Dow Once Again At Critical Levels

200-Day Resistance?

By Bryan Bottarelli
Friday, June 26, 2009 10:54 AM EDT
Fri, 26 Jun 2009 14:54:00 GMT

Dear Bottarelli Research Member,

Good morning. It’s hard to admit when you were wrong, especially when one sudden and unexpected market move (like we witnessed yesterday) alters the make-up of the major market averages. But that’s exactly what happened to us with our Goldman Sachs (GS – NYSE) and Ultra Short 20+ Year Treasury Pro Shares (TBT – NYSE) plays.

The 200-point market breakdown that began this week’s trading on Monday indicated further market weakness, especially since this move pushed the Dow below its 50-day moving average. This prompted us to add GS July 135 Puts (GS SG) in anticipation of their own breakdown below the 50-day moving average. But as you can see below, this breakdown did not occur, which has officially stopped this position out. Sell.

GS

NOTE: As you can see from the chart, I continue to believe that GS could trade anywhere between $100 and $140. If the shares break below the 50-day moving average, we could have another shot at downside puts. But like everything, timing is critical. I’ll keep a close eye on it.

In a similar fashion, the TBT chart moved against us when news that a “successful” 7-year auction pushed the TBT below the support level at the 50-day moving average. On a longer-term basis, I am bearish on Treasuries. As you can see below, the TLT is hitting a resistance level right now, which could officially end the recent upside move.

TLT

At the same time, the TBT is also hitting a support level at the 200-day moving average, which could spark an upside move. But nevertheless, our TBT July 52 Calls (TVT GZ) have officially hit our stop loss, so this position is now closed as well. Sell.

TBT

This leaves us holding the SDS August 57 Calls (SDS HE), which we entered yesterday for $4.89 in an attempt to “fade” the market rally. As of today, these calls have traded as high as $4.20. So even after yesterday’s market rally, we’re still in the game. Hold these calls for more market downside.

As for a general market comment, a quick look at the Dow chart shows you that the Blue Chips continue to trade at a very critical level. Yesterday’s rally pushed the Dow right back to the 200-day moving average, which has (thus far) acted as resistance. As I write, the Dow is about to trade below the 50-day moving average. Like I’ve said before, anywhere below this level could ignite a 700-point haircut. But we must remain cautious. Let’s see if another pump job pushes the Dow back above this breakdown level. If not, it just might be time for more puts.

INDU

As always, I’ll keep you fully informed.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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