December 2009

It is absolutely dumbfounding that Harry Reid's legislative turd is about to become law. For yet more reasons why this is The Worst Bill Ever, click here.   A Wall Street op-ed piece dissects some of the bill's hidden costs, which are all but certain to bankrupt or drive out insurers who serve the market for individuals and small groups.  For one, because such companies don't enjoy the economies of scale of larger insurers, their administrative costs are typically around 30%. And yet, Reid's big, fat stinker would make them give rebates to customers if administrative costs exceed 10 percent.

Buyers of the January 46 puts could have paid as much as 1.11 or as little as 1.06 -- more than I'd anticipated because put volatility surged on yesterday's gap-up opening.  We'll stick with the 15-cent stop-loss in any event, using the low end of the range. That means you should exit the puts on a sell-stop if they trade for 0.91.

Gold was moving effortlessly higher Wednesday night even though the Dollar Index was off just slightly, suggesting there are committed buyers behind the rally.  The high so far is 1103.70, the precise target of the pattern show in the chart, but any progress above it would portend a minimum 1107.50/1108.60.  To determine whether this surge is more than a one-day wonder, we'll use 1123.90 as a benchmark. A print today at that price would shorten the odds that an important bottom is in.

The futures are bound for at least 1146.50, presumably by New Year's Eve.  Another Hidden Pivot that will be playable when the futures take out yesterday's high is 1132.50.  That will be my minimum upside objective on a breakout, and it is shortable with a stop-loss as tight as 1.00 point. Longs from these levels therefore have a potential 14-point ride, but camouflage will be tough to come by with the bear rally now scraping highs.

Gold’s slippage in recent weeks has closely mirrored the U.S. dollar’s rise. For bullion bulls, the good news is that the dollar is rallying not for fundamental reasons that might persist indefinitely, but because of short-covering by carry-traders who effectively went short against the dollar.  Mostly, they borrowed greenbacks in size in order to plow them into something else offering either higher yields, greater leverage, or both. That’s what happens when the Fed artificially lowers interest rates: financial speculators, including most of the biggest banks,  borrow all the dollars they could conceivably wish for, practically for nothing. The big losers are pensioners and other savers, who effectively supply the dollars at the going rate – currently close to zero -- fixed by the Federal Reserve.   Lately, however, the dollar has been rising, putting pressure on the carry-traders to repay their loans in an appreciating currency. The result is a short-squeeze that has pushed the dollar relentlessly higher for nearly three weeks with nary a correction on the daily chart (see above).  The rally is just a minor, bear-market blip when viewed on the weekly chart. However, under the magnifying glass of a dollar-obsessed financial world, the rally is being hailed as the beginning of a major upturn in the dollar.  We disagree. The dollar is intrinsically worthless, and merely comparing it to other currencies that are almost as worthless is no argument for a long-term bull market. Only a comparison to gold is valid, and in that respect, the dollar, euro, yen and British pound can only fall over time.  Remember, no matter how strong the dollar looks right now, it’s only a mirage. It could persist for quite a while – for several months, even -- but ultimately, all short-squeeze rallies can only end in collapse.  A Launching Pad  So

Subtleties occupied our time, including some of the finer points associated with camouflage. ABC perfection is what we should look for – always -- but today’s selection yielded only meager possibilities. This was all to the good from a teaching standpoint, since we need to be able to recognize weak patterns in order to pick out strong ones. Gold, the E-Mini S&Ps and T-Bond futures all came under scrutiny, and we were able to discover some tradable opportunities in each.

Despite my bullish outlook for the E-Mini S&Ps,  the 45.44 rally target flagged here a while back still looks sufficiently persuasive to justify our risking small change to short it.  I'll suggest buying two January 46 puts (QQQMT) for around 1.02 ( instead of the original four January 45 puts) when the Cubes get within a few pennies of the target.  Stop yourself out if the puts trade 0.15 below their purchase price.  If the stop is hit, the Cubes are signaling more upside to at least 46.00, another place where we would attempt to get short.  The last stop, Hidden Pivot-wise,  would be at 46.91, where I'll be more eager than ever to lay 'em out.  Bottom line: Save some ammo for later, just in case.

Targets posted for gold and silver today should see us through Christmas, at least.  In any event, Thursday's edition will be abbreviated, with updates for gold and the E-Mini S&Ps, though not for my daily rant.  I will be in the chat room briefly Thursday morning, but to all who will be away from their desks that day, let me wish you a merry Christmas and all good cheer in the holiday season.

A while back, I identified a Hidden Pivot at 607.28 as a minimum rally target, suggestion that you short this chazzerai when it hit our number.  That day has nearly arrived, and the bet is still on.  Short by buying two January 570 puts  (GOPMN), day order.  You can use a 1.90 limit order today if you want to park the order with a broker. However, this estimate is subjective and may go unfilled if put-option volatility rises as GOOG rallies toward the target.  I've included a snapshot of an options calculator with a 21.1 implied volatility that closely approximates the option's actual volatility with the stock trade about $6 shy of our target.  The best way to get a fair price on the option, however, is to eschew calculations and simply position your bid so that it is in line with the spread as GOOG approaches the target. _______ UPDATE (1:00 p.m.EST):  I've issued a "sell" order in the chat room, since GOOG trashed the target after slightly exceeding it on an opening gap.  A chat-roomer reported paying 2.35 for the puts -- reflecting a volatility explosion as GOOG climbed, and so there would be a $50 loss on the trade if exited on a 2.10 bid.  It was possible to avoid the loss, however, and perhaps to come away with a small profit, if you used the initial pullback to 605.00 after the target was hit to take a partial gain.