Watching SPX 1,400

Plus: Add NVDA Calls

By Bryan Bottarelli
Monday, April 21, 2008 10:23 AM EDT
Mon, 21 Apr 2008 14:23:00 GMT

PLAY: Buy the NVDA June 20 Calls (UVA FD) at or under $1.75 good for the day.

Dear Bottarelli Research Member,

Good Monday morning. As you very well know, we’re coming off a powerful week of market gains — one that witnessed the Dow, the S&P 500, and the NASDAQ all gain over 4% over the last five trading sessions. That’s quite impressive. So, to kick off today’s new trading week, I’d like to switch gears a little and talk about the S&P 500 (versus my typical chart discussion of the Dow). And the reason we’re looking at the S&P 500 this morning is because it seems like everyone is talking about the magical 1,400 level.

As you can see from the S&P chart below, the 200-day moving average doesn’t come into play until 1425. But the 1,400 level is so important because this is the level that witnessed market failures on three separate occasions (one in February, one in March, and one in April). Therefore, this is what everyone is watching. With the S&P 500 currently trading at 1386, all eyes are on the S&P’s reaction to this critical 1,400 level — and of course — we’ll be waiting and ready to trade in whatever manner the market dictates.

SPX

In fact, in terms of new trades, the latest momentum sectors are found in steel, coal, railroads, oil exploration and drilling, ocean tankers, and agricultural chemicals. As you probably know, agricultural chemical and fertilizer names like Potash. (POT – NYSE) and Mosiac (MOS – NYSE) have both been on fire — and this has pushed the price premiums on their call and put options to the moon. But another player in this group is Agruim (AGU – NYSE), and this could be our best opportunity to play this booming sector. As is stands, POT is selling at 60 times trailing 12 month earnings, MOS is selling at 42 times 12 month trailing earnings, but AUG is trading at only 27 times trailing 12 month earnings. To my eye, AGU is the “value” play among this sector group — and their call and put options are much more reasonable than MOS and POT. If AGU pulls back over the next week, it could offer us a nice opportunity to enter into calls on a dip.

AUG

But in the meantime, I think we have an instant opportunity to enter some medium-term calls on NVIDIA Corporation (NVDA – NASDAQ).

NVDA makes the award-winning GeForce 8800 GT GPU, which is the best graphics chip your money can buy. These chips are the reason that video games have become so incredibly realistic — and there is reason to believe that the stock is quite over-sold at current levels. On Wednesday April 16, for example, they announced that an upgrade kit is now available for the Mac Pro, meaning that NVDA’s chips are now supported by Apple Computer’s dual 30-inch Cinema HD displays.

NVDA

But what really caught my attention was the fact that 89% of NDVA’s sales come from overseas. Of all the stocks on the S&P 500, NVDA currently owns the highest-degree of International exposure — and it paints a strong picture for NVDA’s ability to withstand any technology-based weakness here in the United States. With the stock trading under $20.00 per share, the risk/reward is well in our favor, so I’d like to enter June calls now.

PLAY: Buy the NVDA June 20 Calls (UVA FD) at or under $1.75, good for the day. Place a protective stop limit at $0.90 but do not place a sniper sell at this time, as I’d like to let shares of NVDA run for an extended time frame.

Also, if the markets give back some of last week’s gains, it could trigger another upside call play in our favorite gold major, ABX.

ABX

I’ll be watching this situation as well. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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