Expect Another Wild Day

Maintain All Positions

By Bryan Bottarelli
Thursday, April 23, 2009 10:38 AM EDT
Thu, 23 Apr 2009 14:38:00 GMT

Dear Bottarelli Research Member,

Good morning. It looks like we’re in for another wild day of trading. At the open, the markets popped higher on positive news from Apple (AAPL – NASDAQ), but the buying conviction didn’t last for more than 25 minutes. As a result, the Dow quickly dipped lower, as you can see from the chart below. To my eye, the Dow will re-test the 50-day moving average at 7,500. That’s about a 400-point drop from current levels. If this support level holds, then perhaps the bulls are stronger than I give them credit for. But if this support level fails, we could see an avalanche of selling pressure. As always, I’ll keep you fully informed on the directional situation going forward.

INDU

Looking at our current positions, I’d like to maintain all four plays. To protect ourselves against a market rally, we entered the CMED May 20 Calls (QCY ED) yesterday for $1.90. As of today, these calls have hit a high of $2.45, good for a quick 28% gainer. They’re doing their job, so hold these calls for more upside protection.

CMED

Over on the put side, our SMH May 22 Puts (SMH QJ) are breaking into profitability today. As you know, we entered this play as a way to short the semiconductor sector, and as you can see, we’re getting a nice red candlestick formation in today’s action. We originally entered these puts for $2.44 and they’ve traded as high as $2.58 today, so we’re on the right track. Hold for more gains.

SMH

And finally, we have our two ultra plays on financials and real estate. This morning, the National Association of Realtors said that re-sales of existing homes and condos fell 3% in March, to a seasonally adjusted annual rate of 4.57 million. And remember, this number counts “distressed” sales, which now account for half of all sales. This continues to paint a gloomy picture. With median sales prices down 12.4% in the past year, the pain in the real estate sector is long from over. Therefore, let’s hold our SRS May 32 Calls (SAK EZ) for more upside.

The same goes for our FAZ June 8 Calls (FAY FH). There’s a whirlwind of rumors swirling around the stress test results, and this should lead to even more volatility. I have no doubt that the government will attempt to spin the results in a very positive light, but I’m hoping that investors see through any of this nonsense. The threat of bank nationalization is very real, and we all know how this ended up for shareholders of Freddie and Fannie. Their stock was wiped out, and they got nothing. Any threat of this could fuel a powerful exit in financial stocks, and I want to remain positioned to profit off any such move. As you know, we entered our FAZ calls for $3.00 and they’ve already hit a high of $3.90 today, good for a quick 30% winner. Let’s hold for more gains.

As always, I’ll follow up with more updates as the day progresses. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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