In Advance of the Fed

Possible Plays & Position Updates

By Bryan Bottarelli
Wednesday, June 25, 2008 11:23 AM EDT
Wed, 25 Jun 2008 15:23:00 GMT

Dear Bottarelli Research Member,

Financial stocks are leading the markets higher — all in advance of the Federal Open Market Committee’s rate decision (and accompanying policy statement) due out around 2:15 EST.

The strength of the financials is certainly a strong component to establishing market stability, and if we are indeed nearing the bottom, this will be a very welcome sign. In fact, a stock like Merrill Lynch (MER – NYSE) could represent a tremendous call-buying opportunity if today’s Fed comments spark an upside run in the financials.

MER

Another stock that could bounce hard is DryShips (DRYS – NASDAQ). As you can see below, shares set a near-term bottom at $70.00 in early June, and today, they’re in the process of hammering out a higher-low around the $80.00 level. If this level holds, we could see a quick move back above the 50-day and the 200-day moving averages, with shares possibly getting as high as $100 once again.

DRYS

I will keep a sharp eye on both DRYS and MER for any upcoming trading opportunities. But first thing’s first — we don’t want to make any new plays until after the Fed has spoken. After all, we all know how volatile the markets can become on Fed days, so there’s no need making more plays in advance of the coming volatility.

In terms of today’s trading, we’re experiencing weakness in the sectors that have been strong as of late, as oil, energy, agriculture, and steel companies are all lower. This is pushing both COP and STLD down over $1.00 in today’s trading. Some say it’s a top, while others say it’s profit-taking in advance of the Fed. I feel the oil & steel weakness is a temporary event, but nevertheless, let’s all be sure to adhere to our $1.30 protective stop on your STLD July 40 Calls (RQL GH).As you know, STLD has been inching higher in previous trading days, but it just can’t seem to string together a series of upside moves. As much as I’d like to give this one room to move, we must also stick to our protective trading rules. So for now, maintain the position, but if your calls drop at or below $1.30, close them out.

STLD

The same goes for our CMG July 90 Puts (CMG SR). As you know, we came within $0.10 of locking in profits on these puts yesterday, but we just couldn’t get our sale prices executed by the close of trading. And then today, shares of CMG have put in a $4.00 upside move. Just like STLD, I’d love to maintain these puts, as the CMG chart continues to signal more downside action. But as a precautionary and safe trading measure, adhere to your $2.50 protective stop if prices dip that low.

CMG

In some better news, it appears that shares of Aluminum Corp. of China (ACH – NYSE) are in the process of establishing a bottom. Therefore, maintain your ACH August 30 Calls (ACH HF) for a July/August bounce.

ACH

I’m sure I’ll be out later today with Fed reaction — but until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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