Two Plays to Kick off 2009

Add KSS Puts, JASO Calls

PLAY: Buy the KSS January 40 Puts (KSS MH) at or under $3.50, good for the day. Place a protective stop limit at $1.90 and a pre-determined sniper sell at $5.00.

PLAY: Buy the JASO February 5 Calls (QJP BA) at or under $1.00, good for the day. Place a protective stop limit at $0.35 and a pre-determined sniper sell at $2.00.

Dear Bottarelli Research Member,

Happy New Year!

Now that 2008 has officially been placed in the history books as the third worst year in market history, we’ve began 2009 with a new sense of optimism. And as you probably know, the major market averages began the 2009 trading year with a bang. Looking at the Dow chart below, the Blue Chips gained over 500 points last week, which blasted them above their 50-day moving average. But whether or not this is another “false breakout” move is still unclear. After all, we witnessed a similar breakout above the 50-day moving average back in December, which quickly gave back 500 points. Take a look:

As I read and listen to market observers, many are calling the January 20^th Presidential inauguration as the upside trigger catalyst that will sustain the market rally all month long. But from my view, we already have a pretty good sense of what Obama is planning to do. Therefore, any upside strength leading into the inauguration will most likely be sold off immediately afterwards.

Another interesting chart to discuss is the current status of the CBOE Volatility Index (VIX). As you can see below, the recent market upside has pushed the VIX all the way down to the 40 level, which is a level we haven’t seen since late September of 2008. Even more alarming is the fact that there is very strong support at the 200-day moving average, which falls right around the 35 level. To my eye, this chart formation gives off an early warning signal: We could be getting close to a sizable downside move.

Therefore, I’d like to kick off the 2009 trading ledger by adding one new put position. You see, leading into 2009, consumers all across our great nation are taking the same approach to their finances: Cut back. Words like frugality, safety, security, and necessity, will be the driving forces behind most of this year’s spending habits, and this paints a long-standing gloomy picture for most mid-level retailers.

In my view, we’re now entering a period of “retail and consumption glut.” In other words, America (as a nation) has spent the last three to five years buying junk they don’t need with money they don’t have. And now, we’ve come to the saturation point, where saving money trumps buying more unnecessary crap. For example, you can walk into any retail store in America and pick out something that you might actually consider buying. Then ask yourself, “do I really need this item?” Most likely, the answer will be “no.” Do you want it? Perhaps. But do you need it? Absolutely not. This internal question will cross the minds of every consumer in America here in early 2009, which does not bode well for Q1 2009 sales for a company like Kohl’s (KSS – NYSE).

As you can see below, KSS is in the process of establishing a triple-top formation right at the $37.50 level. In my view, a move back down to $30.00 (and possibly even lower) will be next up for KSS, who really doesn’t sell anything that you cannot get at Wal-Mart or Target. Let’s profit off this down-move using January puts. Here’s the play:

PLAY: Buy the KSS January 40 Puts (KSS MH) at or under $3.50, good for the day. Place a protective stop limit at $1.90 and a pre-determined sniper sell at $5.00.

At the same time, let’s hedge this downside play by entering cheap upside calls on solar-power player JA Solar Holdings (JASO – NASDAQ). If we do witness a sustained market rally leading into the inauguration, we could see strong upside movement on a solar-power play like JASO. Chart-wise, the recent breakout above the 50-day moving average looks strong, so let’s add some super-cheap February calls to our ledger now.

PLAY: Buy the JASO February 5 Calls (QJP BA) at or under $1.00, good for the day. Place a protective stop limit at $0.35 and a pre-determined sniper sell at $2.00.

And finally, the cover story of this week’s issue of Barron’s asks the question that has been secretly crossing my mind lately, which is, “Are Treasury Bonds Safe?” If you recall, I recently published an alert which included the chart formation of the TLT, saying that it has moved up too far, too fast.

Well, just last week, the TLT made a sharp downside corrective move, which could be the beginning of a pending fall. With money flowing out of treasuries and into equities here at the outset of 2009, we could have a nice opportunity to play puts in TLT. I will continue to monitor this situation, and tell you the exact time to act. But until then…

Lock and load!

Sincerely,