A Critical Level

Plus, Take CLF Profits!

By Bryan Bottarelli
Tuesday, December 09, 2008 10:33 AM EST
Tue, 9 Dec 2008 15:33:00 GMT

PLAY: Sell your CLF January 22.5 Calls (CLF AS) at or above $5.40, good for the day

Dear Bottarelli Research Member,

We’re at a very critical level on the Dow. As you can see below, the Blue Chips are tapping the top of their 50-day moving average, which has acted as a level of resistance over the last 6 months (perhaps even longer). As traders, we must structure our portfolio to play alongside the prevailing trend lines — which is why I’ve continued to maintain our DXD December 80 Calls (DZS LB).

INDU

But at the same time, we must also recognize the possibility of a trend-break, which is why we’re also carrying the CLF January 22.5 Calls (CLF AS).As you know, we entered these calls yesterday for $4.50, and as I write today, they’ve traded as high as $5.50. That’s a quick 22% gainer, and I’d like to lock in these profits now!

CLF

PLAY: Sell your CLF January 22.5 Calls (CLF AS) at or above $5.40, good for the day.

But let’s get back to the current directional movements. From a technical perspective, one of two scenarios will happen. Either the Dow will attempt to break above these levels and fail (which has been the prevailing trend), or the Dow will attempt to break above these levels and succeed. If we do see a successful breakout, this will officially be a reversal in the predominant trend. And at this time, we’ll shut down our DXD calls and transfer over to a more upside bias.

But as you know, this market has been full of landmines and booby-traps. Along the way, we’ll see intra-day volatility swings that make us all question the directional bias. That’s why it’s always smart to own exposure to both sides of the market. But since we’re faced with such a critical level, I’d like to trim our downside exposure, and that means closing out the put-side of our QLD December 22 Straddle.

QLD

As you know, we entered a basket of calls and puts for a total of $6.90. We sold the calls for $5.00, and we’ve been waiting on the puts to pull the entire basket into profitability. On some occasions, we have seen this basket tip slightly into the profit zone, but the rally over the last few sessions (notably Friday afternoon and into yesterday) has pushed this position lower. Therefore, let’s salvage what we have left and sell our puts — and take a slight loss on the straddle basket. Sell your puts.

I’ll be out later in the session with further alerts. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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