Tuesday, January 12, 2010

A moderately important rally target at 107.58 is not likely to produce the Mother of All Tops, but it does look like a high-odds shorting opportunity because of its subtlety and the single-bar delicacy of its ABC coordinates (180m, A=97.94, 11/04; B=103.62, 11/11).   Accordingly, I'll recommend buying two February 107 puts (DIANC) if and when the target is closely approached.  A rough estimate of their value with the underlying at 107.58 is 1.80.  I did not use a calculator to come up with that number, by the way;  rather, I took the current, 1.93 bid for the February 106 puts and reduced it by 12 cents, based on delta value of 0.45 and a 30-cent rally to 106.58. _______ UPDATE:  The Diamonds plunged at the opening bell, so our short went unfilled.

DXY overshot a 76.91 support by 0.12 points -- probably enough for us to infer that still lower prices impend. However, the short-term bearish outlook would be diminished, though not negated, by a morning thrust exceeding 77.51 to the upside. That would create a bullish impulse leg on the hourly chart, setting up a possible reversal of the corrective forces that have dominated since just before Christmas.

Silver's pullback has been impressively shallow so far, considering the steep pitch of the rally over the last five days. A minor midpoint support lies at 18.485, but if it's breached, brace for more corrective action over the near term down to as low as 18.290. Alternatively, a renewed surge today that exceeds 18.990 would be extremely bullish.  You can look for a camouflage entry opportunity if there's a pullback from within 2-5 ticks above that threshold.

So that it can be found archived in the touts section, let me repeat the outlook for February Gold discussed in today's commentary:  To keep shorts on the defensive, the futures will need to push on, taking out the fifth peak at 1170.20 shown in the chart.  A vigorous effort should take no more than one or two days to succeed, and we should expect no less if bulls are to tackle the all-time high at 1227.50 with overwhelming power.  To put it another way, the ease with which the futures get past 1170.20 is likely to be predictive of how easily they surmount resistance at 1227.50.

So much for the drum-rolled, promiscuously featured rally target at 1149.50.  The 1148.00 peak that actually occurred was a nasty tease if you were offering contracts short precisely at the target. Fortunately, there will alway be another opportunity -- such as the Hidden Pivot support just below, at 1135.25.  Night owls can bid there with a two-tick stop-loss, although the support might prove a bit frail for the herky-jerky action that is common on openings.  You'll be on your own if this one fills, but don't hesitate to take a partial profit early on if you initiate the position with more than one contract. _______ UPDATE (10:24 a.m. EST):  With the disappointment over Alcoa, notice that even on a day when the stock market should have gotten creamed, the E-Mini S&P is down a paltry seven points.  This is yet more evidence that money flows remain sufficient to keep stocks buoyant no matter what the news or the condition of the economy.  Even so, it looks like the broad averages will have to sweat the negative earnings news out of their system this morning before they can resume their robotically ordained trek higher. The intraday low not only exceeded the Hidden Pivot, stopping us out for pocket change, it also exceeded the "false" D target we might have calculated if we'd used yesterday's high, rather than the one-off high, as the 'A' of the down-pattern.

Early Monday evening, Gold was holding onto most of the impressive gains it scored a day earlier. You needn’t be a technician to see unfinished buying in the chart below. It shows Sunday’s explosive, $25 rally in the Comex February futures contract, followed by a tedious consolidation that was still in progress 24 hours later. Shorts have good reason to be nervous when gold shows such reluctance to give up ground. As recently as Christmas they were salivating over the prospect of a major selloff. Gold had come down hard from an all-time high of $1227 recorded earlier in the month.  When quotes dipped beneath $1100 just before the holidays, some were predicting the bull market had breathed its last. In retrospect, it appears they were wrong. Assuming the $1075 retracement low holds, the correction will have amounted to about 12% -- mild and healthy, as far as bull-market consolidations go.   Notice how Sunday’s buying frenzy drove gold’s price past four resistance peaks.  Using Hidden Pivot analysis, we require only that two such peaks be surpassed to create a bullish “impulse leg.” This leg obviously has power to spare.  Above peak #4 is another peak at 1170.20 that is unlabeled. If the February contract were to get past it by Wednesdays’ close, that would refresh the bullish impulse, putting even more pressure on shorts. It would also practically guarantee a test of the $1227 high. Bears can see this as well as we can, implying that the $57 rally it would take to put the futures at the threshold of new record highs is likely to occur very quickly. Traders should therefore be ready to seize the breakout opportunity if 1170.20 is breached within the allotted two days.   (If you’d like to have Rick’s Picks commentary delivered free each day