Avoid This Temptation

Calling a “Bottom” is a Losing Proposition

By Bryan Bottarelli
Monday, October 27, 2008 9:53 AM EDT
Mon, 27 Oct 2008 13:53:00 GMT

Dear Bottarelli Research Member,

Good morning. As we begin trading in the last Monday in October, you’re hearing a lot about market “bottoms” in the financial media. As I mentioned last week, it’s critical that we do not get involved with picking a bottom. That’s a sure-fire way to get whip-sawed in this market.

We have a Fed meeting on tap this week, where policy-makers are expected to drop rates down to 1%. This could initially spark a market rally, and that’s where you’ll hear a lot of market-watchers declaring a bottom. Try to avoid buying into this hype.

To echo my comments from last week, I continue to believe that last Friday’s market action left at least 700 points of downside on the table. As a result, I think we must remain as nimble and careful as ever. In other words, I’ll issue trades that play the tape. If the market wants to rally, we’ll profit off it. If the market wants to continue falling, we’ll profit off that too. In times like this, the best tactical move is to set aside your biases and simply trade alongside the most powerful current. The trick is to ride this current as long as possible — perhaps a day or two, but in this market, it’s more like an hour or two — and then get out. There’s no sense trying to be a hero. Make a play, see a quick profit, and lock it in. That’s the name of the game.

As I write, we’re holding the DIA November 80 Puts (DIJ WB) and the ABX January 17.5 Calls (ABX AW), both of which are basically trading at break-even. I still think the Dow will dip below the 8,000 level this week, which justifies holding our DIA puts.

INDU

And I also think that Barrick Gold (ABX – NYSE) is at trading at a dramatically reduced value. We should see a nice pop prior to our extended January expiration.

ABX

So for now, maintain both positions. And if I see any further trading opportunities, you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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