Silver Bounce Nailed, Futures Higher Overnight

Silver gapped lower today but rallied higher throughout the day as predicted on Sunday night and additionally, the overnight prints are showing spot silver up as high as a percent and a quarter. Institutional short covering came late in the morning session and again just a half an hour before the closing bell as silver made an intraday low of $26.15, but closed $4.63 off of the lows for just a .30 decline. The pattern on the chart is a bottoming tail and more importantly, silver tagged support in the $26-$27 area, but rallied back for a close just off of the flatline.

This should signal some short term relief in the selling and any shorts may be squeezed out should silver make its way back above $31 tomorrow. The likely scenario is a gap higher off of the opening bell and I plan on exiting my SLV $30 call tomorrow should that happen.

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Dollar Call Comes To Fruition, CME Gold And Silver Hikes

The equity market dropped sharply last week after the Fed’s “Operation Twist” was not enough to get investors excited about the long side. Bearish technical patterns in key asset classes signaled that a major move down was coming after the month of consolidation following the initial drop in August. The only chance the market had of holding on for a move higher was the fact that too many investors and traders had already fled the market and had begun to overload the sell side. At any rate, the market consolidated long enough for key stocks like AAPL and AMZN to make new all-time highs which may have been enough to get retail longs back into the market.

Regardless, the market has flushed and more downside should follow, most likely sooner rather than later, but I am not so sure that the market will completely crash in the near future as it appears that policy makers in Europe and the US are already preparing the market for a default in Greece. The fact that Ben Bernanke announced policies last week that he must have known would not be enough to prop up the market smells fishy in itself. Without getting too deep into detail, it looks as if the politicians and bankers are attempting to flush the market before Greece officially defaults on the basis that the default would eventually price itself in.

Moving on to the charts, I can finally claim victory in my call for dollar strengthening as price activity has now indisputably completed a reversal and breakout of the previous downtrend. I originally suggested that the dollar and gold would both strengthen versus the Euro back in February and I also successfully called for the bottom in the dollar in May, citing capitulation selling volume on the ETF UUP for multiple days towards the end of April and into early May.

The dollar index had a nice consolidation of the big upmove in early September right beneath the $78 area. There was major resistance at $77 and after consolidating sideways for a week or so, the dollar yet again broke higher after the FOMC policy decision. The USDX paused on Friday to digest the buying pressure, however the next major level is $78.87 and should the dollar consolidate again beneath this level, it may build the momentum to break through that level and confirm.

Coinciding with the dollar, the SPX paused on Friday after the sharp decline last week. The many patterns that I cited in the analysis videos – the bear flag, the M&A reversal/shoulder head shoulder pattern etc, have all begun to play out. The targets for these patterns are in the 1030 – 1050 vicinity on the SPX and 9700-9800 area on the DJIA. There is already support in those areas and the fact that these bearish patterns are targeting them reaffirms my belief that the market will ultimately trade there. My outlook for this market over the medium to long term is that there won’t necessarily be any 2008-esque collapses, but over time it will appear to have been a grind lower with highly volatile swings in both directions, though the possibility of an outright crash is certainly on the table.

Regarding the near term, I shorted ahead of the FOMC decision which turned profits and should the market consolidate for a few days, maybe less, I may take another short with a stop based on a close above Thursday’s high or a fill of the breakaway gap which was the close to open from Wednesday – Thursday. To reiterate again, the only hope the market has of rallying, is that too many retail investors have piled into short positions and the institutions decide to swing the market higher to shake out the weaker players. The problem with this is that this type of outcome is more typical when the market is close to options ex, and currently we are still several weeks away from next month’s expiry.

Over the last couple of weeks, I have cited copper as a potential leading indicator for a selloff in the equity market given that copper is an economic forecaster. That predictaion has also has come to fruition. Copper first broke down in the middle of last week and I posted the trigger of the bear flag which coincided with the break of a three-year trendline on the weekly chart.

There isn’t much to say about this chart from a technical perspective since it has crashed through every single major level of support on the chart since the initial breakdown. However there is a bit of minor support in the area of $3.17-$3.23, though that area was more or less tagged on Friday and any bounce will be due to pure overextension from the 20 MA, which it is currently 16% away from.

Crude oil was another chart I used as a leading indicator for a move lower in the equity market being that crude, like copper, also gauges economic strength. Again, there isn’t much to go over here, other than the chart pattern worked out yet again, there was a bear pennant on the daily chart much like the one that played out from late April – June and it enabled me to forecast a drop in oil prices that would translate into pressure on the stock market.

Gold and silver both dropped after the Fed announcement and entered an oversold condition in an extremely short period of time. The original explanation was that the European banks were taking profits on long gold positions in order to cover margin calls from the equity selloff. This explanation is arguably good enough to cover Thursday’ selling, but not nearly enough to explain the continuation into Friday. It is painfully obvious that Gold and silver collapsed because inside info was leaked prior to the CME’s margin hike on Friday.

Simply put, the fundamental case for selling on Thursday and Friday should have been dead from the beginning. The Fed was/is always in a box when it comes to a policy decision regarding the price performance of precious metals – if the Fed attempts to stimulate, then PM’s rise on inflation expectations and if the Fed does nothing, or not enough, then the metals rise due to uncertainty and sovereign credit risk. Between the dollar index hitting new highs, the stock market bloodbath, and treasury yields reaching record lows, gold and silver should have at the very least, held the flatline last week, and even that would have come as a shock. It’s not to say that the metals will always rally, but the knee-jerk reaction from the Fed should have at least given them an upside bias for the remainder o the week.

My guess is that the CME had scheduled a margin hike for Friday on the idea that the metals would inevitably rise after the FOMC for the reasons listed above. Someone inside the CME then leaked info to institutions but the problem was that the margin hike was never cancelled after the metals collapsed. Interestingly enough, the last time that the CME hiked margins, there was a selloff leading into the margin hike, and a bottom was put in after the announcement which of course makes perfect sense. The same exact thing happened last week and I expect gold and silver to bounce this week as the institutions cover their short positions.

Regarding the chart, notice how gold found nice support near the last area of consolidation around $1662. This is a good level for a bounce given how oversold gold is in the short term.

Another gold chart that often revert back to is the weekly, considering that the three-year trendline is one of the strongest trends ever. Some interesting data about this chart is the most recent peak, is really no more extended than other previous peaks in this cycle. This is significant because though the move looks dramatic in nominal terms, percentage wise the most recent peak was normal, meaning that gold really isn’t that extended in terms of this current bull cycle. The three most extended peaks from this trendline are February 2009, (Peak of $1007 – 23%) November 2009, (peak of $1227 – 19%) and of course August 2011 (peak of 1923 – 23%).

By using this trendline as a basis for gold’s health and as a gauge for its cycles, it would then make sense that over more time (perhaps the next year or so) gold may revert back to this trendline yet again as I called for over the summer. Clearly, that wasn’t the case this summer, but as with the call for a strengthening dollar, I have been early before.

Silver sold into the 200 MA on Thursday which should have been a solid level for at the very least a small bounce. That fact that it did not find any kind of support there confirms my belief that there was inside selling. In any case, I entered silver as a long on Friday after the pierce of $31 ($30 on SLV) which coincided with the 2009 trendline that I have talked about many times in the analysis videos. I originally called for silver to reach this particular trendline after the initial blowoff this Spring and through months of bearish consolidation, it has finally reached that level.

Regarding the trade, I think we’ll see a gap lower on Monday, (but not a new low) followed by a rally throughout the rest of the day and into Tuesday. That is essentially what happened the last time the CME hiked margins after gold and silver were down on high volume. Whoever shorted is likely holding into the weekend given the fact that the metals weren’t able to get much of a bid off of the lows on Friday and that pressure should translate into a gap lower on Monday. After that, I would be surprised to see the metals staying suppressed for long, it just doesn’t make any sense to risk profits when someone is that far in the money.

Also adding to the case for a bounce is that $31 is a major level and as mentioned before, it coincides with the 2009 trendline on the weekly chart. If anything, expect buyers to show up in this area on a gap down on Monday. Also notice how the chart continues to lead the news, the chart tells you what is going to happen, and then the news confirms it! Going into next week, I have no trades other than SLV $30 Q4 calls, but as mentioned before, if the market consolidates sideways, I may use that to look for shorting opportunities.

Silver Long Triggered On Pierce Of Trendline

A Tip For Option Trading

Today I learned a lesson when it comes to trading options. There may be an option that you are in the money on and are thinking of selling, which is good because no profit should ever turn into a loss, however, in some cases stocks can become extended and pure emotion and irrationality comes into play. In these cases one can profit from being in the money on a call option by taking advantage of the irrationality of others while maintaining gains and minimizing risk. It’s never a bad decision to take gains off of the table for a profit, but there is nothing wrong with leaving some exposure in your portfolio when a stock is hot.

Last week, I purchased AAPL $385 calls for $2.80 and sold them shortly after for $4, a 70% gain. Not bad. Today those same calls are going for over $40 and will most likely run higher as the market floats up on low volume ahead of the Fed.

Yes, I sold those calls for $4 for a 70% gain, but today they would have gone for – $40/$2.8 = 14.2 or 1420% gain from principle.

What I am trying to say is – take some profits but it doesn’t hurt to LEAVE RUNNERS ON THE TABLE!!

And that, is my tip today for option traders.

Markets Grind Higher During Options Ex Week

The stock market chopped higher all week but not without whippy volatility along the way. The institutions forced a mostly neutral close on Friday but allowed the market to finish higher for the first 5 day winning streak since the Independence Day week. Currently, there aren’t any shorting opportunities though the market may be getting close. Patience is key, shorting, or even going long too early in this environment is a recipe for disaster.

Take A Look At Copper

Looks like a breakdown of a 3 year trendline in JJC after a bear flag from the July highs. Copper is a leading indicator and if this chart confirms, it could signal further downside for the equity markets.

PCM: Why U.S. Banks Won’t Be Crushed By A Greek Default

http://seekingalpha.com/article/293018-why-u-s-banks-won-t-be-crushed-by-a-greek-default

The markets have priced in what seems to be a full expectation of a default of Greece. Germany, the most important pro-bailout force in the EU may be throwing in the towel as early as this week, as the nation’s populace gets increasingly pessimistic about the whole situation. Merkel will have to make the politically correct choice – all signs are pointing to a default.

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The stock market has priced in much worse. US banks have been hit almost as bad as European banks. How bad is the Greek risk to US banks? This article from Reuters outlines why the already low ~$33 billion worth of exposure from US banks is already hedged (although we don't have all the details). The point is, a lot of people have already assumed the worst in the stock markets (and the best in treasury bills, but that's a whole different topic). The European-related damage has already been done to your portfolio, and US banks are not going to take as big a hit as you might have thought. If you sell now, you'll miss a potentially huge rebound – especially in the financials.

This is not even accounting for the power that the fed will invoke to boost the stock market in the near future. One thing we can infer, is that Bernanke really wants to help the banks. The recent strength in the US dollar would provide the perfect opportunity for this to happen. Even if money supply increases drastically from the new measures, relative to alternatives in fiat currency, the dollar (and yen) will still manage to look attractive to frightened institutions and individuals worldwide. If you needed a reminder as to how dovish Bernanke remains, here is a quote from the Jackson Hole speech earlier this year:

Monetary policy must be responsive to changes in the economy and, in particular, to the outlook for growth and inflation. As I mentioned earlier, the recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting, and that temporary factors can account for only a portion of the economic weakness that we have observed.

A dovish fed, and a potential QE3 (or something similar) will create a comfortable landing pad if bank profits fall for the remainder of 2011. Even earlier in the year, the fed "promised" low interest rates until 2013. The highly troubled housing market could finally see a bottom given stimulus, as banks would be able to significantly expand their capital. This is one of the only feasible methods by which the fed can get banks to lend to homebuyers a "vital" part of the recovery as stated by Bernanke.

Looking at bank equities, we see that investors have left anything that could be affected directly by Greece and Europe in general. This is on top of, what seems to be, a "priced in" recession. Here is a 6-month chart showing just how far financial stocks have fallen this year relative to SPY (The SPDR S&P 500 ETF), especially recently:

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Value investors should be grabbing shares of major US financial institutions hand over fist at these levels – especially the banks who are taking less damage from continually deteriorating housing market conditions. JPMorgan Chase (JPM) and Wells Fargo (WFC) are the best examples of this. Both incredibly undervalued, these banks are growing profits (albeit slowly) despite the poor loan environment. Citigroup (C) and Bank of America (BAC) are still extremely troubled, with BAC not even making a net profit yet. Still, they've simply fallen so far relative to other stocks that it's hard to justify selling these stocks if you already own them (or passing these equities up in this Euro-induced fire sale). This is not 2009.

European banks are a different story. Barclays (BCS) for instance has much more Greece exposure than the US banks and will hence take a much bigger haircut when earnings are released in subsequent quarters. Banco Santrader (STD) is something you ought to avoid as well, even if the dividend is enormous. Spain's situation resembles Greece to a large degree, and it's hard to justify buying STD while there are equally cheap American banks that are much safer in relation.

Firstly, I think the author deserves a re-post for going out on a limb and saying something this crazy. The kicker is that I agree with his general sentiment. Over the last couple of weeks I have stated hesitance to short the market due to the overwhelming amount of investors who are looking for the next 2000 point collapse. Once again, I really don’t think a collapse like we saw in August is on the table right now because everyone expects it to happen.

Just like everyone expects a Greek default, I read earlier today that there is now a 97% chance of a default on their debt. So, believe it or not, the DJIA which is trading about 2000 points off of the last July high and roughly 500 points off of the August low, HAS priced in a Greek default and any initial selloff after the news of a default could be used as a buying opportunity as the selloff should amount to a knee-jerk reaction that the retail investor tries to short.