Weakness Ahead?

Dow and Nasdaq Tapping Resistance

PLAY: Buy more RIMM March 70 Puts (O:RIMM 10O70.00) at market, good for the day. Lower your protective stop limit to $1.60.

Dear Bottarelli Research Member,

Congratulations on two nice winners on Barrick Gold (ABX – NYSE) and Career Education Corp. (CECO – NASDAQ).I hope you’re starting to see the power of our earnings strangle strategy. In short, if the stock makes a big earnings reaction, it’ll hand you a return above 50%. If a stock makes a semi-muted reaction (which is what we’ve seen on CECO and ABX), then we can lock in a gain between 15% and 30%.

And then, if the stock makes a very minimal earnings reaction (like ANF), then we have a break-even proposition. At this point, we must trade around the play to turn it into a winner.

Either way, we’re looking at a break-even as our worst-case proposition and a substantial winner as our best-case scenario. Those are the type of odds that make traders rich.

Now, looking at the Dow and the NASDAQ charts below, I can’t say that I like what I see. As you can clearly see, both indices are bumping their heads against resistance at their 50-day moving averages. Since today’s market seems a little exhausted, I would expect to see today’s strength roll over into weakness.

Therefore, I’d like to increase our downside exposure by adding to our Research in Motion (RIMM – NASDAQ) position. As you know, we entered the RIMM March 70 Puts (O:RIMM 10O70.00) on Tuesday for $3.20, and they’re now trading at $2.30. Let’s lower our cost basis and at the same time increase our downside exposure.

PLAY: Buy more RIMM March 70 Puts (O:RIMM 10O70.00) at market, good for the day. Lower your protective stop limit to $1.60.

Going forward, let’s also maintain our two earnings positions on DLTR and GRMN. Specifically, hold the DLTR March 50 Calls (O:DLTR 10C50.00) and DLTR March 49 Puts (O:DLTR 10O49.00), which we entered yesterday for $2.95. Hold.

Also hold the GRMN March 33 Calls (O:GRMN 10C33.00) and GRMN March 32 Puts (O:GRMN 10O32.00), which we also entered yesterday for $3.36. Hold.

We’re also holding SHLD March 95 Calls (O:SHLD 10C95.00), which we entered yesterday for $3.90. Based on SHLD’s short position, any weakness could spark a new rally. Hold.

We’re also holding the ANF March 32 Puts (O:ANF 10O32.00), which give our overall position a break-even at the $0.66 level. From a chart perspective, it looks like ANF can roll over at anytime. Hold.

And finally, we’re holding the MOS March 60 Calls (O:MOS 10C60.00), which we entered yesterday for $3.45. If MOS can hold the line at the 50-day moving average, we’ll be fine. Hold.

In terms of new plays, keep an eye on VMware (VMW – NASDAQ). If the stock sets a double-top at $49.00, the resulting down move could offer us a really nice put winner. If a proper failure triggers, you’ll be the first to know.

But until then…

Lock and load!

Sincerely,