The Decision at 6,500

Rally, Stall, Or Fall?

By Bryan Bottarelli
Friday, March 06, 2009 1:01 PM EST
Fri, 6 Mar 2009 18:01:00 GMT

Dear Bottarelli Research Member,

This market is very, very dangerous right now.

On one hand, it’s clear that the bulls simply cannot hold onto any sort of gain. This morning, for example, the Dow traded over 140 points higher. But as I write, the Blue Chips are back down 70. That’s a 210-point reversal to the downside — all before lunch. And the financial stocks, which I said this morning were the ones fueling the rally, have completely reversed as well. This is not a good sign. It sure looks like Dow 6,000 is in the cards. See below:

INDU

On the other hand, the market is severely over-sold right now, which indicates that we could see one of those one-day rallies of 200 points (or more). Therefore, I would say that we have 65% odds of a significant down-move and 35% odds of a significant up-move. In a case like this, it might be appropriate to play a “straddle” on the Dow, NASDAQ, or S&P 500. But there’s really no sense making such a play on a Friday afternoon. Unless, of course, you expect to see major movement (either up or down) going into the close. At this particular moment, I’m inclined to stand pat. Should anything change, you’ll certainly hear it first.

In the meantime, we’re forced to close out our two current holdings. Despite the fact that the TBT is just now touching its 50-day moving average, today’s prices have officially trigged a stop on our TBT April 48 Calls (TBT DV).As much as I still think that the TBT is due for a pop, we must close this position out. Should the time come to re-enter it, I’ll let you know. But for now, sell.

TBT

The same goes for our AAP April 40 Calls (AAP DH).As you can see, the stock is just now hitting a strong support level at the 200-day moving average, but once again, prices have officially hit our stop loss. Therefore, this position is closed as well.

AAP

This will leave us with an empty ledger, which is actually alright in a market like this. Something tells me that we could put in a rally here, but of course, I’ll wait for strong confirmation before entering such a play. I’m thinking that an ultra-short straddle might work best, but I’d like to run some more numbers before entering any such plays. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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