Dow Up 250. Do You Trust It?

Maintain Straddle: Possible GLD Play

By Bryan Bottarelli
Tuesday, September 30, 2008 10:29 AM EDT
Tue, 30 Sep 2008 14:29:00 GMT

Dear Bottarelli Research Member,

Right before our eyes, the western world is becoming significantly less wealthy. Over the last week, trillions of dollars have evaporated on Wall Street. In fact, after yesterday’s brutal 777-point sell-off, corporate America lost value that was equivalent to the size of the entire Indian economy. “Amazing” is hardly the word.

And what’s more, I really can’t find anyone who is making any headway in this market environment. Some of the most high-profile investors, politicians, and fund managers are losing unprecedented amounts of money. Firms like Lehman Brothers and Bear Stearns, for example, have been around for over 100 years. They employed some of the most brilliant minds on Wall Street, and yet they’ve gone belly up.

Bill Miller, who manages more than $60 billion of assets for Legg Mason, was best known for beating the S&P 500 index for 15 consecutive years (1991 through 2005). But lately, Miller has gotten clobbered, capped off by his multiple purchases of Freddie and Fannie stock that eventually became completely worthless.

Speaker of the United States House of Representatives, Nancy Pelosi, reported that her husband owned between $250,000 and $500,000 of AIG stock. And John Kerry disclosed that his wife, Teresa Heinz Kerry, had more than $2 million worth of AIG stock at the end of 2007. That’s all gone too.

And then there’s Texas Pacific Group, who lost $1.3 billion when regulators seized Washington Mutual (TPG bought common stock in WaMu as part of their $7 billion capital raising in April). $1.3 billion has never disappeared so quickly.

I could go on and on, but you get the idea. In fact, as I was collecting all of this information yesterday, the song “Highway to Hell” by AC/DC randomly came up on my iPod. “How ironic,” I thought to myself. After all, the game plan on Wall Street right now is to sell anything at any price. Cash is king. No stock is being spared.

If nothing else, the series of events that have unfolded over the last few days should solidify your viewpoint that trading is the one and only way to go in this market. Being nimble and taking quick profits (using both call and put positions) is the only way to make money right now. And I think this will be the case for the foreseeable future. So on that note, I’m sure glad you’re part of our elite group of traders. Unlike everyone else, we’re positioned to take full advantage of this market environment. I’m glad you’re with me.

Looking at today’s Dow chart, we’re seeing an opening-session bounce of 200 points. But as you can see below, this hardly makes a dent in yesterday’s crushing sell-off. Because of this, I want us to remain biased to the downside. In fact, I wouldn’t be surprised to see today’s action turn negative by the close of trading.

INDU

As I outlined yesterday, I want to take advantage of one final downside push to lock in profits on our DIA Political Straddle (October 110 Calls & Puts). Therefore, let’s continue to maintain both sides of this position for the next major move.

Today’s morning pop has also sent shares of the SPDR Gold Shares (GLD – NYSE) down over $2.00. As you can see from the chart, GLD finds itself in a really nice support range between the 50-day and the 200-day moving averages (which means GLD has support anywhere between $82.50 and $87.50). If we can pick up another series of GLD calls on a dip, I’ll certainly take full advantage. More to come.

GLD

Aside from that, I’m going to keep our ledger light. After all, the market moves right now have nothing to do with technical formations and everything to do with “headline risk” driven by uncertainty, emotion, and panic. In times like this, it behooves us to be nimble, cautious, and smart. Trading light positions on gold, or taking both sides of the market via a straddle are two of the best ways to go. Unfortunately, yesterday’s sizable downside move officially stopped us out of our KMB October 65 Calls (KMB JM). Therefore, this position is now closed.

As always, I’ll continue to update you throughout the trading day. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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