Tuesday, June 22, 2010

Like Gold, Silver took an impulsive plunge on the hourly chart yesterday, obliging us to keep a close eye on minor retracement patterns until things improve.  The good news is that the futures poked above an external peak on the hourly chart before diving, suggesting they are still feisty enough to be a little playful even when bears threaten a pounding. But buyers will need to push the July contract above 19.070 today to recover the advantage. That corresponds to a minor peak made yesterday on the way down.

The Dow didn't fall far enough to create an impulse leg on the hourly chart, but the weakness was nonetheless sufficient to create a so-far bloodless duel between bulls and bears. If the Dow does a 180 today for the usual non-reason and heads higher, you should use 10645 as a target, since that's where DaBoyz will be taking it once they recover their mojo.  For clues that this may be about to happen, watch for a midpoint bounce on the 15-minute chart similar to what I've sketched out.

It may prove significant that the futures have created a bearish impulse leg on the hourly chart without having quite achieved their last rally target, 1272.60.  If this had happened to some broad stock-index such as the Diamonds or SPY, I'd have given bulls last rites.  But because the selloff occurred in Gold, we'll treat it with a little more skepticism, especially since the ostensible reason for bullion's plunge is the crackpot notion that China's revaluation of the yuan will somehow turn the tide for a world sinking deeper each week into full-blown debt deflation.  Regarding the hourly chart, we'll need to see a rally and then a c-d decline to a Hidden Pivot midpoint before we are able to confidently assess the resolve of sellers. For now, though, I see the selling as having been orchestrated by strong-handed buyers rather than  the onset of something serious.

Opening up a bearish position yesterday morning not long after trading began, we caught a fine breeze that allowed us to short the Diamonds just pennies off their hysteria-driven, opening-hour high. Here’s the trading recommendation exactly as it went out to subscribers the night before: “Buy four August 98 puts if DIA gets within 0.05 points of the next Hidden Pivot resistance above, 105.92.  You should be prepared to buy four more August 98 puts later if the Diamonds get past 105.92, since that will imply they’re going to at least 106.73 before a top is in.  We are going out to August because the remaining life of the July options will be shortened not only by their July 15 expiration date, but by a holiday weekend.” As it happened, the Diamonds took a powerful leap at the bell, responding to ostensibly bullish news that China will allow its currency, the yuan, to rise. We were in luck to have bet against the crowd, since the rally ultimately went no farther than 105.96 – just four ticks above our target. That gave us a perfect opportunity to get short at the height of the short-squeeze, moments before DaBoyz pulled the plug on frenzied buyers.  Look at the chart below if you want to see what a classic bull trap looks like, especially when its sprung on a Monday morning on news that has been timed for maximum effect: Because we had anticipated the rally top very precisely with Hidden Pivot analysis, we were able to buy August 98 puts for 1.28, three cents off their intraday low.  Later in the day, we took a partial profit on the position as is our custom, selling half of the put options for 1.50. This effectively reduced the costs basis of the puts

The Diamond target worked nicely to get us short yesterday in a great place, as did our gut feeling that the best time to get short is when the pain of doing so has become all but unbearable. Fortunately, we were able to sidestep that part of the experience by predicting exactly where the pain was about to become unbearable for bears other than ourselves.

After purchasing four DIA August 98 puts not long after the opening yesterday for 1.28 and taking profits on two of them later at 1.50, we still hold two with an adjusted cost basis of 1.06.  We also have four July 96 puts acquired earlier for 0.70, and we'll plan to spread off the premium risk thereof by selling other puts against them if stocks continue to fall.  Yesterday's collapse following an opening-bell head-fake was as refreshing as a summer dip in a lake, but we shouldn't allow ourselves to be lulled, since the pullback so far has not gone "impulsive" on the hourly chart. Also, the upward flick in the final moments of the day suggests there are still a few shorts who are not exactly cool about letting their profits run. Please note that by taking a partial profit on the puts, we are now in good shape to weather a breakout to new highs (specifically, to a Hidden Pivot target at 107.73 given here earlier) without getting much underwater on our position.