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Topic of the Week
TODAY'S ACTION for Wednesday
Rick's Picks for Wednesday
The 1053.00 target given here yesterday remains valid, but the bullish case for the near term was weakened by the fact that all of yesterday’s action took place below a 1027.75 peak recorded on the way down a week ago. Because the plunge from that peak would have trapped many bulls, we should regard it as daunting if not impermeable. If the futures take a stab at it today, the effort should be considered ineffectual unless it exceeds the look-to-the-left peak at 1031.00 recorded on August 30.
Yesterday’s breakdown was serious, although I’d stipulated that DXY close for two consecutive days below 77.54 before we assume the worst. Tentatively, however, we’ll look for a quick drop to at least 76.05, or to 75.57, the Hidden Pivot given here originally, if any lower. My worst case number for the period preceeding the G-20 meeting in Pittsburgh at month’s end is 72.93. My hunch is that such pronounced weakness in the dollar is unlikely ahead of the meeting, but if it comes, stocks are going to fall too, and steeply.
Silver’s most recent peak at 16.860 fell 8 cents shy of a clear Hidden Pivot at 16.940, so we should assume the December contract has at least a little further to go before it hits something solid. Position traders should consider lightening up, with the goal of replacing on the pullback any shares sold near the target. If the futures close above 16.940 for two consecutive days, or trade more than 10 cents above it intraday, that would be a very bullish sign going forward.
Yesterday’s patently spurious plunge should look more like a swoon by Wednesday mid-morning, when I expect gold will have recovered. The sell-off was very obviously caused by the nasty bull trap that ran stops placed slightly above a 1008.80 high made shortly after 4 a.m. In a bigger picture, the 1074.50 target given here earlier remains valid, although I should introduce another, lesser one at 1016.60 that looks capable of showing some stopping power. The less stopping power it displays, the more quickly and powerfully the next thrust is likely to develop.
Weak when the market was strong a short while back, NFLX has rallied sharply this week as the Dow has plummeted. Go figure. We hold a bull call spread expiring next Friday that we’d nearly given up for dead, and although it is still well out of the money, it has started to perk up. Yesterday we did some pruning, turning our eight December 400-410 spreads into a ratio spread. We did this by selling half of the December 400s, so that we are now long four of them against eight short 410s. Do the math and you’ll see that our position will be profitable between $400 and around $415 at expiration. It would start to lose money above that; however, with the stock currently trading around $373, we should be so fortunate as to have to worry about the 410s biting us in the ass. Long before that would happen, our long 400s would spring to life and give us a good chance to exit profitably before the options expire. The one caveat is that NFLX could explode for 50 points in a single day, turning our ‘front spread’ (i.e., negative-gamma) position lethal. To deal with this risk, we’ll plan on buying a few Dec 415 calls when they are offered for nearly nothing. They were fetching around 0.25 at yesterday’s close, but their value will sink quickly if there’s even a hint of a stall in NFLX’s steep rally today or Monday.
Incidentally, our bull spread was part of an ostensible ’straddle’ balanced by DIA put options. We folded the cost of those now-worthless puts into the NFLX spread, but also took partial profits in NFLX on the way up, so that our all-in sost has been reduced to just $190. Whenever we buy options, we treat out-of-the-money puts as having a value of zero, and calls as having only a slightly higher value. This is justified because most options purchased by retail customers expire worthless. It is the ’sell side’ of the game that makes money, but the most lucrative strategies are out-of-bounds for customers because of the steep margin requirements involved.
In the end, it takes all of the knowledge I have accumulated in nearly 40 years of option trading to have even a modest ‘positive expectation’ on a given trade. Fortunately, though, it is fairly easy to zero-out the cost of an option position by taking a partial profit at the first opportunity. This we do routinely, leaving us with positions that usually cannot lose a dime but which will yield substantial leverage if our horse should finish in-the-money.
Incidentally, the stock looks primed to run up at least another $10, to the 383 target shown, before taking a breather. A pullback to the red line — a midpoint Hidden Pivot at 367.50 — should be regarded as a belated buying opportunity.
We’ll grudgingly give bulls the benefit of the doubt for now, since the pullback from Tuesday’s high looks like a classical consolidation. However, there is no getting around the fact that bulls lacked the cojones to push past the external peak at 1268.00 (see inset) on the first try. This display of timidity is almost certain to have implications going forward, but at the very least it suggests that gold’s true believers lack the energy or the conviction to end a bear market that is now in its third year. The futures remain a bull trade at the moment nonetheless, and traders should look to do their buying on a pullback from just above 1253.50. That’s equal to a small peak made near the end of Wednesday’s session that’s easily visible on the 5-minute chart. The relevant point ‘A’ low would be 1252.00 (6:25 p.m. EST). ________ UPDATE (December 12, 9:44 a.m. EST): Gold has gotten dumped for the umpteenth time, so far retracing a little more than 70% of the recent, apparently gratuitous rally. If you need a slender reed of hope to cling to, the 1212.10 low is still intact. A longstanding bear-market target at 1139.50 remains viable. This corresponds to the 1125 target given for the December contract. _______ UPDATE (December 13, 12:04 a.m.): As long as the 1210.10 low holds bulls are entitled to the benefit of the doubt. But they’ll need a ‘booster rally’ of at least $14.40 to get out of crisis mode, and exactly twice that to set up a recovery next week. Assuming such a rally were to occur from no lower than yesterday’s 1222.60 bottom, that would imply that 1237.00 is where encouragement begins, and 1251.50, a sigh of relief.
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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. _____ UPDATE: Some closing sales @ 0.10 were reported, and so I’ve used the proceeds as an offset against the cost of our NFLX spreads.
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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.
SIDE BETS for Wednesday
A minor Hidden Pivot resistance at 10.57 is the nearest impediment, but if UNG gets past it and a peak at 10.75 made in late August on the way down, it would be clearing the path for yet more upside. The implications will not affect the daily chart, however, until 16.27 is touched.
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Jubilant Traders Miss Another Ominous Sign
by Rick Ackerman on September 9, 2009 12:01 am GMT · 7 comments
Yesterday morning, an hour into the new trading week, we covered a small short position in the Diamonds, booking a loss of $92 on some September put options. This speculative bet, initiated on the closing bell Friday, was inspired by a hunch that if Mr. Market really wanted to catch investors with their pants down, the Tuesday after Labor Day would be a perfect time to do it. Alas, even with news that should have been helpful in catalyzing a stock-market plunge, stocks trudged higher. The news concerned consumer credit, and it could have left no doubt about the dire condition of the American consumer. He in fact » Read the full article