Out of Hibernation?

Will the Bears Keep the Dow Below 10,000?

By Bryan Bottarelli
Thursday, September 24, 2009 11:59 AM EDT
Thu, 24 Sep 2009 15:59:00 GMT

PLAY: Buy the BEN October 100 Puts (BEN VT) at or under $4.00, good for the day. Place a protective stop limit at $2.80 and a sniper sell at $6.00.

PLAY: Buy the POT October 90 Puts (PYP VR) at or under $3.00, good for the day. Place a protective stop limit at $2.10 and a sniper sell at $5.50.

Dear Bottarelli Research Member,

Don’t look now, but the bears have come out of hibernation. And they’re hungry. Just when the entire investing community basically accepted the fact that the Dow would reach 10,000, we’ve seen a series of two quick and decisive downside moves. These two moves – both of which erased earlier session gains – have changed the conversation entirely. Here is today’s updated Dow chart:

INDU

As it stands, I’m not entirely comfortable with either market direction right now. It’s all a matter of what’s happening in a particular hour (or even minute). But based on the last two days of selling pressure, it’s now time to scan the market for the best downside put candidates. That means we’ll scan for those companies that have moved tremendously higher over the last few months – but now have the most room to fall. Truth be told, as I perform this scan, I can make a bearish case for virtually every company I come across. But the trick is to isolate the high-beta plays that could come under the most fire. Today, I’ll offer you two such opportunities.

The first comes in the form of Franklin Resources (BEN – NYSE). As you can see from the chart, BEN could easily drop $10.00 to re-test the 50-day MA support at $90.00. Let’s ride this downside using October puts.

BEN

PLAY: Buy the BEN October 100 Puts (BEN VT) at or under $4.00, good for the day. Place a protective stop limit at $2.80 and a sniper sell at $6.00.

As a more speculative play, let’s also play a downside move on Potash of Saskatchewan (POT – NYSE). While potash demand is “expected” to increase in 2010, POT just lowered their revenue guidance for the remainder of 2009. Since the company is basically writing off 2009, this could indicate stock price weakness for the remainder of the year. Let’s play this weakness using October puts now.

POT

PLAY: Buy the POT October 90 Puts (PYP VR) at or under $3.00, good for the day. Place a protective stop limit at $2.10 and a sniper sell at $5.50.

In terms of the “careful speculation” plays that we made yesterday, both of them dipped at the open and have since recovered. In particular, the MELI October 40 Calls (QMB JH) Calls have fully recovered, and now trade at our exact entry price of $1.55. This market is truly amazing, as these intra-day moves are both incomprehensible and inconclusive. Based on this action, I’ll continue to follow the MELI play, as it’s our only position left that offers upside exposure. When it comes to our QID October 23 Puts (QOI VW), let’s officially close out this position now at a small loss. This will trim our upside exposure to a more manageable level.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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