Thursday, October 2, 2008

From a trading standpoint, I don't see much to enthuse about in the hourly chart, although it seems clear that rallies yesterday and Tuesday were fakes, since neither exceeded two prior peaks on the hourly chart. I have no targets to offer if another fake rally materializes today, but on weakness look for the futures to come down to at least 1119.25, a Hidden Pivot, or to 1063.00 if they close for two days beneath it. _______ UPDATE: The futures plummeted to within a single tick of the 1119.25 target, making a low that held for an hour and which yielded an easily tradable bounce of 10 points. The subsequent breach of the support at day's end, albeit by just 4 points, implies more weakness is coming.

Gold continues to pussyfoot, failing to launch toward a 1014.70 target even when the global financial system was teetering on the brink earlier this week. Could bullion be reading a deflationary outcome from any bailout attempt? It is a possibility that we cannot afford to ignore. Although I still believe gold will outperform all other investables in a crisis, be it inflationary or deflationary, it makes sense to hedge the downside so that we can comfortably hold a long position even in the most adverse circumstances. In practical terms, that implies buying insurance at targeted rally tops. For now, however, I'll stick with my earlier stipulation that December Gold close for two straight days above 921.60 before we infer that $1,000+ is a done deal. _______ UPDATE: Gold was getting shredded overnight on news that the Senate had passed the bailout package. The dollar was higher, presumably with the unsubtle, coerced support of Japan and Europe, but stock index futures appeared to be struggling to get back to even. As of 3:40 a.m. EDT, the December Comex contract had traded as low as 867.40, a tad shy of a midpoint pivot at 862.70 that we can use as a minimum downside objective. A decisive breach could spell more weakness over the near term to as low as 826.80. ________ FURTHER UPDATE: Gold fell hard and was down more than $50 at one point, but it didn't quite get down to the target, turning instead from 833.50. This is a speculatively bullish sign, but we'd need to see a print at 855.70 by week's end to infer a probable resumption of the bull cycle begun three weeks ago from 739.80.

I'll assume four November 20 puts bought for 1.60, since the alternative November 15 puts were ridiculously overpriced relative to the 0.21 fair value I'd estimated. Since the January 20 puts (CMD) are a better relative value right now, let's try to buy a few of those as well, bidding 1.90 for two of them, and 1.80 for two more, and 1.70 for two more, day order. _______ UPDATE: Sleazeball market makers jumped ahead of our bid, buying January 20 puts for 1.95. The way to defend against this tactic is to monitor the bid closely, at sporadic intervals bidding a penny or two more than what is reflected. Also, keep in mind that whatever "official" bid the dirtballs are disseminating, it will tend to be well below fair value for relatively illiquid series such as we were attempting to buy.

The nearest resistance is a Hidden Pivot midpoint at 29.04, so let's plan on buying two January 30 puts (MOJMF) if the stock trades there. If you want to park a limit order with your broker to execute this order (risking going unfilled, though not overpaying), make it 4.60 bid. This is a day order. Merrill's upside potential is to 36.04 if it smashes through our number, so let's plan on stopping ourselves out if the stock trades 30.01 or higher. _______ UPDATE: Merrill collapsed after peaking at 29.25 a day after we canceled the order. If you did it anyway, I'd suggest selling one of the puts on the current bid, 8.20. That would give you a cost basis of 1.00 for the put that remains.