Add DXD Calls

Playing a Near-Term Top

By Bryan Bottarelli
Wednesday, July 15, 2009 3:37 PM EDT
Wed, 15 Jul 2009 19:37:00 GMT

PLAY: Buy the DXD August 46 Calls (DXD HT) at or under $2.65, good for the day. Place a protective stop limit at $1.40 and a pre-determined sniper sell at $4.00.

Dear Bottarelli Research Member,

The Dow has now gained over 427 points in the last three sessions. Just to follow up on the chart I sent you earlier in today’s session, you can see below that the Blue Chips are now bumping their head right at the 8,600 level, which has acted as near-term resistance in June and July. See below:

INDU

As a result, I’d like to short this rally going into the end of the week. We’ll do so using Ultra Short Dow 30 ProShares (DXD – NYSE). Specifically, let’s short this rally by adding the DXD August 46 Calls (DXD HT) at or under $2.65 per contract. The current bid/ask spread is $2.45 to $2.60, so you should be able to get this price.

Why short such a powerful upside move? Well, take one look at the VIX, and I think you’ll have your answer. As you can see below, the VIX is actually moving higher on the day. On a day that the major market averages are rocketing upwards, this is highly unusual. After all, an upside market should be reducing the market’s fear level, which pushes the VIX lower. But strangely enough, that is not what we’re seeing today.

VIX

This indicates to me that the smart money is now shorting the rally going into the close. Let’s establish a short position right alongside them. Here’s the trade…

PLAY: Buy the DXD August 46 Calls (DXD HT) at or under $2.65, good for the day. Place a protective stop limit at $1.40 and a pre-determined sniper sell at $4.00.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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