August 2011

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

Baja Mining (BAJFF), initially recommended for purchase at 1.32, is the subject of an upbeat report published August 4 by Haywood Securities. My source notes the following highlights: "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. "I think that Haywood's price targets are very conservative at current copper prices." *** At the moment, Baja shares are getting savaged due to the steep decline of copper prices.  The stock today is trading beneath $1 for the first time since last October and, based on Hidden Pivot analysis, could fall to as low as 0.55, a midpoint support.  I would judge the selling to be egregiously overdone at that point -- even moreso than it is now.  Nonetheless, let the buyer beware.  This was not a "hot tip" as far as I was concerned, but rather the considered opinion of an analyst whose acumen, if not timing, have impressed me in the past. -- RA

We hold the August 175-170 put spread twice for a 0.05 debit.  One easy way to "cover" the spread is to buy two offsetting August 170-175 call spreads. Let's start by trying to buy an August 170 call today for $170 or less.  If we're successful, the worst we can do at expiration would be to make $325 per spread, or $650 on the position. This tactic will leave us with two September 175 calls to short if and when the stock rallies.  The premium we receive for them would boost the $325 gain on the spread by the amount of the sale.  You can take 0.15 of discretion on the bid for August 170 calls. ______ UPDATE (3:13 p.m. ): With a Hidden Pivot bottom in sight, I couldn't resist buying some Sep 175 calls even though they only partially hedge our put spreads rather than offset them.  We acquired the calls for 1.60 when IBM was near its so far intraday low of 166.52. They are currently trading for around 2.35, and I'll suggest for now that you do nothing further.

Shares will get violently crushed on Monday at worst, or gyrate wildly throughout the day at best, now that Standard & Poor’s has downgraded U.S. Treasury debt to a still-delusional AA+. Whatever happens in the silly, benighted world of stocks and bonds, it would be a shame if Wall Street’s headless-chicken act overshadows the deaths of 30 American troops in Afghanistan over the weekend. Twenty-two of them were Navy SEALs from the same elite unit that killed Osama bin Laden in Pakistan in May. They were the best of the best among America’s fighting forces, and their deaths will raise further, grave doubts about the U.S. mission in Afghanistan. When the Russians were there for nine years fighting the mujahedin, we marveled from the sidelines at how the insurgents, armed with U.S.-made Stinger missiles, were proving to be more than a match for Brezhnev’s 40th Army. Now it’s our turn to apply all that we have learned about asymmetrical warfare. The generals say the war is winnable – but then, they always say that. Whether it is winnable or not, the pretense is fading that the Afghanis alone will be able to hold a murderous Taliban at bay as the U.S. draws down its troops ahead of Mr. Obama’s re-election bid. Neither should Americans pretend that giving the Taliban free rein in Afghanistan will be without serious consequences.  For in fact, if and when all of our troops eventually do come home, no U.S. company with offices or operations outside of North America will be safe from bombings, shootings, kidnappings and extortions. Problems Dwarf Presidency In the meantime, perhaps the President should follow Lyndon Johnson’s principled example by resigning. With a war that is going badly and an economy that is headed into Depression, the Republicans are going to have

With an S&P downgrade of U.S. debt in the pipeline, I revisited the Two-Year T-Note chart to see what alternatives might exist to the huge rally that until Friday had seemed possible based on Hidden Pivot analysis of the 30-Year.  Two things are striking: 1) Although I'd projected as high as 143^11 for the September T-Bond if a Hidden Pivot at 135^13 was surpassed, the futures' ballistic rally stopped 1/4-point shy of that threshold on Friday; also, 2) futures for the continuous Two-Year Note came within a hair of an equivalent target at 110^10.  Taking both of these very-near misses together, it's possible to infer that Friday's highs may have marked blow-off tops for Treasury debt prices, and therefore very important lows in yields.

The narrow failure of last Thursday's rally  to exceed a look-to-the-left peak recorded May 4 on the way down is disappointing, but we should probably chalk it up to Silver's propensity to out-do Gold at each turn when it comes to frightening bulls. The subsequent downdraft projects to 36.045, and the target should be taken seriously since its sibling midpoint at 37.955 has already been exceeded by 40 cents.  Alternatively, the futures would need to hit 39.885 (a l-t-l peak from 8/4, around 1 pm. EDT) today to turn the intraday charts bullish once again.