Friday, September 4, 2009

The futures pushed slightly above a 16.265 pivot that had served as a short-term, minimum upside objective. The overshoot hints of further upside progress, presumably to the next Hidden Pivot resistance worth noting, ______.

Check out the pre-holiday special in the Diamonds if you trust Mr Market about as far as you could heave a Bosendorfer.  The idea of a strong rally today, followed by a devastating collapse immediately after summer's last fling, sounded too sexy to pass up.

I usually ignore hot tips, but a pen-pal of mine, Phil C., sent me a breathless, totally out-of-the-blue alert predicting that the Dow would rally 100-150 points this morning, forming a top from which it will collapse when traders return after Labor Day.  Putting aside the details, this sounds so absolutely right to me that I'm inclined to speculate modestly.  Mr Market loves to spring dirty, stinking, vicious surprises whenever possible, and what could be more vicious -- or more surprising -- than a tsunami to greet us as we return from our final summer vacation, tan, rested and anything but ready?  To get short, we can use the midpoint resistance at _____ shown in the chart, buying two September _____ puts if and when the Diamonds get there.

All are ducks are in line now that we've successfully legged into the December 12.50-15.00 call spread eight times for a net CREDIT of 0.15 per.  The short sale of some December 15 calls for 0.45 yesterday morning clinched it, allowing us to capture premium in this series when the options were fat and juicy. Let's put in a stink bid of 0.20 to cover the December 15s, good through Wednesday. It would be worth our while to get 'em in at that price if we can do so within the next few days. Our goal would then be to re-short them on  rally.

We're no fans of head-and-shoulder formations, since they are everywhere the amateur chartist might want to find them. But there is something to be said for the bullish reverse head-and-shoulders pattern that gold futures have been tracing out for the last year-and-a-half. The pattern is shown in the chart below, and it is predicting that December Gold, which settled yesterday at 997.70, its highest close since February, is about to run up to $1060. Trouble is, just about everyone we know thinks gold is about to pop to 1060, give or take. Or nearly everyone, anyway. Someone mentioned in the Rick's Picks chat room that CNBC's Ron Insana can't imagine why gold has been so strong. Earth to Ron:  Put down that copy of the New York Times for a minute and try browsing Goldseek, Kitco and Gold-Eagle. That'll jump-start your imagination. A little hoopla is natural every time gold butts up against $1000, as it has done no fewer than four times so far this year. Old-timers might remember the excitement on Wall Street when the Dow Industrials in 1966 first approached 1000. Few would have imagined at the time that it would be another 16 year before the Industrial Average finally leapt past 1000.  We don't think gold bugs will have so long to wait, although some of them might tell you they've already waited for nearly 30 years for gold to deliver on the promise of its spike to an $850 in 1980.  $1175 on Comex December? Head-and-shoulders patterns aside, just about every decent technician we know is looking for a breakout above $1000 right now.  One of the very best of them, Institutional Advisors' Ross Clark, the Mozart of the charting world, is focusing on a triangle pattern that encompasses the right side of our motley H&S formation.

The following questions about my option strategies came up in the forum, but I am republishing them here because they may be of interest to a wider audience: What is the advantage of going long one call, and then locking in a given spread via shorting another call, versus “locking-in” the spread by going long on puts instead? My answer below is more generalized, but to address your specific point, we should prefer to "lock in" a profit by shorting a wasting asset rather than buying one ourselves.  For most option traders most of the time, shorting calls is MUCH more profitable than buying puts.  Indeed, in the several decades I have been trading options,  I cannot recall a instance when put buyers were happy for more than three consecutive days.  Even those who owned puts ahead of the 1987 crash had just two days of sheer bliss to get rid of them. Is it that in the latter scenario, one is long twice, and can thus get screwed twice by the pros? I always thought the latter scenario would be a good one in cases of low implied volatility, where the loss on one is mitigated, and the gain in the other is increased when implied volatility rises during larger underlying moves. (That may just be retail-customer theory, which the pros have long beaten. But what do I know? I’m still waiting for someone to start offering straight options on the VIX. Thanks! &&&&& The spreads I prefer are intended to provide a highly leveraged shot at big profits, but without the usual, horrendous time decay. This tactic is especially useful if we expect a stock to rise (or fall) over a period of several months. We also seek to take advantage of fleeting spikes that goose option volatilities to the moon.