-- Posted Monday, 6 August 2007 | Digg This Article
8-2-2007
This week’s Metal Report is a bit different. For the past month we have been building a studio in our offices where we can record for you to view, my thoughts on certain markets. Think of it as Video Updates of Special Market Situations. This goes hand in hand with the new video’s we are posting on the front page of our website, at www.iepstein.com.
I recorded last night my first Metal Update video. You can view it by clicking here or pasting;
http://www.iepstein.com/dailyVids/metals/MetalUpdate8_1_2007.html in your web browser.
As readers of this report know, for the better part of this summer I have been Bearish on both gold and silver. I am now leaving that thought stance and beginning to focus being Bullish in both. The question for you is: Do you wait for the markets to turn Bullish or do you get in before they do, by using Options on Futures?
The answer is complicated. Here’s why. As readers of my Weekly Metal Report know, I have been writing about the Seasonal Trend in gold and silver for the past couple of weeks. I did so since I believe trade setups take time. Gold and silver have a history of beginning a rally in the late August through the early October time frame. Below are charts of both, showing the basis for my conclusion.
Does past history guarantee what will take place in the future? No it does not! In fact I don’t use Seasonal Charts by themselves to make trading decisions and don’t recommend you do either. Rather, I recommend that they be used in combination with many other factors, including but not limited to: market timing, risk analysis, moving average analysis, general economic market conditions, whether the market is in an overbought or oversold condition and last, whether or not the market is trending.
History plays a role in market analysis, but that role is limited to looking back at what previously occurred. Past history does not in any manner guarantee what will take place in the future. Past history is but another trading tool to look at when plotting out a trading strategy.
December Gold
I find myself often asking; “What is the definition of a trend and what is the importance of price within a trend?” I do this because it brings me back to the basics of understanding market direction and timing. While its nice to listen to CNBC and hear about Subprime issues, job growth, GDP and home values, the reality is that at any given in point in time, the current price of market represents all of the “known” market factors. Assuming as I do that market futures market pricing is efficient, the current price takes into account all “known” factors.
Trends develop from price action. As such, the definition of trend is simple to understand. People like to make things hard, but in reality, setting rules that define a trend are simple and need to be consistent.
An “Uptrend” exists when prices make higher highs and have higher successive reactionary lows.
A “Downtrend” exists when prices make lower lows and have lower successive rally highs.
Another way to say this is “Uptrends” are made up of patterns that have higher highs and higher lows while Downtrends are made up of patterns that have lower lows and lower highs.
Let’s look at a chart of December Gold.
The above chart is a Daily Chart of December Gold. I have labeled the already established monthly lows of June and July. This is a process you should go through if you are going to work with Seasonal Charts.
In the first section of this report I displayed a Seasonal Gold Chart. It shows that the market has historically made a pattern of higher lows in prices both July and August. Prices moved higher historically in September and October from June’s low point.
So far this is occurring. However, keep in mind that this is only August 2nd. We don’t know how August will hold up. What we do know is that it would take a move under the July low of 659 in the December Gold Futures Contract to break the Historical Seasonal Chart Pattern.
As you can see on the December Gold Daily Chart, a move over 680.9 is needed to begin a pattern of higher highs. The current pattern on the Daily Chart as I am writing this report is one of an immediate lower low. I would like to see the market close over the 18-Day Moving Average of Closes, which in this case would put the market over 680.9 before I begin recommending purchases of futures contracts. As this has not yet occurred, I am on the sidelines, but getting myself to recommend entering a long position.
Conclusion and Recommendation
Different traders have different trade styles. Some like using options to build a long position in Gold, given the Seasonal Chart Pattern. As you can see from my above comments, we haven’t yet had reason to “pull the trigger”. However, I do want to pose ideas from one of my fellow IECo brokers, Mark Pesek. I asked Mark to put together a table of Option Call Spreads. For those that aren’t as concerned as I am about market timing, this type of strategy offers another method of playing gold. Keep in mind that if gold does not rally as it has done in the past; the dollar risk is limited to the price you pay for these spreads plus commissions and fees.
My idea in using Call Spreads now, even thought the futures market trend in gold has not yet turned up, are:
· Call Spreads if put on and taken off together help in limiting dollar risk
· By establishing them as the market moves higher, market timing is not a crucial as when using futures contracts
· If traders realize they want to be “early” in establishing a position, Call Spreads offer some flexibility
Here are some ideas that Mark came up with:
The above spreads take into account a commission of $50 per option plus applicable NFA, Exchange, Floor Brokerage and order transaction fees
These strategies were complied using data on August 1, 2007. While the bids and offers will change, the overall strategy doesn’t change. To discuss these strategies in more detail, call your IECo Representative or Mark Pesek.
Mark can be reached at:
1-800-284-1065
If you wish to e-mail Mark you may do so by writing him at: mailto:MarkP@iepstein.com
If you haven’t had a FREE 2-Week Trial to our Twice Daily Market Recommendations and access to our nightly videos where we review charts nightly, go to
http://www.iepstein.com and fill out the New Investor Kit Form. We will send the kit and access to our research to you.
As long as you haven’t had access in the past year, you can obtain a Free Subscription to receive access to all of our research, including Nightly Audio/Video Recordings where we cover in detail all the metal markets, when you fill out the New Investor Kit Form on our website.
September Silver
If history repeats, silver often follows gold at this time of the year. The Season Chart shows that silver can take out the July lows, before joining gold in a move up into the fall months. It doesn’t have to, but it has in the past whereas gold typically builds on higher lows that were established in June and July.
I believe that gold and silver were negatively affected by the unwinding of “carry trades” and by investors liquidating metals while the stock markets broke these past 2 weeks. Housing is in the doldrums here in the US, but growth is taking place in China and Europe. As an industrial metal, silver pays close attention to manufacturing demand, which still looks like it is growing in most industrialized parts of the world.
What we now know is that investors did not run to gold and silver during the stock market break that just occurred. In fact it appears that gold and silver are now following stock market trends, rallying when stock prices rally and breaking when stock prices break.
Inflation is not supporting metals, or isn’t a driving force in them at this moment. The value of the Dollar and US stock market movements seem to be the driving forces. I believe the US Dollar will be sharply lower by year end. Investors who look to the Dollar as a safe haven simply have me confused, as it is the USA’s issues that have become a drag on world economies, not the other way around.
No matter, as a technician I look at charts….daily and intraday to base my trade recommendations on. Let’s look at a Daily Chart of September Silver.
So far the July low is higher than the June Low. If you look at the Seasonal Chart, you will see that historically speaking, silver often breaks the July low and even the June low in August. In other words the trend doesn’t historically start picking up steam until later in August.
The Daily Chart of September Silver is at an interesting one. Frankly September Silver is a short sale until 13.09 is taken out. A close over 13.105 is necessary to turn the short term trend up.
From a longer term perspective, one that attempts to play the historical move up in September, we will use the December Silver contract, not the September one. However, we can wait a week or so for the switchover as the September contract currently has more open interest and trade volume, right now, than December’s. This will change very soon, with December taking on the lead trade position.
So the question now is what to do. If the stock market has run its course to the downside, I think silver prices will advance. I believe that the US Dollar is going to resume its downtrend, that fund selling of metals for margin purposes related to the stock market washout is probably over and that inflation is going to get worse.
Energy prices are very strong. Should a hurricane move into the Gulf of Mexico in the near term, I would expect a run into the mid 80’s for Crude Oil. So the question becomes one of what to do if you believe that prices are not going to break in August. In fact, if prices get over 13.09 the question becomes one of deciding if you should jump into a long position of some type.
Given the history of this market, I recommend for those that want to get into the long side of silver to consider using Call Options until later in August. Because silver tends to break in early August, I think it prudent if you decide to go long to use an option strategy rather than futures. It allows you to hold onto you position with limited dollar risk. Yes the upside is limited as well, but I don’t see that as an issue since I am more interested right now in buying time over price. These strategies provide that. They key of course, is no matter the Bull Option strategy you put on that silver ends up rallying.
Recommendation
Mark Pesek prepared the table below for those that want to build a Call Option Position using the December Futures as the basis the position.
The above spreads take into account a commission of $50 per option plus applicable NFA, Exchange, Floor Brokerage and order transaction fees
These strategies were complied using data on August 1, 2007. While the bids and offers will change, the overall strategy doesn’t change. To discuss these strategies in more detail, call your IECo Representative or Mark Pesek.
Mark can be reached at:
1-800-284-1065
If you wish to e-mail Mark you may do so by writing him at: mailto:MarkP@iepstein.com
Free Offering
New Futures Trading Kit
Our FREE New Investors Kit is contained on a CD. It includes:
14-Day Trial to our Charting Software with:
· Live Streaming Quotes from the CBOT and the CME
· Paper Trading
· Price Ladders
· Streaming News
14-Day Access to our Nightly Audio/ Video Report
14-Day Access to our Twice Daily e-mailed Market Research
Brochures, Booklets and much more…all on the New Investor Kit CD
For Self-Directed Traders that want to or are trading the fully electronic Metal Markets and are reading this report, please look below at our commissions. If you’re trading elsewhere, we’re most likely beating what you are paying by a lot.
Simply make mention to one of our representatives when you open your New IECo Trading Account of this “Special” low commission.
As Exchanges and Vendors raise and/or lower rates, those changes are passed on. The Fees and Commission being quoted are on a per-side basis and are all inclusive!
To learn more about us or to get started trading through us simply go to our website at http://www.iepstein.com and fill out the New Investor Kit Form. A CD-Rom will be sent to you. At the same time you will instantly begin receiving access to and instructions on how to access our daily market research, trading recommendations, charts and much more.
If phoning us is easier for you our phone number is 1 800 284 3010.
We handle trading accounts from individuals in a number of foreign countries as well.
Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from Ira Epstein & Company or Shatkin Arbor, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are no indication of future performance.
-- Posted Monday, 6 August 2007 | Digg This Article
