Thursday, February 26, 2009

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.