Tuesday, December 8, 2009

We hold a round lot with an effective cost basis of 11.01 and a long-term rally target of 27.15.  As detailed here earlier, I am recommending that you short a December 23 call against the stock if and when the target is reached, and that you also buy a January 23 put at that time.

Silver's bullish impulse leg on the hourly chart is similar to Gold's and portends a rally over the near term to at least 18.650, provided its sibling midpoint at 18.405 can be overcome. If the futures get past it easily, that would suggest that the finishing stroke to the higher number will be unlabored as well.   Please note that it will take only 18.590 to refresh the bullish impulse on the hourly chart.

The December 17 - January 15 call spread could have been bought for as little as 0.35-0.40, but we'll use the 0.55 price advised when I recommended rolling our call spread out to January. This means we are long eight December 12.50 calls effectively for a 0.40 debit (i.e., long stock for 12.90), and short eight January 17 calls for 0.80. Don't worry if you didn't roll the spread;  the goal in any case is to come out of next Friday's expiration with 800 shares of stock to hold as a long-term position. The short January 17 calls will simply give us a little downside protection at a cost of limiting our near-term upside potential above $17.80.

Some gurus and permabears have already throw in the towel on the possibility of a meaningful decline during the remainder of the year, but let's not forget that there are some potentially VERY important Hidden Pivot rally targets just a two-day rally above these levels.  I remain confident not only that they will be reached, but that the futures will correct sharply after making contact.  The price action that follows could conceivably become part of a rolling top that carries into next year, but the chance that a major top is in should not be dismissed.  Here are the targets once again, respectively, for the December and March futures:  1138.50 and 1140.00;  and 1127.25 and 1129.50.

February Gold created a bullish impulse leg on the hourly chart without having reached the 1133.70 downside target proffered in yesterday's tout.  This is quite bullish on the face of it and suggests that the correction from last Wednesday's 1227.50 peak has already run its course. We'll hold bullion to a higher standard, however, and continue to monitor its vital signs each step of the way.  At the moment, our benchmark is an 1181.50 rally target, assuming the futures can first get past its sibling midpoint at 1167.50.   The bounce so far has gotten as high as 1164.20, so bulls will need to do a little better to earn safe passage to the 1181.50 Hidden Pivot. Traders and night owls should look for camouflage opportunities near 1160.30, since that's where a buy signal was triggered during the night session. The signal will remain valid as long as there's no dip below 1153.20, the point 'C' of the pattern. _______ UPDATE (9:50 a.m. EST): The futures aborted the rally to 1181.50 in the pre-dawn and have since taken an unconcvincing dive lower.  A re-test of Monday's lows near 1136.00 seems likely, but in any case, it would take a print of at least 1177.60 to turn the lesser charts decisively bullish once again.

For those who have been unsettled by gold's corrective weakness in recent days, I've reprinted a reassuring letter below from a friend and longtime subscriber who also happens to be a U.K.-based gold-dealer and metals trader. Andy, as he is known in the Rick’s Picks chat room, is bullish as ever on gold and sees a potential "black swan" bearing down on the financial system in the form of a Chinese derivatives-default.  This is a looming catastrophe that we've written about here before, as some of you may recall. The threat surfaced with an announcement by China a couple of months ago that the government would take no legal action against its own banks if they walked away from derivatives deals gone bad.  Imagine what this would mean if you were running one of those banks yourself. In effect, it would allow you to build extremely risky derivatives positions, but with no exposure if they didn't work out. Here's an analogy: Picture yourself being allowed to use counterfeit money in a casino. You make huge bets in roulette, blackjack and baccarat, and although most of these bets lose, the casino pays your winners in real money.  You bank the winnings -- buy gold bars with it, perhaps -- and continue to gamble with funny money until you've used it up.  Heads or Tails: Who Cares?  This, in effect, is undoubtedly what some Chinese banks are doing right now: laying highly leveraged bets all over town, knowing they won't have to cover them if the derivatives market starts to implode again. Moreover, the mere fact that the Chinese government has promised legal amnesty to those who lose big at this game is probably causing the volume of such bets to explode. We'll find out for sure when reality comes calling once again