100-point downside day since we entered these puts — and thus their value eroded.

Although this position did not work out the way we expected, the sliver lining is that maybe the inability for us to show a gain on our puts is indirectly telling us that our trading bias should now be on the bullish side. As you know, for the entire Q1 2008, we were selling any rally. Perhaps now, this trading tactic should be buying any sell-off? It’s probably too early to tell, but I always use the performance of my positions to let the market do the talking. And in that spirit, maybe we’ve received a critical piece of market information on the performance of these DIA puts. But in terms of today’s action, let’s close out this position for good.

PLAY: Sell your DIA April 114 Puts (DIA PJ) at market, good for the day.

Looking at our other three positions, I’d like to continue holding all of them. First off, today’s market weakness is great news for our PCLN April 120 Puts (PUZ PU). After getting close to our stop price yesterday, we’re seeing a really nice bounce-back today as shares of PCLN are trading over $2.00 lower. From my perspective, this stock could move a lot lower, so hold this position for more upside.

Also continue to hold your ABX May 40 Calls (ABX EI). If the markets do sell off, we could see a flight to safety back into gold, and this would help stocks like ABX. Shares still appear over-sold, so we should be fine with these calls going into May.

On the same hand, also continue holding your LVS May 85 Calls (LVS EQ). If we are indeed in a recession, then the old adage says that alcohol stocks, cigarette stocks, casino stocks perform the best. And since LVS shares also look over-sold, I’m sure that we’ll see some type of upside pop going into May. Maintain this position as well.

Should any further trading action come about, you’ll be the first to know. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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