Rally Ahead of the Fed

Take GG Profits at $3.10

By Bryan Bottarelli
Wednesday, June 24, 2009 10:51 AM EDT
Wed, 24 Jun 2009 14:51:00 GMT

Dear Bottarelli Research Member,

Good morning. As we speak, the Fed is meeting behind closed doors, which will result in a new policy statement this afternoon.

While it’s clear that today’s announcement will not result in any new action on rates, what’s unclear is how the Fed will structure their wording about future economic conditions.

On one hand, the exceptionally low federal funds rate has brought about some small signs of economic recovery. This has some believing that the economy is on track to recover later this year. The problem is, if the Fed hints that these programs (which are designed to drive down rates on mortgages and other consumer debt) will be slowed down, our fragile economy could quickly regress right back into where we were in March. As a result, the Fed finds themselves in a very difficult spot.

The combined efforts of the U.S. government, the Federal Reserve, and the U.S. Treasury have stabilized – and even sparked some small signs of recovery. But if any of these efforts are minimized, the last three months of progress could get eliminated.

From a chart perspective, the Dow began the day trading below the 50-day moving average. Thanks to a stronger-than-expected durable goods number, the Blue Chips are attempting to dip back above this level in today’s action.

INDu

Personally, I’m always cautious about a strong market move (either up or down) in advance of a Fed announcement. Therefore, we’ll approach the trading leading up to the statement with a heightened level of caution. If anything, we could see increasing levels of price premium added into the TBT options string (both the calls and the puts) leading into this afternoon. If that’s the case, I would not be opposed to locking in quick profits. As you know, we entered the TBT July 52 Calls (TVT GZ) yesterday for $2.45, and they’ve now traded as high as $2.60. Hold for more upside.

TBT

Also moving in our direction is the GG August 35 Calls (GG HT), which we also entered yesterday for $2.35. Gold prices are recovering nicely today, as we expected, which has pushed these calls up to a high of $3.09. As I write, they’re trading between $2.85 and $2.95, so I’d like to re-adjust our exit target right now. If these calls move above the $3.10 level, go ahead and lock in your profits. As I mentioned, prices are not this high yet – but they could tick up as the day progresses. Therefore, consider this your exit recommendation in preparation for another up-tick.

GG

PLAY: Sell your GG August 35 Calls (GG HT) at or above $3.10, good for the day. Prices are currently $2.85 to $2.95, so be sure to sell on the next upside move.

And finally, we just witnessed our GS July 135 Puts (GS SG) move from a quick profit to a quick loss. As you know, we entered these puts for $4.65, and they’re currently trading for $2.80. If the bulls are unable to push the major market averages back above the critical 50-day and 200-day moving averages, I feel that GS could easily give back all of the recent gains in no time. Therefore, let’s continue to hold this position in case the Fed announcement sparks a downside move.

GS

As always, I’ll continue to update you throughout the trading session. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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