The Best Month Since 1939

Can the Dow Rally Extend into August?

By Bryan Bottarelli
Friday, July 31, 2009 1:52 PM EDT
Fri, 31 Jul 2009 17:52:00 GMT

Dear Bottarelli Research Member,

With less than half of the trading session to go, the Dow is aiming for its best month since 1939. It’s hard to believe that the Dow has gained over 1,000 points in July, fueled primarily by companies that have beaten severely reduced earnings expectations.

What’s worse, virtually every single talking head on today’s top financial programs has bought into the rally 100%. This morning, for example, I listened to two analysts who said that Dow 10,000 is now a lock. One even said it would occur next month.

I get really nervous when everyone is on the same side of a market. Now I admit, I’ll gladly be the first one in line to profit off a new bull market. But I’ve been trading long enough to know that the markets do not go straight up forever. Out of the 22 trading sessions in July, the Dow had registered a gain in 17 of them. That’s a remarkably one-sided market. When the bulls run out of steam, we’ll certainly re-test the 50-day moving average at 8,500. See the annotated chart below:

INDU

The trick, of course, is to quickly isolate when the bulls will run out of steam. As of today, we’re still seeing a market that refuses to trade lower on negative news. According to a report today from Bloomberg, for example, the first 12 months of the U.S. recession saw the economy shrink more than twice as much as previously estimated.

According to the Commerce Department, the U.S. economy contracted 1.9% from Q4 2007 to the last three months of 2008, compared with the 0.8% drop that was previously reported. This new figure reflected even bigger declines in consumer spending and housing. In fact, consumer spending (which makes up 70% of our economy) dropped 1.8% from Q4 2008. And yet, the market still refuses to trade lower. This tells me that the upside trend is still holding strong.

But the higher we go, the more cautious we must be. After all, we all witnessed just how much the commodity sector can dip if China (or oil prices) exhibit and signs of weakness. The moment the tide turns, the resulting drop could be precipitous. Therefore, going into next week, I’d like to remain positioned in all of our current holdings. The ICE August 100 Calls (IHH HT) offer us upside exposure should the rally extend. Despite a dip today, ICE still looks strong.

ICE

I’d also like to remain in the DO August 90 Puts (DO TH) and the BG August 65 Puts (BGW TM). Despite today’s up-ticks in both DO and BG, the powerful red candlestick formations from Wednesday signal that the underlying strength is losing steam. If you adhered to the protective stop loss on BG, then you have sold this position. But for anyone still holding, I’ll continue to monitor it going into next week.

BG

Aside from that, I’ll refrain from making any new trades this week. So until next Monday, have a good weekend. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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