Wednesday, October 6, 2010

I've provided charts to go with major new targets for Silver and Gold that were disseminated on-the-fly yesterday. The price patterns are sufficiently compelling that even traders with a rudimentary understanding of the Hidden Pivot Method should be persuaded by their visual logic.

Silver is up 20 cents in night trading, presumably working on a 23.010 target that I mentioned during yesterday's trading-room session. (Note: An alternative target at 23.17 could also evince some stopping power.)  We must use the daily chart, however, to identify the last major rally targets still available to us for the December contract.  They lie, respectively, at 24.915, 25.165 and 25.280, with the lowest serving as a minimum upside projection for the near term.  If the highest is eventually exceeded, we'll need to haul out a continuous weekly chart that may not yield such precise pivots.

When Gold exceeded our longstanding target at 1340.00 yesterday by nearly $3, I introduced a new target at 1381.70 by way of an intraday update.  The specific coordinates were given at the time, but I am reproducing a chart that shows them graphically. You can see for yourself that the target is clear enough to imply a tradable pullback is likely to occur; however, if so compelling-looking a Hidden Pivot proves to have little stopping power, it would be more good news for bulls.  For trading purposes, finding camouflage entry opportunities will be a delicate operation, since shorts are getting squeezed hard, and because nearly everyone except Dennis Gartman is a bull by now.  Night owls should consider using a second (or third) signaled 'X' entry point of whatever ABC rallies develop, letting the first (and possibly second) go by.

A seller with a ton of supply evidently sat on Silver Wheaton yesterday, capping the stock even as Silver futures went bonkers.  Assuming bulls prevail, we can look for the SLW to reach 28.61, a Hidden Pivot, over the near term.  We hold 800 shares with a 12.95 cost basis, and I am once again going to suggest doing a covered write if and when the stock approaches the target. Short eight November 29 calls for around 1.55-1.60, stopping yourself out if SLW touches 28.81. The best way to get a fair price for the calls is to monitor the option bid/asked spread when SLW gets within 25 or so cents of the target.  By the time it finally gets there, you'll know the market for November 29 calls well enough to offer them advantageously. I've included a snapshot of an option calculator that I used to approximate a fair price.  The 43.6 volatility -- the heart of the solution -- was interpolated from TradeStation data. _______ UPDATE (3:10 p.m. EDT): In the chat room a moment ago, I recommended buying four Nov 27 puts for 1.72 against our long position in the stock. (Note: The order was filled about 20 minutes later.)

We're off and running!  With Monday's trade we completed the second and final leg of a butterfly spread at terrific prices.  By buying the November 300-310 call spread for 2.10 when AAPL was plummeting earlier in the week, and then shorting the 310-320 call spread when AAPL soared yesterday, we effectively legged into the November 300-310-320 butterfly spread twice for a debit of just 0.20. Our position can do no worse than lose $40 plus commissions, but it has the potential to produce gains of as much as $2000.  Also, we can expect to profit over a very wide range of prices come mid-November -- anything above $296 or so.  Keep in mind that my original price target for the stock was $315.32, and if it heads there before the November calls expire, we will reap substantial gains -- especially relative to the $40 risk we are taking. I offered this gambit in order to help traders, including novices, get over the idea that options are just too complicated, risky and difficult to mess with.  Although butterfly spreads are indeed arcane (even to many stockbrokers), and although they are rarely used by retail customers because they generate relatively high commissions, I wanted to prove that it's possible to beat the game anyway. Now, we have a very good chance of doing so, mainly because we were able to use Hidden Pivots to nail a big swing in the underlying stock precisely.  And because our risk is limited to $40 plus commissions, we can simply forget about this position until such time as AAPL advances toward our rally target.

I didn't even check my WSJ "crib sheet" to find out what supposedly caused yesterday's rally.  Some unholy mixture of stupidity and greed, to be sure -- with just a touch of evil.  Anyway, the rally has further to go -- presumably to at least 1163.25, an up-to-the-minute Hidden Pivot derived from the pattern shown in the chart. I'd said earlier in the week that the pattern would need to develop a couple more days' worth of symmetry before the futures ejaculated higher -- and so they have, borne aloft by bears who evidently will never learn.  The target is short-able, although its obviousness, which comes from the lovely symmetry of the rally pattern itself, makes me a little nervous about laying 'em out with the usual penny-ante stop-loss. But use 1164.25 if you're feeling lazy; otherwise, you should look for a subtle "camo" abc downturn on the 3-minute chart to get you aboard.

The other day, we asked what kind of benighted Wall Street lackey would be so bearish on gold and silver these days as to advise their immediate sale.  With nearly every central bank in the world on a monetary wilding spree, how, one might ask, could bullion prices possibly fall?  And, yes, they will someday -- in a big way. But that day probably lies well down the road, since there is almost no chance that a world hopelessly addicted to central-bank “free” money is about to go cold turkey. Europe’s move toward austerity is arguably the only fiscal threat to bullion’s powerful bull market right now, but at the end of the day it is no more a counterforce to global money-mania than a sand castle is to the pounding surf of a hurricane. In any event, long before the supposed bubble in gold and silver bursts, the dollar would have to collapse, taking the global economy with it into a deflationary Marianas Trench. Until that day arrives, however, one would have to be crazy to think that the bull market in precious metals is anywhere near an end.  For now, we’ll stick with a litmus test we proposed here earlier to determine when the bull market is ending. Specifically, we wrote that Joe Sixpack would be telling his poker buddies about mineralization levels in Ghana before bullion peaks. So far, though, as is plain to see, Joe Sixpack has not even discovered mining stocks, let alone Ghana core samples. Let’s Out the Bears Speaking of Wall Street lackeys who are bearish on bullion, we’d like to list them publically so that they will be as harmless as belled cats the next time they appear on CNBC (with predictions that will typically lag actuality by months, if not years). If