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Topic of the Week
TODAY'S ACTION for Friday
Rick's Picks for Friday
All our 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. _______ UPDATE: We weren’t able to cover the short December 15 calls, since they never traded below 0.35. However, with the stock pushing toward $13 our position is looking better than ever. We have a chance to make as much as $2120 with SLW trading $15 or higher at expiration, but even if SLW plummets we’ll still make at least $120.
I usually ignore hot tips, but a pen-pal of mine, Phil C., sent me a breathless note 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, nasty surprises whenever possible, and what could be nastier — or more surprising — than a tsunami to greet us as we return from summer’s final fling? To get short, we can use the midpoint resistance at 95.07 shown in the chart, buying two September 93 puts (DAVUO) if and when the Diamonds get there. _______ UPDATE (11:52 a.m.): Stocks are only modestly higher today after an other-then-depressing unemployment report, so a short-squeeze to the levels where we’d wanted to get short seems unlikely. We’ll do nothing officially, but personally I’m going to take a couple of puts home with me over the weekend. My hunch is that the best prices of the day will obtain near the close. (Note: I bought some September 93 puts — DAVUO — for 0.86.)
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, 16.640.
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Trading the E-Mini S&Ps used to be as easy as shooting fish in a barrel, but no longer. In fact, the futures have gotten so cunning when they reverse direction that I’d all but given up on using camouflage tactics to corral them. It’s not that the turns haven’t been occurring precisely where they are supposed to — just that they haven’t been doing so with the kind of subtle abc patterns that yield easy ‘camouflage’ trading opportunities. My hunch is that this behavioral change is the result of machine trading’s growing dominance.
From our standpoint, the way around this problem turns out to have been so obvious that I failed to see it until recently. Very simply, we should go back to trading the E-Minis the old-fashioned way — i.e. without camouflage. This means putting up a bid against the minor trend, which can be scary. But we can mitigate the fear factor by being especially choosy about the kinds of patterns we trade. The one shown in the inset is a case in point. It is what I like to call ‘beautiful-ugly’, meaning that although it is not very abc-like visually — it’s pretty gnarly, actually — it meets our abc criteria perfectly, with a point ‘B’ low that has surpassed out two distinctive ‘external’ lows.
Those who were in the chat room yesterday got a taste of the near-certitude that such price patterns can inspire. With the futures trading around 1790.00, I stated that the E-Mini was bound for a tradable low at exactly 1785.75. (A Tradestation quirk caused me to err by two ticks, but several chat-roomers got the 1786.25 Hidden Pivot target precisely right.) An hour later, with the futures still noodling around a few points north of the target, I posted the following: “[The E-Mini] is taking its time getting there, but it doesn’t have any choice about it. The trade desks of the world are the unwitting lackeys of Hidden Pivots.”
So it would seem. A short while later, with about 100 minutes left in the session, the futures made their final descent to an intraday low at…1786.25. At least one person in the room reported nailing the trade and coming away with a quick profit of $200. This was the second day in a row that the futures bottomed exactly where we’d expected. A cheap parlor trick, for sure, but one that anyone can learn. To reserve your seat for the upcoming Hidden Pivot/Camouflage Trading Webinar on December 11-12, or to find out more about it, click here. The early-bird special is still valid for a $560 discount.
At the Mining & Minerals Conference that I attended last week in San Francisco, I found Altius still to be high on the list of many savvy investors. With $130 million cash in reserve and a royalty stream that nicely offsets fixed outlays of $5 million per year, the company is well positioned to ride out whatever further pain bullion’s bear market inflicts on investors. Altius is waist-deep in iron ore investments these days, causing some to remark that bullion is no longer much of a concern to the company. This is an exaggeration, but investors should be happy in any case that the firm is doing what it takes to survive gold’s fall from $1900 to a recent $1220.
From a technical standpoint, the stock has been in a holding pattern centered on a $9-$11 range for more than three years. The weekly chart shows ‘dueling impulse legs’, implying that the tedious battle between bulls and bears could continue for yet some time, perhaps with an exhaustion skew down to $8 or a little lower. At that price, especially considering Altius’ enviable cash position, the stock would represent a back-up-the-truck buying opportunity.
We hold twelve December 145 puts, offset in ’straddle’ fashion by bullish NFLX call spreads we own. To simplify accounting, and to consolidate the risk, I’ve imputed the cost of the puts to the NFLX position so that we now hold eight December 400-410 calls spreads with an effective cost basis of 0.55. Keep in mind, however, that the DIA puts still have value. As such, I’ll recommend that you offer them to close, good-till-canceled, for 0.02 less than the market makers. To do this, wait until the options have opened each day to see what bid/asked is being reflected by DaRapacious Dirtballs. At the moment, they are showing a bid of 0.06 and and offer of 0.12 (!). This means you should be offering the puts for 0.10. Please notify me in the chat room if your order fills, since it would be nice to have the puts off the sheets even though we are carrying them for zero.
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In the current forum discussion, Cam Fitzgerald focuses on coffee’s bear market to provide some lucid insights into the deflationary dynamic at work in the commodity markets. He notes that although the price of coffee beans has collapsed, falling by two-thirds since 2011, Starbucks is still charging the same four bucks for a large latte. This profit-friendly anomaly has held true for many other companies that benefit from a widening spread between commodity prices and end products. It would seem to flout the laws of supply and demand, but Cam says the textbook relationship will reassert itself with a vengeance as consumers become increasingly frugal under the weight of a deepening Great Recession.
From a technical standpoint, his theory looks quite solid. The weekly chart (see inset) implies that a pound of coffee currently trading on NYMEX for $1.03 is about to fall by half. If the futures were in fact to achieve the Hidden Pivot target of 53 cents, that would represent an 83% drop from 2011’s all-time high of $3.08. Coffee lovers may have something to look forward to, but they should be careful what they wish for, since the implication of coffee beans selling for 50 cents a pound is that the world by then will be chest-deep in a deflation of falling wages, plummeting asset values and significantly lower corporate profits.
A query in the chat room Friday concerning the Dow Transports sent me to the charts in search of the inevitable rally-stopping Hidden Pivot. The index has been on a tear this year, up 35% since January. Much of the gain can probably be attributed to a new airline business model that has been great for carriers but horrible for passengers. We’re talking about things like Spirit’s $35 charge for storing carry-ons in the overhead bin. Lower fuel costs have also helped, especially since the carriers have evidently chosen not to share any of this windfall with passengers via lower ticket prices. And no passenger who has sat in the increasingly cramped economy section can be unaware that capacity has shrunk so drastically that nearly all flight are full or nearly so.
Perhaps it will be the full-force resumption of The Great Recession that stops the rally cold. In any case, the 7444 target shown, representing a 6 percent premium over Friday’s closing price, looks formidable enough to provide more than a little challenge for bulls. Those who trade this vehicle or related issues can use it as a minimum upside objective for now, but you’ll want to reverse the position and go short — tightly stopped, of course — if and when it is reached. _______ UPDATE (November 5, 8:45 p.m. EST): If it’s going to be an easy cruise to the 7444 rally target noted above, we should see the correction from Monday’s high reverse today from near the 7077 midpoint support (see inset), but certainly from no lower than the d correction target at 7042. More downside than that could be our first, subtle warning that all is not well with the Transports, which have flourished even as airline profits have soared on a suicidal model that would nickel-and-dime passengers to death. _______ UPDATE (November 19): You go, girl! Wall Street’s best and brightest fly first class, presumably desensitizing them to the fact that the fabulous recovery in airline profits that has helped push the Transports into a vertical climb is being driven by the steep deterioration in amenities once enjoyed by passengers, even those who flew economy.
My outlook has been bearish, with a 45.29 downside target, notwithstanding a couple of short-covering eruptions along the way. I am now lowering the target to 43.83, however, on the basis of the chart shown. Your trading bias should be bearish until the target is reached, or very nearly reached, but if and when that occurs, you should reverse the position and get long with a stop-loss as tight as 0.20 cents. I’d suggest a good-till-canceled bid of 43.88, since it’s possible the stock will turn without quite having reached our number. If the order fills and survives the stop, tune to the chat room or this page for further guidance. _______ UPDATE (November 13, 8:33 p.m. EST): The stock has lost my interest and attention, so I’m taking it off the front page for a while. One final note, however, that could prove useful to camouflage traders: At Wednesday’s closing bell, it reversed the bearish polarity of the last three weeks with the bullish impulse leg shown (see inset, a fresh chart). ________ UPDATE (November 26): After taking its sweet old time reaching my 43.83 target, Facebook has taken a lunatic bounce this morning from within 23 cents of it, hitting a so far high of 46.08. If you loaded up near the low, please let me know in the chat room and I’ll provide tracking guidance. Whatever you may have bought, half should have been exited by now for a partial gain.
This Just In... for Friday
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!
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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. If, for instance, SLW opens on a gap this morning (it did), we may have a chance to short Dec 15 calls when they are hugely overvalued — sell them, perhaps, for even more than the 0.45 we’d intended. (They topped at 0.50 before receding with the tide.). And, of course, we do so with the expectation that Silver Wheaton will be strong in the coming months, but not so strong that the December 15 calls will go in-the-money. We may ultimately decide to exercise our December 12.50s, a step in building a long-term position. RA
Were you aware that the Bureau of Labor calculates unemployment in various and sundry ways that are not shared with the press? Neither were we — until we heard about ‘U-6,” which reckoned U.S. joblessness at 14.8 percent back in February. We would assume it’s much higher now, but unfortunately February was the last month given. Incidentally, if 1933’s rate of 24.7 percent had been calculated using today’s dubious metrics, it supposedly would have been lower by at least five to ten percentage points. Click here for the link.
Hidden Pivot Webinar & Tutorials
The Hidden Pivot Webinar is two-day event is designed to teach you the risk-averse trading strategies Rick has taken to his seminars around the world. Once you have learned his proprietary secrets, you will approach trading and investing with enough confidence to make your own decisions without having to rely on the advice of others. The next Webinar will take place on December 11-12, 2013. For more information, or to register, click here.
With $1000 Looming, Gold Fever Is Back
by Rick Ackerman on September 4, 2009 2:15 am GMT · 5 comments
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 » Read the full article