May 2011

A tortuous slog lower looks targeted on 1327.50, a Hidden Pivot support associated with the corrective pattern shown. The tedium may go unalleviated today, given that the rally from yesterday's low has exceed the c-d midpoint by six points.  You can bottom-fish the target with a three-tick stop-loss if the futures eventually get there, as I expect they will.  Bulls would be in the driver's seat again, however, on a print today at 1362.25.

Ya gotta love this stock for hanging tough yesterday when Silver futures were getting savaged. Our 300-share position from 42.01, now hedged with three June 40-May 38 puts spreads legged on for a 0.50 credit, has barely been stressed by the action thus far. That said, we don't want to get sandbagged if the stock falls a further $3 -- which it could! -- while we're busy patting ourselves on the back. I've reproduced a chart alongside that shows the corrective pattern and its 34.17 target. I'll mention as well that a rally would need to clear 38.66 today to somewhat mitigate the threat.

Although some technicians we respect think bullion’s correction will stretch into summer, we think it will be over within a week. In our experience, powerful bull markets recoup violent selloffs with rallies that are just as violent. Silver’s correction has been violent indeed, savaging quotes by 25 percent in just a few days. The catalyst for this brazen shakedown was news Sunday night of Osama bin Laden’s death.  Who needs bullion when the world is about to become an oasis of peace, right? Yeah, sure. When the revelers return to their senses the world will still be a dangerous place, the central banks will still be printing money by the trainload, and nothing will have changed to diminish the defensive appeal of precious metals. Under the circumstances, we doubt that Silver will need much base-building to launch an assault on the supposed $50 “barrier.” We view that number not as impenetrable supply, but rather, as a fat carcass waiting to be picked clean by voracious buyers.  Let J.P. Morgan and their ilk try to hold the line at $50. They’re going to be dead meat eventually, so why not now? In our years of experience on the trading floor, huge supply tends to coax forth huge demand.  As traders like to say, opportunity moves to size.  And while the bad guys may have deep pockets and the ability to create tons of “paper bullion” at will, any suspicion that they are trying to cap Silver at $50 is going transform otherwise docile, go-along buyers into aggressive opportunists.  This will prove to be equally true for Gold, we are certain.  The Chinese government, for one, has given its blessing to any citizen who wants to buy the stuff. Want to stand in their way? Precise Numbers From a technical standpoint, July

I've furnished some precise numbers for Silver and Gold that may be helpful in determining whether this correction is likely to be a protracted affair. There's also an update for the Dollar Index that allows for either of two possibilities, one bearish, the other bullish. Obviously, our outlook for the dollar will significantly influence how we read bullion.  I plan to take a close look at all three vehicles during this morning's tutorial session for Hidden Pivot webinar graduates.

Check Tuesday's chat room discussion from around 18:15, since I've summarized the always interesting thoughts of my colleague Ross Clark of Institutional Advisors (i.e., Bob Hoye, Inc.).  His worst case calls for a correction into the mid-$20s, with $35-$40 the mildest we might see. In either case, the pullback would take six to eight weeks to play out.  Rather than speculate on which, if either, scenario will occur -- and even Ross doesn't expect to know himself for at least a month -- I'll continue to track and forecast Silver in my own way, using target levels and price action at 'p' midpoints. Most immediately, we should expect a strong bounce from 40.015 if a quick recovery is in the offing.  That's the 'd' target of the pattern shown, and the subsequent rally would need to exceed 44.300 this week to suggest that bears may soon be on the defensive again.  However, if the futures should close below 40.015, we'll use 50 percent and 61.8 percent corrections to the January low (26.450) to get a fix on the July contract.  Respectively, they indicate downside targets of 38.145 and 35.385. _______ UPDATE (2:33 p.m. EDT): The plunge from today's 47.375 high has opened up a path to as low as 35.390, subject to a possible bullish reversal from a lesser Hidden Pivot support at 37.280.  The latter number is my minimum downside target for the near-term, although an upthrust before Friday exceeding 44.305 would put bulls back in charge.

The recent high at 1577.40 came close enough to a 1581.20 Hidden Pivot target I'd flagged as important that we should be extra careful for a while, lest we be caught off-guard by an air-pocket or weakness that gains in momentum. In practice, and as always, this will entail closely monitoring the 'p' midpoints and 'd' targets of minor uptrends and downtrends. Most immediately, this implies that the futures must hold above, and rally strongly from, the 1521.60 midpoint support of the pattern shown.  Any lower, especially on a closing basis, would be telegraphing more downside over the near term to at least 1491.80, the midpoint's 'd' sibling. ______ UPDATE (2:37 p.m. EDT):  The 1491.80 downside target is still my minimum objective for this correction.  I've also suggested using camouflage to short any rally to 1521.60, its midpoint sibling.

Our bottom-fishing bid at 1345.25 missed the intraday low by two ticks, so officially we did nothing.  Keep in mind that this weakness has proceeded from within two points of a 1371.00 Hidden Pivot resistance I'd flagged as a potentially important turning point. Although I qualified this by saying the odds were against our catching the exact high of the now 26-month-old Mother of All Bear Rallies, there is always that chance. In any event, the bounce from a clear target yesterday has tipped the odds mildly bullish for the very near-term.  There are no opportune entry spots that I can detect at the moment, but night owls wanting to get long using "camouflage" should reference the look-to-the-left peak highlighted in the chart. _______ UPDATE (2:43 p.m. EDT):  Today's weakness should produce a tradable low at 1327.25 (stop 1326.65), although getting this brick to actually fall today has proven to be quite a task for sellers.  The fact that it has fallen at all suggests that bearish cyclical forces may be at hurricane strength.

Although the price action in bullion has been unusually violently since the world’s most feared terrorist was terminated on Sunday, we’ve been able to harness the swings in our favor without much stress. Yesterday, for instance, Silver Wheaton shares, a favorite with Rick’s Picks subscribers, finally hit a correction target at 36.35 that we’ve been focused on for more than a week. The stock has been up, down and all around in the meantime, but even when it was climbing steeply off a scary low, we’d warned that it was not yet out of the woods. That is still true, although we were able to take a nearly risk-free position just pennies off yesterday’s low. We’d been expecting a tradable bottom at exactly 36.35, a Hidden Pivot support, and it was achieved in the opening minutes of yesterday’s session.  The swoon provided us with an opportunity to hedge a position we’d held for a while:  long 300 shares (or a multiple thereof) from 42.01 against three June 40 puts (or a multiple thereof) acquired for 2.35. Silver Wheaton shares can be extremely volatile, and that’s why we hedged them, buying puts when the stock was relatively strong.  The June puts gave us good downside protection, but it came at a price.  In effect, we were paying $235 to insure each round lot of stock till June 17 against a decline below $40 a share. Fortunately, near the exact bottom of yesterday’s selloff, we were able to short three soon-to-expire May 38 puts against our June 40s for 2.85 apiece. This gave us a $2 vertical put spread – a bearish position – for a net credit of $50 per spread. Ordinarily, one pays money for such spreads rather than taking money in, and if you had bought the spread at

We hold 300 shares with a 42.01 basis against three June 40 puts @ 2.35.  A 36.35 target that at times seemed so improbable has served us well. Now, let it provide a benchmark for shorting May 38 puts.  If the stock gets within 15 cents of the target, sell three of them against the puts we are long, day order. _______ UPDATE (11:53 a.m. EDT):  The longstanding target at 36.35 caught this morning's low within a penny, allowing us to short May 38 puts puts for as much as 2.85.  That means we have effectively legged into a $2 vertical put calendar spread for a net CREDIT of 0.50 (!).  Do nothing further for now, but if you bought stock near the intraday low, I'd suggest taking profits on half of it, since SLW has rallied $1.36 off the low.  That way, even if the stock relapses in a nasty way, as will always be possible, you can still come away with a profit.