Pre-Market Alert: Add to DXD Calls

Use Volatility to Short Rally

By Bryan Bottarelli
Monday, December 08, 2008 9:15 AM EST
Mon, 8 Dec 2008 14:15:00 GMT

Dear Bottarelli Research Member,

The pre-market futures are showing a strong gain this morning, sparked by Obama’s infrastructure proposal. They’re also rallying on the news of an “outline” to rescue our ailing auto industry. Not only that, but this morning’s pre-market advance comes on the heels of last Friday’s late-session up-move, which shrugged off a horrendous jobs number to post a 259-point gain.

In fact, last Friday’s late-session rally has many market watchers saying that we’ve hit bottom — and it’s all up from here. But as I said last week, I’m not ready to jump aboard the bullish train. After all, the bears have proven to be very patient in their approach — and very devastating in their execution. In other words, when the bears get a hold of this market, they take it down hard. And despite a few upside days, I still think we’re in for another crushing move to the downside.

After all, as you can see from the Dow chart, today’s upside move just might take the Blue Chips up to their 50-day moving average. And from there, they’ll once again hit a strong level of resistance (seen by the blue line). Now I admit, if the Blue Chips can break through this level, then I’d be willing to adjust my position. But until this occurs, we’ll continue to play the dominant trend, which is down.

INDU

Plus, we’re getting more bad company news this morning, as Blue Chip conglomerate 3M cut their earnings outlook, Dow Chemical slashed their workforce and are closing 20 facilities, and the Tribune Company is considering Chapter 11. Plus, in an interview on NBC’s “Meet the Press” this Sunday, President-elect Barack Obama mentioned on two occasions in the opening moments of his interview that the economic situation “is going to get worse before it gets better.” Lump it all together, and I’d like to get aggressive and use this morning’s upside move to add to our DXD December 80 Calls (DZS LB).

As you know, we could have locked in a profit on these calls on Friday, but I decided to hold them for more downside selling pressure. Our average entry price currently stands at $6.50, and these calls closed on Friday trading between $3.50 and $4.00 per contract. With this morning’s upside move, they’ll probably open around the $3.00 range. So here’s what I’d like to do…

First, cancel your pre-determined stop limit order. Second, add to this position at the open, which effectively shorts the rally over the last two trading sessions. Then, go ahead and re-submit your stop limit order at $1.75. And from there, we’ll be positioned to profit off any forthcoming downside reversal.

Should we witness a downside push, I’ll be quick to lock in profits. And in the meantime, we’ll let our BNI December 75 Calls (BNI LO) hand us some near-term profits.

As always, I’ll follow up with you throughout the trading session. But with the pre-market futures pointing to such a strong advance, I wanted to get this play out as soon as possible. Add to your DXD calls at the open. And as always…

Lock and load!

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Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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