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Unilever may be bullish bet are S&P shuffle

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All was well for a Unilever (NYSE:UN) $56.51 -0.03% bull on July 10, 2002. After all, the stock was just off it recent 52-week high at $65.12 (52-week high was $67.09) when Standard & Poor's announced later that night that it wanted to re-shuffle its popular S&P 500 Index to reflect a "more American" market index.

As a result, 7 of the stocks coming out have suffered some downside action as market participants braced themselves for a surge in selling of shares of stocks that were being removed, while demand should have grown for those being added.

I'm not sure if the Netherlands-based Unilever (UN) has seen its consumer goods sales of food, household and personal care sales decline like the stock has due to the S&P 500 impact on supply/demand for the stock, and this "re-shuffling" might provide a bullish trader with an opportunity.

My thinking here is.... up until July 10th's close, it didn't appear that the MARKET had any type of "bearish thoughts" as it relates to Unilever, at least not until that evenings surprise came from the Standard & Poors.

Unilever Chart - Daily Interval

I think that UN was a "bullish" stock where fundamental type institutions were doing well in the stock and may be looking to buy some liquidity on the S&P reshuffling. Shares of UN have found some "suspicious" support at the 38.2% retracement of $56.42. Bullish traders may want to monitor this stock near the close tomorrow. We "know" that the bulk of the supply (selling) has probably come from the stock being removed from the S&P 500 and indexed mutual funds. Should that supply dry up next week, look for a trading rally to $60.

I looked at the UN Aug. $55 calls (UNHK), but they're a little pricey at $3.60 if playing a pop to $60. Therefore, I think a better trade would be to try and get the stock tomorrow, prior to the close somewhere near the $56.50 level, then look for a rally to $60 as target. An "investor bull" might even consider buying the stock as outlined above, then look to sell a covered call on a rally to $60, with the thought of selling some "jacked up" premiums under current market conditions. A stop for bullish trades could be placed just under the recent low of $55.34.

Jeff Bailey
Senior Market Technician
Option Investor

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