February 2009

We continue to look for the right spot to short this foul hoax. Earlier, I’d suggested the possibility of simply going for it, buying puts without using a specific rally target. However, option volatilities are so breathtakingly high at the moment — put options that are $30 out-of-the-money are going for nearly $700 apiece — that we can ill afford to initiate a short position other than at the most opportune moment. Stay tuned!

DXY played toes-ies yesterday with a Hidden Pivot resistance at 87.94, hitting an intraday recovery high of 87.87. This is crucial territory for the dollar, and if the rally relapses without going any higher it could signal an impending bout of weakness. The key number on the way down today, assuming the Dollar Index falls, is 87.49, a Hidden Pivot midpoint. If it is breached, weakness could continue all the way down to 87.11 over the near-term.

The pattern shown in the chart speaks with authority, especially since the visual symmetry of the AB and CD legs is somewhat obscured. The downside target is 730.75 — a bit lower than the one given here yesterday — and it looks like an opportune spot to try bottom-fishing, provided it is hit before the final hour of the session. Bears should dive for cover, however, if, over the next few days, ES reverses and hits 797.00 before 730.75. That would be extremely bullish, even if unfathomable. _______ UPDATE: The futures got pulped overnight, hitting a low before the opening of 729.50. Traders using a stop-loss as tight as 1.50 would have been on board for the bounce that ensued. If you still hold a position as of the opening, I’d recommend using a trailing stop that would ensure a profit of at least 5.00 points, or $250 per contract. Immediate upside potential was to 741.00, a Hidden Pivot. (Note: The bounce had reached 746.75 an hour into the session, although there was a pullback before then from 743.00 that would likely have stopped out most longs.)

Gold’s dip yesterday beneath a 934.90 pivot is not a healthy sign. The actual low was 932.20, and that’s enough of a breach to suggest more weakness ahead. The bearish outlook for the near term would be diminished — though not negated — by a rally exceeding 950.40 overnight, since that would create a bullish impulse leg on the hourly chart. However, we won’t breathe a sigh of relief until the futures exceed Wednesday’s 979.70 peak — and the sooner the better.

There are no promising Hidden Pivots we might use to get short right now, but if the nasty little s.o.b. should push on up toward resistance peaks near 98 that were recorded earlier this month, it would be tempting to toss pivots aside and simply short the stock for the sheer fun of it. For now, though, Goldman shares have been acting too mean to risk jumping on.

Since yesterday’s conniptions failed to boost the futures above the look-to-the-left peak shown in the chart, I’m inclined to give the somewhat larger downtrend the benefit of the doubt. It projects to 732.75, with a midpoint support at 756.00 that has already been compromised. The pattern is so gnarly that it shows promise as a place to try bottom-fishing. Accordingly, I will recommend that you do so if the futures dive to the target before the final hour. A stop-loss at 731.75 would be appropriate.

We bought six June 25 puts yesterday for an average of 1.33. With a delta value of 16, the puts make us short the equivalent of 96 shares, but that value will increase if GDX continues to fall. (This is the “backspread effect”). Let’s try to lock in a riskless profit by shorting six June 23 puts (GBJRW) for 1.35 against our position. Make the order good-till-canceled. If it’s filled, we’ll have legged into the June 25-June 23 put spread at no cost. The total position at that point would have $1,200 of profit potential and no possible loss — a riskless hedge against weakness in gold shares. Regarding the underlying stock, my worst-case target for the next 3-5 days is 30.70, predicated on the breach of a midpoint support at 32.72. Both of these Hidden Pivot targets are shown in the accompanying chart.

Gold got off to a promising start yesterday morning with a strong impulse leg on the hourly chart, but there were minor signs of weakness even as we were examining the rally under a microscope during the weekly tutorial session. The rally subsequently turned ugly, mutating into a downtrend that projects to 934.90. This target is quite clear, so its breach, even by as little as 1.50, would be solid evidence that more selling awaits. If so, a Hidden Pivot at 924.20 can be used as a minimum downside projection. One last note: Either of the two supports can be bottom-fished with a stop-loss as tight as you can manage.