More Troubling Signs

Dow and S&P On The Precipice

By Bryan Bottarelli
Wednesday, July 08, 2009 12:05 PM EDT
Wed, 8 Jul 2009 16:05:00 GMT

PLAY: Buy the ISRG July 140 Puts (AXQ SX) at or under $3.00, good for the day. Place a protective stop limit at $1.50 and a pre-determined sniper sell at $5.00.

PLAY: Buy the DUG July 21 Calls (DZG GU) at or under $2.00, good for the day. Place a protective stop limit at $1.20 and a pre-determined sniper sell at $3.30.

Dear Bottarelli Research Member,

No matter how you look at things, the major market averages look very vulnerable. From a weekly chart perspective, both the Dow and the SPX charts have failed at their 50-day moving average, and are beginning to drift lower with each passing day.

INDU

SPX

On a daily basis, the Dow continues to languish below both the 50-day and the 200-day moving averages. But today, the SPX has just dipped underneath this level as well. Combine all four charts, and we must continue to be very mindful of the potential downside action.

INDU

SPX

But most of all, the bearish bias is exhibited by looking at the CBOE Volatility Index (VIX), which has just pushed above the 50-day moving average. The VIX has not been above the 50-day moving average since early March. Therefore, if this level converts from resistance to support, we could be awakening the sleeping bear. It’s time to prepare ourselves.

VIX

Therefore, in terms of today’s new trades, I’d like to re-establish two bearish positions. The first is Intuitive Surgical (ISRG – NASDAQ), maker of da Vinci surgical systems (used in urologic, gynecologic, cardiothoracic, and general surgeries). I openly admit that their surgical technology has revolutionized the way urologists perform prostrate surgery. But in a market like this, where discretionary medical spending continues to get cut, I cannot see how hospitals can approve ordering this multi-million dollar system. As a result, ISRG’s revenues should certainly decline, which will no longer justify their lofty P/E ratio around 35. Plus, the weekly chart clearly shows a resistance level at $160.00. Let’s add puts to our ledger now.

ISRG

PLAY: Buy the ISRG July 140 Puts (AXQ SX) at or under $3.00, good for the day. Place a protective stop limit at $1.50 and a pre-determined sniper sell at $5.00.

At the same time, the extended commodity sell-off looks like it’ll push oil prices below the $60.00 level. As a result, it’s time to revisit our old friend, the Ultra Short Oil & Gas ProShares (DUG – NYSE). As a pure momentum trade, let’s add July calls on DUG and play this oil sell-off for all it’s worth.

DUG

PLAY: Buy the DUG July 21 Calls (DZG GU) at or under $2.00, good for the day. Place a protective stop limit at $1.20 and a pre-determined sniper sell at $3.30.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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