July 2010

Turns out we weren’t the only ones who must have been doubting every uptick of last week’s phony, witless rally. How could one not distrust a stock market that has been surging higher solely because of short-covering and the manipulation of index futures each and every night during the wee hours on razor-thin volume?  Now, however, we learn that bullish sentiment is at an extreme low of 21%, according to the latest numbers from AAII. What this implies is that there are simply too many bears for stocks to collapse at this moment, notwithstanding the fact that the economy’s statistical slide into Depression appears to have resumed in earnest. The last time there were so few bulls was in March 2009, when this Mother of All Bear Rallies commenced. Although we strongly doubt that the current dearth of bulls portends the start of a major new up-cycle, we’re willing to go with the flow for perhaps another week or two before we start resisting the tape once again with some speculative put-buying. Technically speaking, according to the Hidden Pivot Method, the Dow Industrials, which are currently trading near 10200, would need to hit 10921 this month to earn even the slightest benefit of the doubt. At any rate, we expect the market to be in feel-good mode as the new week begins, assuming the mildly encouraging news that has been emanating from the Gulf of Mexico continues to wax. Under the circumstances, bears will be especially vulnerable on Monday to yet another short-covering panic. Very Bullish on Gold As counterpoint to our own, fervently bearish, bias, we offer below the unmitigated optimism of our friend Chuck Cohen, a NYC-based consultant who designs gold investment strategies for clients both big and small. (Click here if you’d like a free consultation.)  Chuck sent

We added a short August 102 put to our position for 3.10, making us long six August 98 puts and short three August 102 puts for a net debit of 2.28.  On a delta basis, the position is nearly dead-neutral at current prices, but because it is a backspread, we'll automatically get longer if DIA rises and shorter if DIA falls. For now, no position adjustment is necessary, but you should check this tout (or the chat room) for intraday updates, since a violent move could bring us opportunity.

The AB segment on the accompanying chart looks too elongated to generate a like C-D leg, but we'll use it nonetheless, since price action at the 10261 Hidden Pivot midpoint can tell us if we're on the right track.  A pullback from that number, precisely, would indicate 10489 if it is subsequently breached.

No sooner had we finished reading a breathless note from our friend Chuck Cohen -- "Major, MAJOR bottom here" -- than we received an e-mail from Jonathan Auerbach at Auerbach & Grayson saying more or less the same thing. Each notes that bullish sentiment as recorded by AAII, a contrary indicator, is about as low as it gets.  While I greatly respect both of these guys, and although I think stocks are going higher over the near term, I remain skeptical that we are witnessing the start of a major bear rally. To access the A&G report -- a fascinating read, as always -- click here.  I will post Chuck's essay as commentary over the weekend.

I was only half-kidding in today's commentary about DaBoyz' perpetual motion machine, since they appear to have trapped bears but good this time. Slightly more than half of the losses since June 21 have been recouped in just three days, attesting to the vicious power of this short-squeeze.  This is bearish action, for sure, but that could be scant comfort to those who elected to stay short when the closing bell sounded on Thursday.

Here's Silver, trading exactly where it was in early January. That should temper our expectations for the moment, although it should be noted that an impulsive dip below 17.150 would not exactly be a sign of good health. More immediately, there remains the prospect of a test of trendline support that comes in today near 17.350. Alternatively, it would take an upthrust to at least 18.185 to stir up a mote of bullish enthusiasm.  That's a tick above a look-to-the-left peak that doesn't even exist until one zooms down to the 10-minute bars or less.

You know the drill by now: a push to at least 1222.90 is needed to suggest that bulls are doing more than merely breathing. In the meantime, the 1162.30 correction target is sill viable. Night owls can look for bull camouflage in the pattern shown. If it develops as such, affording an opportunity to get long at 'X', no more than a few ticks should be risked, and partial profits should be taken at 'p' if the position contains more than a single contract. _______ UPDATE (11:57 a.m. EDT):  The trade shown in the chart triggered, but the ensuing rally died at the Hidden Pivot midpoint.  The trade therefore would have been a small winner, or a scratch at worst, but it wasn't until the futures had noodled around for another six hours that they took off in earnest, rallying $20 from the evening/overnight lows. This took them as high today as 1214.10 -- not quite sufficient yet to celebrate.

It's difficult to imagine that yesterday's price action will turn out to have been distribution, so we'll assume the futures are going higher into week's end. The Dark Arts of Hidden Pivotry suggest 1105.50 is possible, but we should also pay heed to the 0.618 Fibo line. Relative to the selloff from the summer solstice high, it comes in at 1081.25 and seems like a logical minimum upside target now that the 50% line at 1066.25 has been breached. Alternatively, if the futures should astonish and delight by collapsing, a midpoint support at 1030.50 will be in play provided 1068.50 has not been exceeded first.

With bears struggling to hold stocks down yesterday, we temporarily neutralized our short position just before stocks took off, selling two August 102 puts for 3.70 against six August 98 puts already held for an average 2.13.  This is a "backspread" position, and it will automatically make us longer if DIA goes up and shorter if DIA goes down. The tradeoff is that time decay will work against us, and that the position is a loser at expiration if the underlying vehicle is sitting near 98.  We have plenty of time to adjust, though, and the adjustment that will work best implies selling into strength and buying into weakness. For now, however, do nothing further. Wait till you see how much fun this can be if the Diamonds should turn violent! _______ UPDATE (2:48 p.m. EDT):  Short one more August 102 put for 3.10 or better. They are currently 3.10 bid with DIA trading 101.68. The resulting backspread -- long six August 98 puts, short three August 102 puts -- leaves us net short the equivalent of 24 shares, but we will automatically become long if DIA moves up just 20 or so cents from here. Our average cost per ratio spread is 76 cents (3.50 average per each August 102 versus 2.13 x 2 cost for the August 98s). This position will have to be worked to overcome the disadvantage of time decay and the prospect of a worst-case loss if the options expire with DIA trading around 98. One way to do this would be to short August 94 puts if DIA falls sometime in the next few weeks.  That would turn our vertical ratio spread into a butterfly yielding a profit, or at least no loss, over a wide price range. If DIA simply goes up, up, up, then our