September 2008

Houston, we've got a problem. Mere days after the U.S. government announced the biggest corporate bailout in human history, investors have already stopped acting relieved. The persnickety S.O.B.s sent the Dow Industrials tumbling 280 points yesterday, wiping out nearly all of the gains that initially had greeted the news. We never thought the good times would last, but bailout hype should have been good for more than the 18-hour short-squeeze that we got. Actually, it was a little worse than that, since the stock market had one more thing going for it yesterday ' oil prices dropping toward $100 ' but failed to convert it into gains. Oil's latest plunge took its toll on bullion as well, but not without creating a crystal-clear price target for December Comex Gold that we will use as a minimum downside objective. It and an equally compelling target in the S&Ps have been identified in the Touts section of Wednesday's Rick's Picks. Through it all, the dollar was somewhat quiescent, if not to say cryptic. Since the greenback has generated quite a bit of discussion in the chat room, and because a strong dollar seems almost inexplicable in the light of the Fanniefreddie bailout, I am reprinting a monograph that I wrote several years ago that considered the possibility of a short-squeeze on the dollar. That such a thing could occur seems counterintuitive with the U.S. Government pledging trillions of dollars it does not possess in order to prop up the banking system. But there is a certain logic to it, so see if you don't agree. Here's the article, which is archived with other things I have written at www.gold-eagle.com: : When Debtors Must Settle in Cash Is the dollar susceptible to a short squeeze? I pursued an answer to that question years

We exited our January 60 call on the opening for 4.50, and if you followed my advice exactly you would have realized a profit of $280 for holding onto this position for two days. I might have stuck with this this one for a while longer, but we must pay heed to the fact that at yesterday's highs, Target failed to create a bullish impulse leg on the weekly chart (see inset). This is not necessarily ominous, and I still like the stock as a defensive play, but it implies that any significant progress above yesterday's spike high could be labored, eroding the time value of our call option.

Using a signal disseminated in the chat room, we tried to bottom-fish the 1238.50 midpoint shown in the accompanying chart. When the 3-tick stop-loss was breached, though, it was time to turn tail. At least one trader went short on the break, though, since it implied more downside to 1195.00. That is my minimum projection for today, and the target can be bottom-fished with a stop-loss of 1.25 points. Nightowls can try and catch the southbound ride by shorting the midpoint or perhaps the 'd' target of any retracement rally that surfaces on the 5-minute chart. Please note that the futures would need to hit 1240.50 to abort the downtrend. _______ UPDATE: As of 2:30 a.m. EDT, the E-Mini looked like it was doing its evil best to trap bulls with a low volume squeeze in the dead of night. A Hidden Pivot at 1244.00 looks like it will be the end of it, if not somewhere lower, but the pivot is not worth shorting because it lies within the thick of a visually evident supply zone on the 5-minute chart.

A 738.80 target broached yesterday in the chat room is my minimum downside projection for the near term, but if the futures close below it, that would create additional downside jeopardy to as low as 628.00. The pattern speaks with authority, since the AB impulse portion was sufficiently powerful to breach two internal and one external lows on the weekly chart without a correction. However, if the futures are going to turn decisively higher, it would take a print today at 809.60 to signal it.

The futures found almost no discernible support yesterday at 11.205, the Hidden Pivot target I'd flagged as a minimum downside objective. They have since created a modest, bullish impulse leg off an 11.015 low, but if it fails to produce a follow through overnight, the next stop below would be 10.615, a Hidden Pivot support that comes off the 30-minute chart. (A=11.850, 9/9, 1:00 p.m. EDT.) To reverse the bearish tide decisively, December Silver would need to print 12.800 before week's end.

There's a midpoint Hidden Pivot support at 112.26 where we can attempt to bottom-fish today using the September 112 calls (DIAIA). The calls would be a good buy for around 1.95 with DIA trading at the target, so bid there for two contracts but stop yourself out if they trade 15 cents lower. _____ UPDATE: The 112.26 target given above missed today's low by just 0.08 points -- very close, considering the broad range DIA has traversed today, but not quite close enough to get us aboard. The call option traded down to 2.08, suggesting that it would have been priced slightly above our bid if the stock had come down to the target. When this happens, if you are able to monitor the order in real time, it is the stock price that should guide you in making entry and not the price I've suggested you pay for the option, since that is just a guesstimate. You should try to buy the option for whatever bid price obtains -- or perhaps a penny or two more -- when the underlying stock is kissing the pivot. We try not to give up even a penny's edge if we can avoid it, since the deck is so heavily stacked against the retail customer. Our edge, such as it is, lies in "knowing" exactly where the stock is likely to turn.

With this latest bailout, perhaps die-hard inflationists will begin to notice that higher grocery and fuel bills are small potatoes compared to the epic deflationary bust laying waste to the financial system. Americans may be throwing away $700 billion a year on foreign oil, but the economic impact of this waste pales in comparison to the implosion of a global financial edifice aggregating into the hundreds of trillions of dollars. At least burning all of that fuel has kept the country moving, economically speaking. We'll receive no such benefit as deflation continues to lop zeroes from the collective value of our homes (and therefore from Fanniefreddie's supposedly rescued $5.2 trillion portfolio). Just the opposite, in fact. Trillions will simply vanish from the electronic ledgers, and it will be as though most of our wealth had been sent into oblivion by some malevolent computer virus. As we have noted here before, deflation will not be dot-com mania in reverse, providing huge opportunities for bearish bettors; rather, it portends a deleveraging of assets that will be all but unexploitable, even by the savviest investors. How many speculators became billionaires by betting the 'don't pass' line on subprimes? As far as we're aware, only one guy made a big enough score to rate a front-page feature in The Wall Street Journal. Considering how obvious it was, even several years ago, that the housing sector was headed for collapse, one might have expected quite a few more speculators to hit it big. In fact, the one guy made out so well because 99% of investors were on the wrong side of the bet. And they still are. The collapse of the banks has left bears precious little to sell short, at least little that promises the kind of leverage dot-com insiders enjoyed when they

I'll take Silver first today, since there were some frightening estimates of its immediate downside potential under discussion in the chat room Monday night. By my calculations, the ugliest of the targets lies at 6.73, but I would rule it out for now, since the terminus of the AB impulse leg failed to exceed the key low at 11.830 recorded in August a year ago. The hourly chart is another matter, though, and it would seem to point very clearly to 11.205 as the next important stop on the way down. Its midpoint sibling at 12.670 did not work precisely, but there is nonetheless a distributive oscillation centered on that price, somewhat corroborating the 11.205 projection. However, our best bet for bottom-fishing above that number may lie at 11.650, a lesser Hidden Pivot support whose provenance is shown in the accompanying chart. You can stop it very tightly, but keep in mind that a decisive penetration would indicate more downside to 11.205 (which can also be bottom-fished). _______ UPDATE: The hidden support at 11.650 got pasted, suggesting more weakness down to at least 11.205. As of the moment, the futures have rallied 30 cents off an 11.555 low.

Gold has put up more of a fight than Silver lately and looks no worse than neutral-to-mildly-bearish at the moment. If it heads lower nonetheless, there's a Hidden Pivot support with so-so appeal at 793.00 that we can use for a minimum downside projection, although not for aggressive bottom-fishing. Alternatively, it would take a print today at 810.70 to turn the lesser charts faintly bullish. _______ UPDATE: As of 7:15 a.m. EDT, gold had coyly flirted with both ends of the forecast range. If you're planning to trade it today, you may wind up spending a tedious day on the 3- and 5-minute bar charts.