Will We Bounce?

Major Test Faces Bulls

By Bryan Bottarelli
Tuesday, May 27, 2008 10:24 AM EDT
Tue, 27 May 2008 14:24:00 GMT

Dear Bottarelli Research Member,

Last week, we experienced the worst market losses since February. And as you know, the levels of market “fear” (as gauged by the volatility index, or VIX) increase whenever the markets move lower. As a result, the VIX moved from 17 up over 20 in one week. As you can see from the VIX chart below, this upside move has brought the VIX very close to its near-term resistance point at the 50-day moving average, and this could be the level where we see buyers step back in.

VIX

Using the VIX as a guide, I attempted to get us positioned to play any forthcoming bounces with a series of June call positions on three strong market sectors (shipping, energy, and steel/materials). These three sectors are represented by our DRYS June 95 Calls (DQR FS), PTEN June 35 Calls (NZQ FG), and CLF June 100 Calls (CGJ FT).As I write, all three positions are below our entry prices, primarily because we have yet to see the market bounce we’re expecting. But if we can hang in there, I think each position will reward our fortitude going into June. In terms of CLF, a handful of contracts traded for our $2.10 stop loss on Friday before quickly bouncing back up. In situations like this, where some members remain in a position while some members are out of a position, I’ll continue following it for the benefit of those still holding.

Looking at today’s chart of the Dow, you can clearly see that the Blue Chip average got oversold last week, as a move from the 200-day moving average to below the 50-day moving average all occurred in one short week. If you study the last two times in 2008 that the Dow dipped below the 50-day moving average, you’ll see similar instances in late March and early April. In each case, the slight dip below the 50-day moving average proved to be a false breakdown — and the markets subsequently moved higher. Using these two recent examples as a precedent, I would expect to see similar action again now.

INDU

Of course, if the markets cannot move back up, then we’ll be forced to transition our ledger over to a downside bias by adding a series of new puts. But it’s still too early to make this move. Therefore, let’s maintain all of our current positions while closely monitoring the major market averages for clues as to the next significant move.

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And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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