Add PCU Calls

Establish Metals Position Now

By Bryan Bottarelli
Wednesday, July 16, 2008 10:26 AM EDT
Wed, 16 Jul 2008 14:26:00 GMT

PLAY: Buy the PCU August 30 Calls (PCU HF) at or under $2.50, good for the day. Place a protective stop limit at $1.40 and a pre-determined sniper sell at $3.30.

Dear Bottarelli Research Member,

“Good morning Bryan. What’s your take here?”

That’s the first email that hit my inbox this morning.

My response was simple:

“I think we’re severely over-sold and due for a bounce. The market wants to rally. But I’m troubled that every single rally gets quickly sold off, leaving no sustainable upside momentum. This tug of war describes the situation we’re stuck in right now.”

A quick look at the Dow chart illustrates this point. As you can see, every indicator (including RSI at the top of the chart and MACD at the bottom of the chart) support the “over-sold” viewpoint. But unfortunately, this has been the situation for the last 1-2 weeks. As a result, any rallies are sold off — further perpetuating the “over-sold” market conditions.

INDU

Now here’s the thing: This cannot last forever. In other words, there will come a time when stock prices get so incredibly low that the buying over-takes the selling pressure, and that’ll be the moment where the market momentum shift occurs. So the trick is to get carefully positioned to profit off this shift when it occurs — while also being able to withstand the choppy trading conditions leading up to it. And in that spirit, I think it behooves us to add an upside play on a metals company, notably Southern Copper Corp. (PCU – NYSE).

PCU

In my view, PCU is one of the best all-around metals plays your money can buy, offering you exposure to copper, molybdenum, zinc, silver, lead, and gold. As you can see from the PCU chart, the stock is right now hitting the $31.00 level which sparked a strong upside rally back in March/April. If this same pattern holds, we can make a really nice play using PCU August calls. Furthermore, PCU shares split 3 for 1 on July 11th, which has now brought the PCU option premiums down to very attractive levels. So let’s enter this position now!

PLAY: Buy the PCU August 30 Calls (PCU HF) at or under $2.50, good for the day. Place a protective stop limit at $1.40 and a pre-determined sniper sell at $3.30.

In terms of our other positions, the trading patterns of ICE tell me that the stock is on the verge of an upside breakout. All we need is some upside market momentum, and we should see a nice return on your ICE August 95 Calls (ICE HS). Therefore, hold for more upside.

ICE

I also see a similar pattern on the $HGX index. Now, I am aware that yesterday’s brief downside move triggered a handful of contracts at the $3.90 level before bouncing back up and rallying for the remainder of the way. In cases like this, where some members triggered a stop while others remain in the position, I will continue to manage the position for the benefit of those traders whoa re still holding. Therefore, I still like the bottom-forming action showing up on the $HGX chart, so maintain your HGX August 100 Calls (HGC HT) for a coming upside pop.

HGX

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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