April 2012

First things first, for those who don’t already receive these commentaries by e-mail: If you’d like to be entered in a weekly drawing to win a three-month subscription to Rick’s Picks worth $106, click here. What do paying subscribers get that lurkers don’t?  Plenty. Yesterday, for instance, they were advised to cover half of a bullish position we’d staked out in GDXJ, a vehicle popular with the gold crowd that tracks junior mining stocks. We paid an average 1.85 for some August near-the-money call options, but because the stock has been strong this week, we were able to exit half of them yesterday for 2.25, a nickel off the high. The implied 40-cent profit has effectively reduced the costs basis of the calls we still hold to 1.45.  Considering that the options have more than four months till expiration, odds of making a profit look pretty good. Ordinarily, the odds are horrendous for retail customers who simply buy puts or calls based on hunches. How bad are the odds?  If it’s a bearish hunch your playing, you’ve got a better chance of making money by matching three numbers on a lotto ticket. I’ve been trading options for nearly 40 years, twelve of them on an exchange floor, and have yet to meet a single person who has made money on put options over time. The odds aren’t much better for buy-and-hold call buyers, either. All options are “wasting assets” because their value decreases as their expiration date draws near.  Because of this, options positions must be “worked” to produce a profit. The Option ‘Sweet Spot’ One way we might work our August call position is to sell other calls against it. For example, if the stock continues to rally, we might be able to sell August 25 calls for 0.45

Gold and Silver futures had steep moves yesterday, and although this will make "camouflage" tough to find for getting long, it does not preclude the possibility of using a timed buy-stop. For a hypothetical idea of what your entry opportunity might look like, check out the chart accompanying today's May Silver tout.

We hold two August 23.63 calls (or a multiple thereof) with an effective cost basis of 1.45 after closing out half of our position at 2.25.  Just for the hell of it, during yesterday's impromptu trading session, I suggested buying April 25 calls for 0.15, but the order was time- and price-limited because of the mayfly nature of  these options. If you bought any, be warned that they will grow heavier by the hour on Friday if GDXJ does no better than stay buoyant. We'll look to sell some premium against our Auggie 23.63s if GDXJ continues to move higher, but for now do nothing further. ________ UPDATE (11:25 a.m. EDT): This vehicle has reverted to its usual, sick-and-tired self, meandering lower after a promising rally last week. However, because we are aboard at a great price, we'll simply stick with the position.  That could change, however, if there's bearish interaction with the 22.28 midpoint support of a pattern that projects to 20.72 (Daily, A=25.14 on 4/2, and B= 22.01 on 4/10. ______  UPDATE (April 6, 2:35 a.m. EDT):  With immediate downside risk to 20.66, or even to 19.50, let's set a stop-loss at 1.55 and stick with it.  Better to re-establish a position later at a higher price than subject ourselves to the pain and desperation of having to hope this piece of crap turns around.  _______ FURTHER UPDATE (April 23, 1:58 p.m. EDT):  In fact, the little piece of crap did NOT turn around, and so we exited our option position for 1.50 -- slightly more than we paid for it. We'll try again later, but please note that today's price action has confirmed the likelihood of more downside to at least 20.72.  If GDXJ turns higher without hitting that Hidden Pivot, we should be prepared to 'camo'

Gold is in a shallow pullback late Thursday night after an encouraging $30 run-up, suggesting it wants to keep going on Friday. Although we might ordinarily expect the futures to peak overnight, the heavy lifting will already have been accomplished with any move that surpasses the two daunting structural peaks shown in the chart. They lie, respectively,  at 1685.40 and 1699.60. Night owls can try boarding via a timed buy-stop, a strategy I've recommended in Silver because of the steepness of the A-B impulse leg. To see what's required, check out the Silver chart, since it's nearly identical to Gold's. ______ UPDATE (2:15 p.m. EDT): Gold has relapsed without challenging the two peaks noted above. The closest Hidden Pivot support where we might look for a turn lies not far below, at 1645.10, but if this midpoint fails, we'd be looking at a likely 1608.90 (daily chart, A=1685.40 on April 2, and B=1613.00).

May Silver did everything we could have asked of it and more yesterday, blowing past a series of peaks from the last few days, but also muscling its way past one more external peak "along the wall" for good measure. The rally is a bit steep for us to presume that entry via camouflage will be easy, but the conditions are right for attempting it via a "timed buy-stop".  Essentially, this means getting long at the 'X' trigger, but sticking with the position only if it is in-the-black after perhaps 30-45 seconds. The accompanying chart is meant to instruct, but also to inspire. ______ UPDATE (2:09 p.m. EDT):  Silver has fallen hard, giving up all of yesterday's gains and more, and bringing into focus a 29.355 downside target (daily chart, A=37.580 on February 29 and B=32.490).

By day's end the futures had surpassed all of the immediate 'external' peaks on the hourly chart, signaling their intention of moving still higher into week's end. DaBoyz will face a pocket of supply just above, in the range 1390-1397 where some distribution took place last week. However, if They are serious about scaring hell out of bears, setting the stage for a short-squeeze start to next week, they'll go all-out to close this cinder block near 1415.00 where there's some serious supply from late March/early April. ______ UPDATE (2:05 p.m. EDT): The effort peaked overnight at 1388.50, a tad beneath the 1390 supply threshold noted above.  The moderate selloff that ensued has done little technical damage. Indeed, the futures would need to fall all the way to 1332.50 before the weakness begins to look menacing.

Gold and Silver had rallied a day earlier, but we found good technical reasons to avoid having this color our usually grey objectivity. Weakness was in fact evident, mainly in the narrow failure of June Gold to reach a clear and compelling rally target. A similar observation obtained for the E-Mini S&P, which was rebounding after the previous day’s selloff, the biggest so far in 2012. This vehicle ,too, had fallen just shy of a clear rally target, giving us reason to infer that weakness would soon return. Finally, we talked about preparing psychologically to trade in a bear market. Because the camouflage technique was developed in the context of a market that has been trending upward for more than three years, we will need to adapt our thinking before we are comfortable shorting tops rather than fishing bottoms.

The tout for June Gold is actionable, but my advice calls for using a conventional trendline as a reference point to determine when the futures have broken out and are suitable for "camouflage".  The Silver analysis remains unchanged.

Using the 180-minute chart, I've drawn a conventional trendline that can alert us to a bullish breakout before this vehicle exceeds the nearest 'external' peaks on the intraday charts. They are a hefty leap from current levels, as noted here yesterday, and that's why I'm going to suggest using the trendline to time your camouflage entry. It will come in around 1663.90 on the first bar of the day, but you'll need to draw your own line on a chart of lesser degree to estimate its slope precisely enough for 'camo' purposes. ______ UPDATE (11:53 a.m. EDT):  Much as a ballistic rally through a midpoint Hidden Pivot is especially bullish, so is one through a conventional trendline.  This one projects to at least 1683.30, implying that buyers will test supply near 1865, early April's high.  Traders will want to note that the futures at this moment are trading just a millimeter shy of  the first of some 'external' peaks made April 3 that could be useful for camouflage.