Stuck In the Middle

DIA Hovering Between 50 and 200 Day Averages

By Bryan Bottarelli
Monday, April 07, 2008 10:58 AM EDT
Mon, 7 Apr 2008 14:58:00 GMT

Dear Bottarelli Research Member,

After taking a series of three nice profits this morning on SPWR, ABX, and STLD, we’re left holding PCLN April 120 Puts (PUZ PU) and LVS May 85 Calls (LVS EQ). Both positions are getting close to profitability, so be on the lookout for a “take profits” alert. When it’s time to act, you’ll be the first to know. But until then, I’d like to take a breather and watch now the market’s react over the next hour or two.

Looking at the DIA chart, you can clearly see that the bulls and the bears are both in a holding period. Ever since the DIA blasted aggressively above its 50-day moving average in early April, the Blue Chips find themselves stuck right in the middle of the 50-day and the 200-day moving averages. Therefore, the big question is whether or not we’ll see a re-test of the 50-day or a breakout above the 200-day moving averages? What’s interesting (to my eye) is that either situation (assuming that the 50-day serves as a level of support) would be viewed as a bullish indicator. Therefore, we’ll continue to bias our near-term trading to the upside.

DIA

Speaking of 200-day moving averages, it’s important to note that as of January 22nd, the percentage of stocks on the NYSE above their 200-day moving average was only 13%. That number has now increased to 30%, which tells you that stocks are indeed moving up — but they still have a lot more room to move.

Another interesting note (one which explains the recent market volatility) pertains to the length of recessions. For argument’s sake, let’s say that we are indeed in a recession. Keeping that in mind, consider this: In post-war recessions lasting less than 12 months, the S&P 500 has averaged a 9.89% gain one year after that recession started. But in post-war recessions lasting longer than 12 months, the S&P 500 has averaged a 22.64% loss one year after that recession started. So as you can se, we’re facing a critical situation which could lead to a great gain or an even greater loss — all depending on the length of our current “recession.” But as the economists and policy makers fight it out, we’ll continue our tactic of using the volatility to lock in quick and decisive gainers. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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