Wednesday, January 19, 2011

Silver looks eager to pull gold higher Tuesday night, but we've seen night-time rallies fizzle too often to lay odds on it.  The E-Minis, meanwhile, look unstoppable, and so I've concocted a bull strategy using SPY call options to leverage bullish expectations.

A simpler analysis than the one proffered today in Gold should suffice. It points to at least 29.400, but 29.630 if any higher. That could seem exhilarating in the context of whatever else the day may bring, but it'll take a bit more -- specifically, a print exceeding last Thursday's 29.810 spike high -- to put the futures on track for a multi-day recovery spree next week.

Today's analysis is filled with expert jargon, so for you Hidden Pivot novices, let me cut to the chase:  While immediate downside potential appears limited, it would require merely a push above  1377.80 -- just $4.00 above Tuesday night's so-far high -- to turn the hourly chart bullish.  Now for the argot:  Friday's decisive penetration of a 1357.00 midpoint support would seem to have left the futures vulnerable to a fall to at least 1321.20, its 'd' sibling. However, the very sausage-y point 'B' demands the use of a one-off A, which can be found on the hourly chart.  Once we do so, we see that the A-B leg is just a composite of a lot of little downlegs on the hourly chart.  This is reason to mildly distrust the 1321.20 target and the short-term weakness that it would seem to imply.

SPY appears hellbound for at least 136.25, a Hidden Pivot that comes from the weekly chart, where A=87.00 on July 10.  Let's try a very low-risk directional play, butterflying the Feb 133/136/139 strikes.  To put the position on, and to virtually eliminate theoretical risk, we'll need to short two Feb 136 calls for as much as we pay for the offsets -- a single Feb 133 call and a Feb 136 call.  That would effectively be "doing" the butterfly for "even' (i.e., no credit or debit), and it would yield a maximum theoretical profit of $300 per butterfly with the stock trading at 136 on expiration day (February 18). We'll want to be careful about putting on this position, since little errors in a three-sided position can whittle away our edge. We may wind up legging into the position by buying a Feb 133-Feb 136 vertical bull spread when SPY dips to a Hidden Pivot low, and then shorting a Feb 136-Feb 139 call spread on a subsequent rally.  Those two action together add up to: long 1 Feb 133 call; short 2 Feb 136 calls; long one Feb 139 call.  However we do it, I will signal the appropriate strategy intraday in the chat room and by way of an update to this tout.  This may seem like a lot of hard work, but I am going to work hard myself in an attempt to make back for you the cost of a one-year subscription.

Yesterday's 118.43 high came within 0.05 points of surpassing a key peak recorded in August just ahead of a selling avalanche. There is no disparaging the importance of this peak, the penetration of which would re-energize the bullish impulse on the weekly chart. Unfortunately, bizarre strike-price adjustments have made this vehicle all but untradable, at least by retail customers.  My strategy would be to butterfly the 127 strike, since that's where DIA appears to be headed. As an alternative, we may be able to use SPY options as detailed elsewhere in today's touts.

We needn't merely spectate as the futures work their way toward a potential major top at 1356.00, since there are lesser targets we can use to get long each leg of the way.  This one points to 1307.25, and although camouflage opportunities will be hard to find above these levels, one as close as 1282.50 lies below. That's the Hidden Pivot midpoint associated with 1307.25, and any pullback that approaches it should be regarded as a potentially tradable bottom. I've reproduced a chart that shows the relevant pattern, since it's not one that leaps to the eye.