Another External Stimulant

Playing “Chicken” With The 50-Day MA

Dear Bottarelli Research Member,

For the second time this week, an outside news item has sparked irrational trading patterns. First was the Fed’s “kitchen sink” announcement, which ignited a rally that pushed the Dow above its critical resistance level at the 50-day moving average.

Then yesterday, the natural market forces pushed the Blue Chips back below this level, which we were positioned for via our DUG, AEM, and AMGN plays. In fact, for those who stuck with me on DUG, our January 31 Calls (DZG AE) traded up to $5.20 yesterday, good for a break even! Considering where this position was a few days ago, that’s quite a recovery.

But back to the major market averages…

Going into this morning, we were looking good with all of our positions — but then the White House agreed to extend $13.4 billion in loans to the troubled Detroit auto-makers (with an additional $4 billion likely in February). Upon hearing this news, the major market averages once again pushed higher.

So as it stands today, we’ve seen a break above the 50-day moving average (sparked by unnatural stimulants by the Fed), a natural dip back below this level yesterday, and now another potential recovery (sparked, once again, by a waste-of-money bailout plan that won’t even carry the Big Three into the early days of Q2 of 2009). If you’re confused by these major directional changes, you’re not alone. As I said yesterday, nobody (and I mean nobody) knows what’ll happen next. It all depends on the news flow that particular hour.

What I do know, however, is that the best tactical strategy that we can implement right now is simply holding an equally-weighted position of calls and puts — and being sure to lock in quick profits the moment any position moves in our direction. In that spirit, I continue to think that gold stocks, like AEM will briefly pull back. With gold down more than $20.00 today, we should see movement in our AEM January 40 Puts (AEM MH). Hold.

We should also see continued upside movement in DUG. As you saw yesterday, this position can bounce back in the blink of an eye. With oil down again today, it’s only a matter of time before we see a sharp sell-off in the oil/energy names, and this will push DUG even higher. Maintain your DUG January 31 Calls (DZG AE), as we should trade above the $35.00 level soon.

And finally, the fertilizer plays (which had been rallying on strong upside momentum) have drifted lower today after Canadian fertilizer company Potash of Saskatchewan cut their profit estimates. Like most commodities, potash prices have fallen substantially this year, which is why POT, MOS, and AGU have all gotten clobbered in 2008. But despite the fall, POT only lowered their 2008 yearnings outlook by 10%. And they still expect to make $10.75 per share in 2008. While most companies are losing countless millions, the potash companies are still taking in substantial profits (albeit less than anyone expected at the beginning of the year).

Using a forward-thinking approach, it’s clear that the demand for fertilizer will outpace the supply over the next few years. Therefore, I fully expect to see a strong rebound in potash prices, and this bodes well for playing POT, MOS, and AGU at today’s current levels. Let’s maintain our AGU January 35 Calls (AGU AG) and see if the stock can absorb today’s news and push back above its 50-day moving average.

As always, if any immediate trading opportunities come up, you’ll be the first to know. But until then, be sure to lock in our special renewal offer, which expires today. If you have yet to lock in this discounted rate, see below:

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And as always…

Lock and load!

Sincerely,