The Debate Continues

Add V, K & AFFX Calls, SPWRA Puts

PLAY: Buy the K August 45 Calls (K HI) at or under $3.10, good for the day. Place a protective stop limit at $1.80 and a pre-determined sniper sell at $5.00.

PLAY: Buy the V August 65 Calls (VEH HM) at or under $4.30, good for the day. Place a protective stop limit at $2.00 and a pre-determined sniper sell at $6.50.

PLAY: Buy the AFFX August 7.5 Calls (FIQ HS) at or under $1.00, good for the day. Place a protective stop limit at $0.40 and a pre-determined sniper sell at $2.00.

PLAY: Buy the SPWRA August 30 Puts (QSU TF) at or under $2.30, 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,

Good afternoon. Last week, the Dow rallied 349 points. Over the last two weeks, the Blue Chips have gained 11.6%, which was the best two-week run since March of 2000. Without question, everyone knows that the market is over-bought right now. But that’s still not stopping the bulls from buying into the dips. After all, the big question on everyone’s lips is whether Dow 9,000 is an entry point or an exit point? As you can see from the Dow chart below, the battle is still being decided. The two-week run had been dominated with powerful upside days, scattered with small, false-high candlestick formations. As I mentioned above, we’re very over-bought right now. Nevertheless, I still fear that today’s formation is yet another false high.

What’s the best way to play this? Well, the most important tactic is to remain nimble. We must also maintain positions that afford us the opportunity to take quick profits no matter what direction the market is moving. So using this trading metric, we’ll add four new positions below. One will be a put play on a stock that’ll most likely fill the upside gap that it set last week. Two of the other call plays are based on earnings reports that should spark an extended upside move. And the final call play stands to benefit from the major upside moves we’ve seen recently in the emerging biotech sector.

But before getting into these plays, let’s do some house-keeping. The MS August 28 Puts (MS TS) that we entered on July 14^th for $2.45 have hit our pre-determined stop. Although our thesis was right on this position (Morgan reported earnings that were far less impressive than their counterpart, Goldman Sachs), the resulting market sell-off in MS lasted only temporarily. If the stock will not drop on poor results, we’re forced to close it out and move on. Sell.

At the same time, the APOL August 70 Calls (OAQ HN) that we entered on July 22^nd have also hit our stop. As I mentioned, APOL tends to move in the opposite direction of the markets. Therefore, as the market rallied, APOL trended lower. This position was initiated as a way to hit an upside winner on any market pullback. The trouble is, we never saw that pullback happen. Therefore, let’s close off this position as well. Sell.

This leaves us holding the AZO August 160 Calls (AZO HL) and the AIG August 15 Puts (AIG TO). Maintain both positions going forward. AIG continues to look weak, and AZO should find support at the 50-day moving average. Hold.

In terms of our new positions, we have a few things to look over today. First off, cereal and convenience foods maker Kellogg (K – NYSE) is scheduled to report earnings on July 30^th. As you know, fellow consumer goods company General Mills (GIS – NYSE) reported strong numbers back on July 1^st, which pushed the stock up more than 7% over three days (see below). Since GIS was so strong, there’s a possibility that K could report similar numbers. Therefore, let’s get positioned to ride any forthcoming upside in K now!

PLAY: Buy the K August 45 Calls (K HI) at or under $3.10, good for the day. Place a protective stop limit at $1.80 and a pre-determined sniper sell at $5.00.

On the same hand, Visa (V – NYSE) is also scheduled to report earnings on July 29^th. As you know, Visa is a global electronic payments network that facilitates commerce among financial institutions, merchants, consumers, businesses, and government entities. As you can see below, the stock has put in a strong rally alongside the rest of the markets. But considering the fact that Wall Street is now rewarding any company that’s beating severely reduced earnings expectations, Visa could be gearing up for another upward push. Let’s also play this up-move using August calls.

PLAY: Buy the V August 65 Calls (VEH HM) at or under $4.30, good for the day. Place a protective stop limit at $2.00 and a pre-determined sniper sell at $6.50.

Another powerful catalyst that we’ve seen on display lately is the explosive moves in the biotech sector. Human Genome Sciences (HGSI – NASDAQ) gained over 300% last week after reporting promising lupus drug results. And stem cell company Geron (GERN – NASDAQ) (which I just locked in profits over in my LEAPS service) is also blasting higher today as well.

This new-found emphasis on emerging biotech firms paints a strong picture for a company called Affymetrix (AFFX – NASDAQ), that develops the consumables and systems for genetic analysis in the life sciences and clinical health care market. In other words, AFFX sells the “picks and shovels” to support the analysis of genetic data. As you can see below, the stock popped higher after reporting a Q2 profit of $7.3 million ($0.11 per share) compared to a loss of $3.6 million ($0.05 per share) one year earlier. Given the upward movements in the small and emerging biotech firms sparked by promising data, the future for AFFX looks strong. Let’s add calls as well.

PLAY: Buy the AFFX August 7.5 Calls (FIQ HS) at or under $1.00, good for the day. Place a protective stop limit at $0.40 and a pre-determined sniper sell at $2.00.

And finally, just to balance out the ledger, it’s a smart idea to add puts on SunPower Corporation (SPWRA – NASDAQ). Last Friday, the number two U.S. maker of solar panels reported earnings that came in higher than the severely reduced expectations. As you cans see, the stock responded by jumping over 28% on the session. But today, it’s clear that investors are taking their profits off the table.

If this persists, SPWRA has a rather large gap to fill. If I was a SPRWA shareholder, I’d use last week’s pop (combined with today’s dip) to take my money and run. I suspect that other investors will follow this pattern. Therefore, let’s add SPWRA puts to profit off this fall!

PLAY: Buy the SPWRA August 30 Puts (QSU TF) at or under $2.30, good for the day. Place a protective stop limit at $1.40 and a pre-determined sniper sell at $4.00.

HUMOROUS SIDE NOTE: I couldn’t help but laugh this morning when I read that Treasury Secretary Tim Geithner cannot sell his home in Mamaroneck , New York. Apparently, Geithner bought the home in 2004 for $1.602 million, and he put the home on the market in February 2009 for $1.635 million. No takers. Then in March, he cut the price by $60,000. Still no takers. Therefore, Geithner has been forced to rent the house. If things get too out of hand, I’m sure the Geithner family will get bailed out, and the home will get purchased by the U.S. government (using our tax-dollars, of course). Either way, I hope this experience gives Geithner a sense of what most of America is dealing with right now.

As always, I’ll follow up with further trading directions as needed. Until then…

Lock and load!

Sincerely,