Searching for a Catalyst

Continued Indecision Kicks Off Trading

By Bryan Bottarelli
Monday, April 28, 2008 10:28 AM EDT
Mon, 28 Apr 2008 14:28:00 GMT

Dear Bottarelli Research Member,

We’ve kicked off the last trading week in April with the markets continuing their search for direction. As noted last week, the major market averages are treading water in that “dead space” between the 50-day and the 200-day moving averages. Looking at the Dow chart below, a powerful bounce off the 50-day moving average in mid-April was a great technical signal for the bulls, but now they need to see some follow-through to extend upon these gains.

INDU

To my eye, it appears like the markets are waiting for a catalyst to trigger the next significant move — and this trigger point could come on Wednesday. That’s when the Fed is expected to cut interest rates another quarter point and then indicate that they’ve finished their rate-cutting cycle for the immediate future. Then again, since this move is widely expected by the markets, I’m not sure how much directional movement it’ll cause.

Another potential market-moving event is the idea that the U.S. dollar has now hit bottom. In fact, there is actually worry over in Europe that the Euro is over-valued compared to the dollar. Since a dollar rebound could (theoretically) hit commodity stocks the hardest, this has many investors getting concerned over stocks like APA, MOS, BG, and FCX, and PCU. Over on the bullish side, a dollar rebound would also be (theoretically) bullish for the beaten-down financial stocks. Now, while I agree with this bullish and bearish viewpoint to some extent, let’s not lose sight of the fact that the dollar has been slowly decreasing (compared to the Euro) since 2006. In other words, a dollar rebound won’t happen overnight — so the near-term health of all the commodity companies mentioned above remains quite strong. And the financial stocks certainly aren’t out of the woods yet.

But nevertheless, the mere perception that a dollar rebound could negatively effect the earnings power of these companies is pushing names like POT, MOS, and BG down in the early going. Of course, this means that our BG May 125 Calls (BG EE), which mounted a strong comeback late last week, are once again below our $5.60 entry price. What I’ve noticed with BG is that traders push the stock down in the morning, and then it tends to recover into the afternoon and the close. If BG can once again fight its way back into the afternoon and break through the $125 level, our calls will hand us a nice return. So for now, maintain this position with a $3.10 stop limit.

BG

Also maintain your ICE May 165 Calls (IHH EM) and your ABX June 42.5 Calls (ABX FV), as each position could break into the profit-zone in short order. And should any other trading opportunity arise, you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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