April 2011

I've provided two closely spaced rally targets for May Silver that are likely to show some stopping power.  In any event, traders and investors should pay close attention, since the range defined by these two Hidden Pivots looks very compelling up to the level of the weekly chart (A=26.400). _______ UPDATE (8:42 a.m. EDT): Mild weakness in Gold is holding Silver back this morning, but nothing in the otherwise bullish picture for both has changed.

[My good friend Tom McCafferty is a veteran commodity trader and the author of numerous books about trading, including one of the very best primers available on the put-and-call game, Options Demystified.  More recently, he has written several guest commentaries for Rick’s Picks, among them an upcoming piece in which he will reveal his top choice for all investables – an asset class that has the potential to pay big dividends for generations to come.  In the essay below, Tom explains why he’s bearish on the economy – and on America – these days. RA] Recently, I was asked why I wasn’t as bullish as some of my fellow traders.  The market has gotten off to a respectable start for the year and I didn’t seem as excited as some of our group.  Short-term, I was as mostly long, but long-term I was Smokey the Bear.  These guys demanded to know why I was so low key.  My answer of course was:  “It’s all the deficits, stupid!”  More definitively, it is all the obstacles that may prevent the United States of America from tackling the problems, i.e.: •           Bipartisanship—I don’t think this country has been so divided since the Revolution or the Civil War.  Nothing gets done as all the politicians, special interest groups and powerful unions fight for their special interest and neglect the best interest of the overall population. •           The sheer size of government—you know you are in trouble when twice as many people work for the various levels of government than work in manufacturing, farming, fishing, forestry, mining and utilities combined.  You know you’re in trouble when the salaries and retirement benefits of public “servants” are more lucrative that those producing the gross domestic product.  Fifty years ago, these numbers were reversed. •           Education—why do less

In today's touts, I've extrapolated a potentially major top in the Gold Bugs Index that lies about 25% above current levels. There are also some benchmarks along the way that could prove useful to precious-metal traders an investors.

The weekly charge suggests clear sailing to at least 637.63, a Hidden Pivot that looks persuasive on the weekly chart (see inset).  If it is decisively exceed (i.e., buy more that $3 or so), however, a potentially more important target well above that price would be in play:  720.13, a key number identified here earlier.  That's where the weekly chart maxes out, so it is a logical place to infer a bull market top.  There is one other resistance worth mentioning -- a Hidden Pivot of lesser degree at 661.07 whose provenance is shown in the chart.

We bought three June 40 puts @ 2.35 to hedge 300 shares of stock whose cost basis is 42.01.  This is a gentle backspread, and because the puts have a delta value of about 35, our position nets out to the equivalent of being long 200 shares. If SLW continues higher the puts will shed deltas, making us "less short."  We'll look to reduce our premium exposure on any weakness by shorting puts of another strike, but for now do nothing further. The stock is still not out of the woods, by the way, and we might still see a foot-fake down to 41.40 before SLW turns sharply higher.  To make this possibility more interesting for newbies, I'll suggest bidding 41.45 for 200 shares, no stop.

Yesterday's short-squeeze rally looked gutless, since it died three pathetic ticks short of a bullish impulse leg on the hourly chart.  However, DaBoyz will undoubtedly try to pop this brick again today, since there were no pullbacks on Thursday big enough to let shorts off the hook.  Whatever happens, we should set aside the 1295.25 downside target given here earlier, since the actual low at 1298.25 will probably stand for a while. If it doesn't, however, you could bottom-fish a Hidden Pivot at 1292.75, provided 1313.25 (aka point 'c') hasn't been exceeded to the upside overnight.

Based on the $6 trailing stop advised, we exited a single contract yesterday at 1459.00 for a theoretical gain of $1300.  I'd suggested implementing the stop when the rally hit 1464.90.  In the actual event, it hit 1465.00 in the wee hours before falling to 1453.20 over the course of several hours. The rally from that low is continuing into Thursday evening and looks capable of hitting 1492.00 over the near term, although any higher would hint of a (minor) cycle-ending flourish to 1509.50, a Hidden Pivot.

Silver ripped the bad guys a new orifice yesterday, embarking on a wilding spree that looked likely to achieve a minimum 43.61 over the near term.  I gave the coordinates for this target in an update yesterday, but today I've included the actual chart.  You can judge for yourself how compelling the target looks, but to my eye it can't miss. An added plus was that the buying was continuing Thursday night, keeping the futures well aloft of the 41.660 midpoint resistance -- now support -- associated with the target.

Our recent discussion of whether deflation or hyperinflation will lay waste to the economy elicited hundreds of responses. Two of particular interest are featured below.  The first, from blogger Charles Hugh Smith, explains why it may be impossible to know with any certainty which of the two forces will prevail.  The second, the thoughts of a fourth-generation Texas rancher, suggests that in a crisis,  we may discover that our need for protein trumps concerns over gold, silver, Treasury paper and the dollar. Here’s Charles, in an excerpt from an e-mail I received from him several days ago: I certainly wouldn’t want to debate anyone because my arguments are those of a trader, basically, not an economist.  Maybe we will get hyperinflation, I don’t claim to know. What bothers me is the widespread conviction that hyperinflation is “guaranteed.”  This smells like a one-sided trade to me, even if it is more of a meme than a trade. As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation?  The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency.  Meanwhile, the Financial Elites would have lost all their financial wealth.  Have they really transferred all their wealth out of all financial instruments and totally into gold and land?  If so, then owns the $160T in financial wealth? This explanation -- that the wealthy have already transferred