A Recession Note

Historical Length Offers Interesting Conclusion

By Bryan Bottarelli
Tuesday, June 10, 2008 10:14 AM EDT
Tue, 10 Jun 2008 14:14:00 GMT

PLAY: Buy more EOG June 140 Calls (EOG FU) at or under $1.55, good for the day.

Dear Bottarelli Research Member,

We’re faced with another weak opening, as the major market indices are extending upon the losses of last week.

But in the midst of this latest round of selling pressure, I’d like to offer you an interesting statistic on the length of recessions. You see, since 1945, there have been a total of 11 recessions — and not a single one has lasted longer than 16 months. Even more interesting is the fact that no single recession has lasted more than 8 months dating back to 1982. In other words, if our current recession began in December of 2007 or January of 2008 (which is debatable) that means we’re in either the 6th of 7th month of it. And since no recession dating back to 1982 has lasted longer than 8 months, one can argue that we’re getting close to the end of this latest cycle.

Going off this historical recession data, I wouldn’t be surprised if the Dow hammers out a near-term bottom right at the 12,200 level. If the Dow can establish this level as a floor, then it would’ve effectively re-tested the March lows and set a higher-low. From a technical perspective, this would be viewed at a bullish event. And more importantly, it would give us the ability to pick back up the pace of hitting strong and consistent winners. But of course, we need to see if the Blue Chips can actually establish this technical level first. So we’ll cross that bridge when we get there. If these levels do not hold, then we could have another 400 points of downside to test the March low at 11,800. And if that level doesn’t hold, then all bets are off.

INDU

In the meantime, we’re left slugging it out, and this will probably lead to more volatility (as witnessed by last week’s 200-point gain on Thursday and 400-point loss on Friday). In the midst of this volatility, let’s once again lighten up our trading ledger until we get some market clarity. If you haven’t already done so, close out your NIHD June 50 Calls (QHQ FJ). The market weakness has limited the upside breakout ability of NIHD (which was indicated by last week’s chart) so this position is now closed.

The same goes for our PTEN June 35 Calls (NZQ FG). As much as I like these calls (and the upside ability of PTEN going forward) the current market environment just does not allow any stock to extend upon a rally longer than one day — and this severely limits the upside momentum of a company like PTEN. Once we regain some level of stability, PTEN could be back “in play.” But until then, the safe play is to close out the position.

PTEN

But in terms of our EOG June 140 Calls (EOG FU), I’d like to use this dip as a careful buying opportunity. As you can see from the chart below, the stock is on the verge of a 50-day moving average breakout, and all it’ll take is a firm market environment to witness this move. Therefore, let’s add to our June 140 calls and play this forthcoming breakout.

EOG

PLAY: Buy more EOG June 140 Calls (EOG FU) at or under $1.55, good for the day. Lower your protective stop limit to $0.45.

At the same time, continue holding your Visa June 80 Puts (V RP) and your DE June 80 Calls (DE FP).And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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