Natural gas remains on track to reach a target of 4.484 and to confirm that it has begun an important uptrend. On Tuesday, the futures tested the recent bullishness with a move down to just below the midpoint of the pattern that we have been monitoring all week. But the recovery was swift, and the bullish tone of the market remains intact. The 4.484 target is “in the middle of nowhere” and does look enticing for a short-side trade. Traders can sell at 4.479 with a stop at 4.491, for a hypothetical risk of $120 per contract. But keep an eye on the big picture, as a move to this “D” target would surpass an important prior high at 4.463, visible on charts up to the 120-minute timeframe, and would give birth to some prominent new impulse waves. Any well-reasoned approach to the long side of this market is likely to be rewarding under the circumstances. (Posted by Doug McLagan) _______ UPDATE (midnight, Thursday, November 11): On Wednesday the futures bottomed about two cents below Tuesday’s low and have moved back up in evening trading. The pattern we are watching is very much intact and our trade recommendation at the 4.484 target remains effective.
From the monthly archives:
November 2010
If gold is finished with its pullback, it will soon confirm important new bullish targets at 1431.6 and 1481.0. Yesterday’s forty-two-dollar decline in the gold futures from an all-time high has created a pattern with striking symmetry between the pullback and last week’s “kA” segment. If the “C” point at 1382.3 holds and the futures move back up, they will confirm this new pattern and the aforementioned targets, as pictured in the attached graphic. The odds of this happening will be diminished if gold trades down a few dollars to 1392.3 and does not revisit the current session high of 1402.9. This would confirm a smaller, bearish pattern which was initiated by the drop yesterday and would suggest a move down to 1381.9, a midpoint pivot, and to 1360.8 if the midpoint gives way. This midpoint would be a risky trade, as it is just below the “B” point made by yesterday’s low, but the sibling “D” target of 1360.8 can be bought with an order a few ticks higher and a stop at 1359.9. Pivoteers should recalculate the targets if 1402.9 is surpassed, thus moving the “C” point higher, and a decline follows. (Posted by Doug McLagan) _______ UPDATE (9:45 a.m. ET): The bullish pattern has been confirmed, and the bearish pattern has been activated with a higher “C” point of 1410.0. Buyable pivots are now at 1389.0 and 1367.9, so long as 1410.0 holds.
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We hold a long-term position of 800 shares with an adjusted cost basis of 13.07 against eight December 30-35 call spreads shorted for 3.80 at the recent high. Let’s try to turn the call spread into a butterfly by buying the December 25-30 call spread eight times for 3.60 or better, good till canceled. (It closed yesterday for around 4.00.) We can’t get hurt to the upside since our short spread is akin to a covered write, so we’ll take our sweet old time waiting for the long spread to come to us at our price if we have to. _______ UPDATE (Nov 16, 12:16 p.m. ET): Cancel the bid for the call spread, since the spread we’ve got on should be protection enough.
The fact that the futures fell so hard without having first reached a 30.005 Hidden Pivot rally target suggests that this correction will need at least another day or two to recharge. In any event, we should have a good indication of trend strength when the downtrend encounters the midpoint support at 26.785 that is shown in the chart. If it is breached by more than three ticks, I’d infer that the pullback is likely to continue over the near term to at least 25.895, its ‘d’ sibling.
An old target at 1233.75 is still valid in theory, although it surprised me that DaBoyz could not reach it in the heavily manipulated opening minutes of yesterday’s session. The downturn that ensued instead projects to 1201.50, subject to a possible bounce from the midpoint at 1206.75. Night owls can try bottom-fishing that last number with a three-tick stop-loss, but it looks too close to a structural support formed by yesterday’s 1206.25 low to be considered opportune. _______ UPDATE (8:14 a.m. ET): The futures spent the night screwing the pooch, a pursuit they seem likely to continue on Wednesday. Since the upward feint marginally exceeded the point ‘C’ of the pattern used to project the two correction targets, we’ll scrap the trading plans detailed above.
Yesterday’s rally was strongly impulsive on the hourly chart, but since it is a flying pig whose behavior we’re measuring, we should want to make doubly certain of the bulls’ resolve by requiring an impulse leg on the daily chart. This will require a thrust exceeding the 78.69 peak shown in the chart. We’ve referenced the peak before, but two rallies so far have failed the test. The third time may be the charm, though, and if DXY succeeds, we’ll be dollar bulls for the time being, like it or not.
Silver Wheaton shares lost a sixth of their value in mere hours yesterday when they reversed sharply after spiking to a record high. Fortunately, we were a step ahead of the plunge, prepared to short December in-the-money call options if the stock came within ten cents of a promising Hidden Pivot target. The actual high, at 37.20, was just four cents from the top we’d projected.
Going into Tuesday’s session, anyone holding SLW would have been concerned, as we were, that the explosive rally of the last two weeks was too steep to sustain. The stock had risen by nearly 30% in just the last week alone, and it began the day yesterday on a take-no-prisoners, $2 gap, peaking at 37.20. As it happened, that was just four cents from the Hidden Pivot rally target we’d disseminated to subscribers the night before. Here is our advice, exactly as it went out to them late Monday night:
“We hold a long-term position of 800 shares with an adjusted cost basis of 13.07 and a theoretical profit of $17,600. One can never be certain exactly where a parabolic rally will crest, but let’s use a Hidden Pivot resistance at 37.16 as a possible target.”
The trading advisory went on to provide a detailed strategy for protecting our gains if the stock’s ballistic surge terminated at or near our number. The idea was to leg on a “butterfly” option spread at prices that would leave us with no risk if SLW eventually went much higher lower, but which would yield profits of as much as $500 per spread if the stock dropped back to around $30 and stayed there for a few weeks. Here’s how we laid it out for subscribers:
[Determining precisely where the stock is most likely to top] will give us the wherewithal to try to leg into a December 25-30-35 call butterfly spread that would give us cheap protection against a relapse. To implement this plan, we’ll start by shorting the December 30-35 call spread eight times if and when SLW gets within 10 cents of the target. My rough estimate of how much the spread will be selling for is 3.85, so if you can get that much or more for it, you’ll be doing great; if five cents less, still not too bad. If we are able to sell the spread, we’ll be looking to buy the December 25-30 call spread on weakness. Our maximum risk on the short spread alone, assuming a sale at 3.85, would be $115 per spread, but that would be more than doubly offset by our corresponding gain on the long stock position.”
In the actual event, the call spread we shorted yesterday could have been sold for as much as $4.00 credit, reducing our exposure to a greater extent than anticipated. However, someone in the Rick’s Picks chat room reported being filled on the spread for a 3.80 credit, so we used that price as our cost basis.
By day’ end SLW had traded as low as 31.76, representing a fall of $5.44, or 16%, from the intraday high. The second leg of our spread was trading close to 3.80 at day’s end, but there was no urgency to buy it, since we may be able to improve on the price if SLW doesn’t trampoline higher in a V-shaped recovery. If we can buy the spread for less than 3.80, we’ll have legged into the butterfly for a net credit, meaning not only that no loss will be possible on the spread, but that we’ll make a profit equal to the credit no matter where the stock is trading come December expiration.
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Yesterday’s trading supports the notion that natural gas has embarked on an important new uptrend, and traders should look for ways to play the long side. Today we will consider the January 2011 contract, for several reasons: the rollover process is well underway, with January’s open interest now higher than December’s; January gives us more time to buy and hold; and the January contract has seen some significant action around the midpoint of the pattern that we are watching. Natural gas rewarded traders who were able to get long the futures as we advised yesterday. A minute after the pit opened (at 9:00 a.m. in New York), a small pattern began forming which offered potential camouflage in the December contract and perfect camouflage for anyone who happened to be watching the January chart. These patterns played out with rallies that never looked back, delivering gains of as much as fourteen cents thus far. Both contracts blasted through the midpoint of the pattern we described yesterday, and the January contract pulled back to nearly touch the midpoint more than once before pulling away to the upside, as pictured in the attachment. Traders not already on board should look for small patterns that create buying opportunities. The “D” target of 4.484 looks good for a short-side trade with a stop at 4.491, but don’t ignore the possibility that a long position might take you a lot higher than that. (Posted by Doug McLagan)
Why Crisis Is the New Profit Center
by Rick Ackerman on November 11, 2010 12:01 am GMT · 47 comments
(Today’s guest commentary is from our friend V.R., a management consultant who incidentally was a student of ours before the term “Hidden Pivot” was coined. Some may find his essay heavy going at times, but the reward for bearing with it, as your editor has found, is that you will have a better understanding of why complex systems, most particularly political and economic, fail. Not all of them do, for sure, and V. elucidates the factors that can make the difference. RA)
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