On down days like Monday, it’s so easy to see red and ponder "if only" or "what if", but profits arise from seeking and finding opportunities. And today, many bright spots appeared in the midst of the stormy weather. Before we get to those bright spots, however, note that the storm wasn’t nearly as bad as it may first have appeared. The Russell intra-day dropped all the way to its 20-day EMA, but bounced substantially to almost regain its 5-day EMA. It is apparent from the chart that the drop today did nothing to derail the uptrend. We’ll need to wait a few more weeks to discover the fate of the bear call we placed a few weeks back. So far, nothing to worry about it.
The Dow was down over 200 points at one stage, but finished the day down 134 points to finish at 12,503. The NASDAQ fell back below the 2,500 level, finishing down 31 points to 2,491. News items for the day included British lender, Bradford & Bingley selling a 23% stake to a US private equity firm. Add to that Standard & Poor’s downgrade of Lehman Brothers, Morgan Stanley, and Merrill Lynch. S&P also moved Banc of America and JP Morgan to a negative outlook. Further fuel was added to the fire as the S&P stated they could see additional write-downs and "sharp deterioration" in residential construction and mortgage loan virtual portfolios.
Further bad news came in the form May’s ISM index showing a fourth straight decline and Construction Spending dropped in April for the sixth time in seven months. No shocker there!
Plus Wachovia’s CEO, Ken Thompson, was fired and Washington Mutual’s CEO Kerry Killinger lost his role as Chairman.
One of the bright spots today was the FXI, which dipped menacinlgly to its 50-day MA today, before rising back above its 5-day EMA and displaying a candle that straddled its 20-day EMA. We don’t anticipate any issues for our bull put spread that was entered precisely at the last bottom around $150 a few weeks back. Again, nothing to worry about.
We have mentioned Nvidia quite a few times in recent weeks in our blog articles and its strength was noteworthy again today. Today, it reached its upper Bollinger Band, often a favorite price target of technical analysts during uptrends. All this in spite of a big drop in the major indexes during the day.
We backed up our call in oil by placing a bullish trade on the DUG recently and nothing in today’s price action gave us any cause for concern today; the DUG remained above its 5-day EMA.
Moving past the bright spots to the areas of concern! The FXE continued its downtrend today and we expect to run into some short-term trouble, but expect we will be in good shape on our trade by expiration. In the short-term, we expect the FXE could drop down to support at $154.
One of our members asked us recently about how to play copper and while it is not easy to find direct ways to play Copper, the DBB offers a possibility with exposure to copper as well as aluminium and zinc.
The bottom line: The market pull back today was very orderly after last week’s run up and we believe aggressive traders should strongly consider stocks in the banking and brokerage areas right now due to compelling reward to risk ratios. Scaling in at this stage should reward disciplined traders by the end of the year. The rest of the market should follow later.
Stock & Option Trades
