Commentary for the Week of March 8

Silver's lesser charts look better fortified to buck adversity today than Gold's, but the July contract could still fall to as low as 18.115 if bears rampage. Looking on the bright side, and taking it one small step at a time, a print above 18.890 would indicate more upside to 19.040, and a close above that Hidden Pivot resistance would telegraph a resurgence to as high as 19.735 over the near-term. That last target would be subject to a possible stall at its sibling midpoint, 19.165.

We continue to hold two August 98 puts for 1.06 and four July 96 puts for 0.70.  DIA bottomed yesterday almost to-the-tick on the target I'd flagged in the chat room, but the weak close suggests that selling could gain momentum today. Let's be ready to leverage disaster with a "stink offer" of 1.40 for four July 90 puts, good-till-canceled. If this short is filled, we will have legged into a $6 vertical put spread with $530 of profit potential for each spread, a worst-case gain of $350 for the entire position, and no possibility of loss. For your information, the Diamonds would need to fall to around 95.79 this week, equivalent to about 7%, to push the July 90 puts up to 1.40.  This estimate is based on a moderate increase of about 6% in the volatility of July options.  The parameters I used are shown in the option calculator (inset).

The hourly chart is still working on the bearish impulse leg begun Monday, implying that if the downtrend continues, we could hazard a bid at 1227.40, the midpoint support shown in the chart. The trade will remain valid as long as the point 'C' of the pattern, 1244.00, has not been exceeded. Please note that the futures would be indicating more downside to as low as 1210.80 if they close beneath 1227.40 or trade more than 2.50 points below it intraday.  A six-tick stop-loss is suggested for the 1227.40 bid.  Alternatively, a bullish thrust would be unimpeded to 1250.70, a midpoint resistance tied to a 'D' target at 1269.80. The first hint that bulls have regained control would come on a 1244.40 print, one tick above a look-to-the-left peak that is nicely visible on the 15m chart. ______ UPDATE (10:38 a.m. EDT): The futures ascended to a higher platform overnight before diving this morning, so we did nothing on the order. The new pattern projects to 1214.20, and because the selling has already breached the 1230.80 midpoint, we should infer the target is likely to be reached. To turn things around, bulls would need to punch the futures up to at least 1237.20 within the next couple of hours or or so.

Will a squabble with his Afghanistan troop commander be the undoing of the Obama presidency?  And will that prove to be the straw that broke the camel’s back on Wall Street, which has been blithely buying up shares for sixteen months in the face of the worst economic crisis since the Great Depression? The Republic is already reeling from the disaster in the Gulf of Mexico; from the looming bankruptcy of scores of states and big cities; from the just-begun, second wave of the housing bust; from the mountainous juggernaut of new taxes that will be needed to pay for Government’s breathtaking expansion into healthcare and just about everything else. Add in a decisive failure in Afghanistan, and there are more problems than the November elections could conceivably resolve. It’s one thing to hope that America will toss the bums out, but we don’t envy their replacements the task they will face if the economy’s plunge is approaching terminal velocity when the new Congress is sworn in in late autumn. In the meantime, we won’t quibble with Mr. Obama’s decision to call Gen. McChrystal on the carpet. It was an unfathomable lapse for a military man with a crucial role in the nation’s defense to loosen up in an interview with, of all publications, The Rolling Stone.  He made the President look bad by saying Obama had seemed “uncomfortable and intimidated” at a meeting with military brass.  As plausible as this sounds, McChrystal should never have brought it up. Under the circumstances, the President has no choice but to project forcefulness in dealing with the errant general. But fire him?  The general’s war record in Iraq earned him the respect of his troops, and the last thing they need is to lose their commander because he spoke rashly. Moreover, the

The bounce from 85.09 yesterday occurred close enough to our 85.01 target to imply that Hidden Pivots are calling the dollar's tune. If so, there are signs of weakness already starting to creep into the rally, since it should have reached 86.16 but only got to 86.04 (at least so far). Another subtle sign that bulls are lacking in gumption is their failure to surpass the look-to-the-left peak shown in the chart. If this rally were headed for significance, let alone greatness, the micro-resistance at 86.04 should have posed no problem. Instead, it capped buying for the day. _____ UPDATE (11:51 a.m. EDT): DXY got past all of the resistance points noted above, but because it took a second running start and a second day to do it, we shouldn't be too impressed.

Like Gold, Silver took an impulsive plunge on the hourly chart yesterday, obliging us to keep a close eye on minor retracement patterns until things improve.  The good news is that the futures poked above an external peak on the hourly chart before diving, suggesting they are still feisty enough to be a little playful even when bears threaten a pounding. But buyers will need to push the July contract above 19.070 today to recover the advantage. That corresponds to a minor peak made yesterday on the way down.

The Dow didn't fall far enough to create an impulse leg on the hourly chart, but the weakness was nonetheless sufficient to create a so-far bloodless duel between bulls and bears. If the Dow does a 180 today for the usual non-reason and heads higher, you should use 10645 as a target, since that's where DaBoyz will be taking it once they recover their mojo.  For clues that this may be about to happen, watch for a midpoint bounce on the 15-minute chart similar to what I've sketched out.

It may prove significant that the futures have created a bearish impulse leg on the hourly chart without having quite achieved their last rally target, 1272.60.  If this had happened to some broad stock-index such as the Diamonds or SPY, I'd have given bulls last rites.  But because the selloff occurred in Gold, we'll treat it with a little more skepticism, especially since the ostensible reason for bullion's plunge is the crackpot notion that China's revaluation of the yuan will somehow turn the tide for a world sinking deeper each week into full-blown debt deflation.  Regarding the hourly chart, we'll need to see a rally and then a c-d decline to a Hidden Pivot midpoint before we are able to confidently assess the resolve of sellers. For now, though, I see the selling as having been orchestrated by strong-handed buyers rather than  the onset of something serious.

Opening up a bearish position yesterday morning not long after trading began, we caught a fine breeze that allowed us to short the Diamonds just pennies off their hysteria-driven, opening-hour high. Here’s the trading recommendation exactly as it went out to subscribers the night before: “Buy four August 98 puts if DIA gets within 0.05 points of the next Hidden Pivot resistance above, 105.92.  You should be prepared to buy four more August 98 puts later if the Diamonds get past 105.92, since that will imply they’re going to at least 106.73 before a top is in.  We are going out to August because the remaining life of the July options will be shortened not only by their July 15 expiration date, but by a holiday weekend.” As it happened, the Diamonds took a powerful leap at the bell, responding to ostensibly bullish news that China will allow its currency, the yuan, to rise. We were in luck to have bet against the crowd, since the rally ultimately went no farther than 105.96 – just four ticks above our target. That gave us a perfect opportunity to get short at the height of the short-squeeze, moments before DaBoyz pulled the plug on frenzied buyers.  Look at the chart below if you want to see what a classic bull trap looks like, especially when its sprung on a Monday morning on news that has been timed for maximum effect: Because we had anticipated the rally top very precisely with Hidden Pivot analysis, we were able to buy August 98 puts for 1.28, three cents off their intraday low.  Later in the day, we took a partial profit on the position as is our custom, selling half of the put options for 1.50. This effectively reduced the costs basis of the puts