Leading Into Friday’s Jobs Report

Maintain Positions for Now

Dear Bottarelli Research Member,

So far, the first trading week of 2010 has been incredibly choppy. As you can tell from our trades this week, the markets are not offering too many extended rallies that we can capitalize on. As a result, we’re left taking quick profits off the table before they evaporate into thin air. Why is this occurring, you ask? Well, take a quick look at the Dow chart, and you’ll get your answer.

As you can see, the Dow has been trading in a tight range between 10,400 and 10,600. Like a group of dogs at the park, the bulls and bears are all engaging in a big session of butt-sniffing – which has left everyone unclear as to how to get positioned for the next move. A breakdown to 10,300, for example, is certainly possible. In fact, this would be a classic pullback within a bull-market trend. Then again, a breakout above 10,600 would spark a push toward new highs. So we’re left with a market that’s just waiting for a reason to engage in either more. But the indecision won’t last long. Tomorrow’s release of the U.S. unemployment data will spark the next major move. The jobless rate is expected to come in at 10.1%, up slightly from one month ago. But how the government fudges the numbers (oops, I mean “reports” the numbers) will certainly be the catalyst for the next major push.

So, from a trading perspective, the most logical approach leading into this sort of market-moving event is to have exposure to both sides of the coin. As it stands, we’re currently holding the CTRP February 75 Puts (QCT NO), which we entered yesterday for $5.30. As I write, these calls hit a high of $5.70, so the weakness in the online travel sector continues. Hold for more gains.

We’re also holding the DV February 55 Puts (DV NK), which we entered on Tuesday for $2.45. This position has been slightly concerning, as the breakdown that we expected below $56.00 sparked an intra-day move down to $54.52, putting our position into the profit zone. But just as quickly as this move occurred, DV snapped back in an intra-day basis, and has shown strength ever since. When it comes to the for-profit education sector, the entire group is very susceptible to news. After all, when you rely on government-issued student loans for 85% of your revenues, any sign of a possible disturbance in this money-train could cause panic.

Now, in my humble opinion, a strong jobs report tomorrow could be bad news for DV. After all, more people finding work means less student enrollment at DV. But, as logical as this may sound, Wall Street doesn’t always behave in a logical manner. Therefore, we must be cautious. As I write, DV is running on fumes. The stock is up $1.00 on volume of 230,000 shares, which is far below its average daily volume of 800,000 shares. In other words, if the gravity that’s holding this stock up quickly evaporates, it could fall back down rather quickly. So for now, let’s maintain our downside bias and hold the play. But, if shares of DV tick back above the $57.64 level, do not wait for my signal. That would translate into an immediate sell. Here’s the advice going forward…

PLAY: Sell your DV February 55 Puts (DV NK) if shares of DV trade above $57.64, good for the day. Otherwise, maintain your position.

And lastly, we have our GMCR February 85 Calls (QGM BQ). As you can see, GMCR traded up to $85.00, which handed us a small profit on our calls before falling back to current levels around $81.68. We’re down slightly from our $5.00 entry price, but if the jobs report tomorrow is strong, we’ll certainly want to have upside exposure. Hold.

At this point, I don’t want to add any further positions to the ledger. Rather, I’d like to see how tomorrow’s jobs report affects the markets, and then we’ll devise the next strategy from there.

So until then…

Lock and load!

Sincerely,