Tuesday, August 9, 2011

We hold a thousand shares purchased for 1.31 just before the price of Copper began to collapse.  Although my source for the recommendation has reaffirmed his enthusiasm for the stock (see below), the very bad timing of it has worked against us.  As a result, and because I trust my technical tools far more than the opinion of any analyst, I will no longer publish "tips," hot or otherwise, without a compelling Hidden Pivot rationale for getting us aboard. I don't doubt that Baja offers good value, just as my source says, but even "great values" can get trashed if investors are in the wrong mood. Be that as it may, here are a few encouraging words excerpted from an August 4 report on Baja from Haywood Securities: "Annual production during the first 6 years of full production is expected to average 125 Mlb of copper, 3.7 Mlb of cobalt, and 25,400 tonnes of zinc sulphate monohydrate (100% basis). Our model includes a life-of-mine average total copper cash cost of US$0.40/lb net of cobalt and zinc credits, which places the project within the lower half of the global copper cost curve. "Baja's portion of this production is 70%. Baja has less than 400 million shares fully diluted and the project a minimum mine life (albeit at somewhat lower grades) of 25 years." Adds my source: "I think that Haywood's price targets are very conservative at current copper prices." Officially, we'll continue to hold the stock. Please be aware, however, that, with the stock's recent breakdown, the 30-minute chart is indicating more slippage to as low as 0.842 over the near term.

We hold the August 175-170 put spread twice for a 0.05 debit -- and now two August 175 calls acquired yesterday for 1.60. They are of little concern, however, since our put spread will only increase in value if a weak IBM causes the calls to fall. For now, offer the put spreads to close for 4.00 with 0.20 of discretion. For the order to fill, the August 170-175 call spread would have to be trading for around 1.00. (Note: If you can buy the call spread at that price, I'd suggest doing so instead of trying to close out the puts. This would effectively leave us with no position in the August 175 calls, but it won't be terribly risky to leave short 170s uncovered for a short while.  In any event, if there are changes to be made, I'll signal via an intraday alert.) _______ UPDATE (4:04 p.m. EDT):  Until I've heard from a few subscribers, I'll tentatively record an opening purchase of two August 170-175 call spreads for 1.00.  This shouldn't have been too difficult, since the spread was do-able for as little as 0.87 when the calls were hitting bottom.  Since we were long two August 175 calls in addition to the puts, we are now long two puts spreads (for a 0.05 debit) and long two August 170 calls. This will allow us to short two August 175 calls without risk, and whatever we receive as premium will be "gravy" on top of the $790 profit we have effectively "locked in" on the put spreads.  Accordingly, and assuming your position matches the one I've detailed, you should short two September 175 calls at will.  They are currently trading for around 1.75.

How silly of me to think that because the S&P downgrade coincided with a rally by this vehicle to a moderately important Hidden Pivot target, that -- just maybe -- an important top was in. Perhaps it was just a lack of imagination that caused me to overlook the possibility that speculators would stampede to the supposed safety of the very vehicles that had been downgraded?  Anyway, it is now clear that the 143 target given here earlier is in play, along with the prospect of long-term yields falling below 2.5%.  The bonds seem to be sniffing economic Depression, and who are we to argue?

Ordinarily, I would say don't worry, Gold's rampage will pull Silver higher no matter how timid buyers of the latter seem to have become. However, it will probably serve us better to read September Silver's chart as though it were the chart of a stock we love to hate, such as Goldman Sachs.  From that perspective, the failure of the last rally to exceed the look-to-the-left peak at  42.330 (see inset) must be acknowledged as a reason for doubt -- or at least caution. More immediately, it would be sign of waxing strength if the day-old correction is able to turn without having breached a 38.030 midpoint support visible on the larger charts (240m, A=42.295 on 8/4; B=37.550 on  8/5). If not, the midpoint's 'd' sibling at 35.660 will be in play. ______ UPDATE (2:53 a.m. EDT): Although there have been times when the Gold:Silver ratio was higher than the current 46, there may never have been a time when the day-to-day disconnect between the two was more pronounced. December Gold is up $43 at the moment, September Silver down 46 cents.  If the purpose of this little exercise is to dampen speculation on Silver's next run-up, it seems likely to work. Meanwhile, we shudder to imagine what would/will happen to Silver if Gold pulls back sharply.

In after-hours trading, the futures have gotten still closer to the 1728.00 target that has served us so well.  If you revisit the chart I used to project that number in the archive, you'll understand why we should be especially cautious right now.  For now, I'll recommend that 'camo' traders look for a minor (i.e., 15-minute chart or less) abc pattern to get short or to initiate a hedge against a long-term position. That said, I'll reiterate that a decisive move of perhaps $3 above the Hidden Pivot would be hinting of even more strength to come, while a two-day close above it would be a bright green light for bulls. _______ UPDATE (2:09 a.m. EDT): Buyers have demolished the 1728 target tonight, and because it was a quite substantial Hidden Pivot (i.e., definitely NOT chopped liver), I can only infer that significantly higher prices impend.  A hidden resistance at 1846.10 will exhaust the intraday charts (240m, A=1481.00 on July 1, B=1684.90 on August 4, and C=1642.20, p=1744.20) as an upside price objective for the near term, but if we spread out the bars of a continuous "daily," another at 1882.00 comes into view (A=1165.30, B=1581.20). Two major rally targets within $40 of each other demands caution, but our bias for trading purposes should nonetheless be aggressively bullish.

At yesterday's lows, the Indoos had exceeded by 27 points a 0.618 retracement of the bull cycle begun last July from 9614. However, it would take a further collapse of nearly 2000 more points to retrace 0.618 of the Mother of All Bear Rallies begun in March 2009.  The exact level is 8872, and we should remind ourselves that, hard as the averages have fallen in recent days, it's possible the worst is still to come. Most immediately, though, the Indoos are stealing up on the 10784 target shown. Its breach would of course be warning of yet more weakness to come. I am not suggesting that you bottom-fish in the Mini-Dow, however, because the equivalent pivot has already been exceeded.

Since there are no big patterns sufficiently compelling to measure and predict this selloff, I'll suggest using the lesser charts and taking the down-legs one at a time. Most immediately, that would imply just a bit more short-term weakness, to at least 1095.75, in after-hours trading. That number can be bottom-fished with a stop-loss as tight as 1094.75, but you may be able to reduce the risk even further by using camouflage to get aboard on the first abc rally pattern from very near the target. As always, an easy breach of the support would imply there is weakness, possibly considerable, remaining to be spent. ______ UPDATE (2:29 a.m. EDT): DaBoyz are taking no prisoners tonight! They hauled the futures down the equivalent of 300 Dow points on thin volume after the close, then goosed them into positive territory just moments ago for the first time tonight. Let's puts Hidden Pivots aside for the moment and focus on two short-squeeze targets that would represent a 50% retracement of the collapse from the July 22 high, and a 61.8% retracement. The targets lie at, respectively, 1212.50 and 1244.50.

And how did Treasury paper do following Standard & Poor’s bombshell downgrade of U.S. debt?  Why, T-Bonds, Bills and Notes came through unscathed, thank you. Actually, they did much better than that, rallying so sharply yesterday that one might have inferred the U.S. was the last citadel against the panic, confusion and fear that rein elsewhere in the world. Which is more or less true, relatively speaking.  We hesitate to describe yesterday’s tidal surge in Treasurys as counterintuitive, however, since, officially, U.S. debt is still rated AA+.  That’s a tad optimistic, if not to say delusional, given the fact that U.S. borrowing is eventually headed north of $20 trillion.  How could debt not be about to go parabolic now that Congress has discovered that the debt ceiling can be raised without exacting a fiscal price, or even a political one? Even so, and as the mortgage boom/bust demonstrated, institutional investors base their allocations not on fundamentals or even reality, but on the official say-so of the ratings agencies.  And although we all understand that the AA+ rating is conferred with a wink and a nod, it has always been in Wall Street's best interests to pretend to take it seriously. Keep in mind as well that neither Moody’s nor Fitch’s has gone along with the downgrade, at least not yet.  This will suffice to allow those who have been mindlessly pouring cash into the Treasury of a nation edging toward bankruptcy to credibly claim down the road that, at the time, the U.S. was still officially the safest place on earth to park one’s cash.  They’ll be correct about that, too, since U.S. Treasury paper has become the only sanctioned safe haven for the very biggest money.  George Soros undoubtedly recognized this when he decided to shut down Quantum.  These