Strap on the Horse Blinders

Playing the Government’s Game

By Bryan Bottarelli
Monday, May 11, 2009 10:48 AM EDT
Mon, 11 May 2009 14:48:00 GMT

Dear Bottarelli Research Member,

Good morning. As you can see from the Dow chart below, the Blue Chips are making a small 100-point retreat this morning, but it’s pretty clear that buyers are standing ready to buy up any dip.

INDU

Therefore, after some soul-searching over the weekend, I’ve concluded that in order to successfully trade in this market environment, we have to temporarily put our horse blinders on (pictured below) and ride the blissful ignorance of the bulls.

Blinders

There’s no sense fighting against the Fed, the Treasury, and the U.S. government, so we’ll play alongside them — knowing full well that their actions could lead to even more disastrous effects in the months and years that follow. But right now, their magic potion is working, so we’ll play along. That means if I see signs that the pullback is short lived, we’ll buy the dips. I certainly don’t like it, but right now, we have no other choice.

From a tactical standpoint, we’ll also play June contracts — just to give us enough time for our plays to make their moves. So in that spirit, let’s go ahead and close out our two underperforming May positions, which include the ESI May 85 Puts (ENJ QQ) and the SMH May 22 Puts (SMH QJ). Both plays are not moving the way I expect, so let’s close them out now and move on. Sell.

At the same time, let’s continue holding our two Ultra-short June plays, which are the SRS June 25 Calls (SAK FE) and the FAZ June 8 Calls (FAY FH). If we do see the proper amount of downside selling pressure, both plays will offer us nice upside potential.

Going forward, we’ll look to play the upside strength as carefully as possible. When it’s time to make a play, you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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