When the correction begun around ten days ago from a 29.77 Hidden Pivot target ends, expect the next rally cycle to achieve a gain of about $4. Sellers somewhat dominated last week while failing to do much damage. Considering the menacing look of stochastic indicators on the daily chart, the selloff could have been much worse. Now, the stochastic divergence (see chart inset) has nearly corrected, with the indicator approaching an oversold zone that hasn’t been penetrated in nearly four months. This attests to the strength of the uptrend and the enthusiasm of buyers. We can’t rule out a downdraft that would shake out the weak hands, but for the moment things look mellow. We continue to hold 6th Sep 29/31 vertical spreads effectively for free, although subscribers have reported variations on this. ______ UPDATE Aug 20, 7:15): A diagonal put spread — Long 30th Aug 28 puts, short 27th Sep 27 puts — has comfortably offset the call spread. The first leg of this spread — buy Aug 28 puts — was posted in the Trading Room on August 7, and the position has provided insurance against a downdraft. The short side was legged on shortly afterward for 0.02 less than paid for the 28s, making the position nearly riskless. Note that the 28 put will be held ‘naked’ if GDX is above 28 come Friday when the 27s expire. _______ UPDATE (Aug 23, 10:59 a.m. ET): If GDX rolls over from these levels, or merely rallies half-heartedly, it will generate a third, diverging stochastic peak. (Click here for chart.) This implies that any selloff from these levels could be a doozy. I am at the airport but decided the update couldn’t wait. I have a GDX 28/27 diagonal put spread on (see above), but I will not roll it when the short 27s expire today. I’ll be long the call spread and, against it, naked long the 30th Aug 28 next week. ________ UPDATE (Aug 24, 11:10 a.m.): Friday’s strong leap has taken some of the menace out of the stochastic indicator noted above. If the rally continues into next week, the threat will pass entirely. In any event, I am long a bunch of 6th Sep 29/31 call spreads against naked 30th Aug 28 puts that effectively cost me nothing. If GDX pushes above 31 over the next 3-4 days, I will offer the by-then in-the-money call spread, which has the potential to pay off at $200 per copy, for around $150 or so. Of course, gold’s strength will diminish if DaBoyz rally the stock market, so we’ll all be rooting for the broad averages to get obliterated.
GDX – Gold Miners ETF (Last:29.64)