Thursday, May 24, 2012

Our large-scale bearish patterns for gold are alive and well after yesterday's aggressive test of the lows, but in the meantime the stage is set for upward impulsiveness and potential camouflage for buyers.  The attached chart shows no fewer than eight prior highs that could be wiped out by a small rally.  Of special importance is the one labelled at 1564.40:  if the futures should surpass it narrowly and then pull back, as shown by the hypothetical dotted line at right, our criteria for camouflage would be exquisitely fulfilled, and traders should buy the 'X' entry point with both hands, placing a stop under 'C' as shown.  If instead gold resumes its downtrend, the pivots and targets mentioned in yesterday's tout remain in effect, except for the midpoint at 1538.40 which was broken.  (Posted by Doug 'harry' McLagan)

Index futures and bullion are going their separate ways early Thursday morning, presumably because gold and silver have some catching up to do following a short-squeeze that pushed the Dow to nearly unchanged after being down nearly 200 points intraday.

To judge whether this rally is impulsive or merely corrective, let's watch to see how buyers handle resistance at 574.53 and 596.48, the respective midpoint and 'D' target of the pattern shown. Apple is our bellwether for the broad averages, since no major rally can occur without its leadership.

June Copper's breach yesterday of a midpoint support at 3.3963 implies more downside over the near term to 3.2605, its 'D' sibling. The futures can be shorted from current levels or bought with a tight stop-loss at the target, but if you attempt the former you should use the 3.3825 low shown in the chart for 'camouflage'.  This implies taking the first 'X' entry signal on a chart of 5-minute degree or less following an impulsive breach of 3.3825.  We've executed this trade many times in uptrending vehicles, but it's time we started practicing on southbound traffic. _______ Note: The corresponding target for the July contract is 3.2560, and for the external low, 3.2700. _______ UPDATE (July 7, 10:13 a.m. EDT):  The June contract has bounced reflexively off a recent low of 3.2380. It is bearish that the downside target was exceeded by nearly 2 cents, but bulls would take command of the short- to intermediate-term if they can muster a push exceeding May 21's 3.5380 peak.

The futures were bound for 1329.75 at day's end, assuming the short-squeeze begun from well below these level carries into Thursday. The 1319.25 midpoint is too close to yesterday's high to be worth much for 'camouflage', but if the futures get through both of these resistances, you can safely infer that bulls will remain in charge into week's end at least. My maximum upside objective for the near term (i.e., through Friday) is 1333.25.

With the Dow down almost 200 points yesterday, we were kicking ourselves for having scratched a bearish “strangle” position in the QQQs the day before. We’d been long the June 65 calls and June 62 puts in a slightly bearish ratio, having paid a relatively whopping $444 for this high-leverage bet on volatility. We say “a whopping $444” because it is only on very occasions that Rick’s Picks has recommended taking positions with puts and/or calls that risked more than theoretical nickels and dimes. Usually, we try to leg into vertical spreads or butterflies so that risk has been reduced in theory to zero (or less, if possible, since one can sometimes leg into vertical bull or bear spreads so that they are carried, effectively, for a net credit). Just this once however, we’d justified entering the trade on the prospect of an avalanche in stocks to kick off what is looking increasingly like a nascent bear market. But straddle bets are expensive, akin to betting on longshots at the race track. And with June expiration stealing up on option-premium buyers  -- essentially, retail suckers -- there was risk that the remaining time premium would implode if the broad averages noodled around for more than another day or two.  Friday would come, and it would dawn on the rubes that expiration lay just three weeks down the road – on the 15th of the month, the earliest expiration date possible, since June 1 falls on a Friday. We Remain Skeptical And so, bearish as we were – still are – we decided to cut and run.  The decision looked like perfectly bad timing yesterday around mid-morning, when stocks were getting schmeissed. Fortunately, however, the decision to exit the strangle with neither a gain nor a loss proved to have been