Thursday, January 28, 2010

We hold two March 44 puts for 0.75.  Cancel the order to short March 39 puts against them, and take partial profits by selling one of the puts market-on-open.  Tie the other to a stop-loss at  45.73. _______ UPDATE (10:44 a.m.):  The 1.27 we received for the put on the opening has effectively reduced the costs basis of the put that we still hold to 0.23.  Now, offer a March 39 put short against it for 0.63, good till canceled.

It would be oh-so-coy for Wall Street to pretend there are enough good things in Obama's speech to justify a big rally, but more devious things have happened. In any event, DaBoyz are certain to try and milk this short-squeeze opportunity for all it's worth, since last week's decline will have added urgency to their task of distributing stocks to widows and pensioners.  However things play out, today's E-Mini S&P tout tells shorts exactly when they should become alarmed.

Tiresome as these mini-explosions have become, we can't afford to ignore the possibility that one of them is going to trigger a real short squeeze. That could happen as early as today if a follow-through to yesterday's wilding spree pushes the futures above 1103.00.  The accompanying chart shows how it would convert a garden-variety impulse leg into one with serious power.  From there it would take just another nine points to take out a third external peak, presumably greasing the path upward through week's end. _______ UPDATE (10:40 a.m.):  Ha-ha, very funny. The futures head-faked their way to 1103.50 overnight and then dropped dead.  Go figure.  Perhaps, for our watchful vigil, a nursemaid is called for, not a technician?

Wednesday's moderate weakness changed nothing in the immediate outlook.  A print today above 1104.80 would turn the lesser charts bullish, and that external peak can be used to create a camouflaged entry opportunity if there's a shallow pullback from just above it. However, if the selling continues, look for a potentially tradable bounce from somewhere in the range 1074.50-1075.90.  _______ UPDATE (1:05 p.m. EST):  This morning's breach of the 1074.50-1075.90 bottoming range we've been using spells a 1039.20. A midpoint support at 1071.60 is all that stands between.  For the April contract, that means 1072.50/1040.00.

While Rick’s Picks has focused with bland, mechanical detachment on the technical picture  in gold and silver, we rely on our friend Chuck Cohen, a New York-based gold consultant, to stir readers’ imaginations when they think about how high gold shares and bullion could eventually go. We asked Chuck for his current thoughts, and he kindly obliged, even though he was ensconced in a hammock in Puerto Vallarta, sipping a margarita, when we called. **  The single most important point remains that you keep your perspective fixed on the long-term picture. In spite of all of the monetary stimulation and frantic attempts to prop up a decaying system, the economy and the financial structure are still a mess, with no hint of an effective remedy.    ** Gold is still in a parabolic move, and nothing has changed after eight consecutive yearly rises. This means you must remain patient and focused. At this point, where else would you put your money? The persistent rise in gold will not suddenly end, especially considering that the public has yet to participate, let alone go crazy. To the contrary, most of the gold ballyhoo has come from mainstream economists and such notable gold-haters as Nouriel Roubini and Bob Prechter. As far as the public is concerned, they’ve been all too eager lately to liquidate their gold and jewelry. These are undoubtedly the same folks who got decimated in the dot-com craze and who segued into overpriced homes. Never underestimate the average Americans ignorance in financial affairs. ** Corrections do what they have to do. They will flush out latecomers, top-callers, in-and-out traders, the timid, dollar bulls, emotional investors and momentum players. None stand to reap much benefit from this historic bull market. ** Ignore the media’s take on markets. They have no real idea

The following describes how I usually manage the risk of a trade as it appproaches a price target: Some successful traders say it matters less where one enters or exits a trade than how one manages its risks. One way we can keep risk tightly under control as a stock moves up or down is to use dynamic, or risk-adjusted, trailing stops. How do they work? To illustrate, let’s take the example of a trader who buys a hundred shares of XYZ stock at $62.00, with the intention of selling it when it reaches $65.00.  In this instance the expected gain is $300, or $3 per share. But how much risk is acceptable? The answer, both initially and as the trade progresses, will depend on how and under what circumstances the trader determines to exit the position. For instance, a prudent trader might decide before initiating a position that, once on board, he will risk no more than $1 to make $3 at any point along the way. Thus, with a target of $65, if he is able to buy 100 shares of XYZ for $62, he should use a $61 stop-loss initially, limiting theoretical loss to $1. (The risk is theoretical because in practice there is no assurance the trader will be able to get out of the position at the predetermined price. In fact, stop-loss orders are often executed at prices far worse than intended.) In this example, the stop-loss at $61 is referred to as “fixed” because it will remain unchanged as XYZ moves up or down within certain limits. But let’s suppose the stock rises straightaway to $63.50. At that point the trader would have an unrealized gain of $1.50 per share, with additional profit potential of $1.50 per share (assuming as before that XYZ reaches