9-20-2007

Let me remind those who follow this report that I now record and publish two Mid-Day Video’s: One on Gold and Silver along with one on Stock Indices. Both are in addition to the in-depth nightly video I record that covers charts and my market opinion on all the major futures markets.

The link to the Mid-Day Videos is below. Be sure to click on the RSS feed to know when a new video is posted. I do my best to record and get these posted by 1:00 P.M. CST.

http://www.iepstein.com/videos_start.aspx

We will soon be recording many more videos, some along the theme of my past TV show called: “Stocks, Options and Futures”, where I will be interviewing market technicians and offering up copies of their market letters, sent by e-mail to you.

The Fed to the Rescue…

The Fed had a hard decision to make. While the Fed did not want to bail out the financial institutions that made bad loans on mortgages, the Fed was faced with doing the right thing for the good of the nation, which included helping out those institutions…to a degree. The “good of the nation” can be summarized as the feelings Americans were having about themselves in terms of their finances, their job security and what financial news headlines were saying and leading us to believe. Doomsday was around the corner.

For weeks we were bombarded both on TV and in print with nothing but bad news. Go back and read the papers. There were very few financial headlines that offered ray of hope. On a personal note, as the owner of a brokerage firm I’d wake up wondering if another “shoe” had dropped overnight and what new exposure my trade recommendations had taken on.

I believe this issue came to a head when banks basically stopped making loans amongst themselves. It didn’t matter what the Libor Rate was. Banks wanted to hold onto their funds. This made headlines. History will look back on this as symptomatic of the lack of trust many had in the financial system. This lack of trust was leading to a melt down, both mentally and financially speaking.

So to the rescue comes the Fed, who did a very brave thing. They did not play it safe. The Fed moved to get ahead of the curve. Bravo.

Now What…

This move by the Fed has left me thinking that the Fed knows that their move is an inflationary one. How could they not with Crude Oil near $80-82 a barrel, grain prices soaring, milk prices doubling and the US Dollar down to near historic lows against the Euro.  Only home values seem to have recently fallen in value. I believe that the Fed came to the conclusion that they would rather fight Inflation than Stagflation or Deflation. I agree with them if that was their conclusion.

My take on the rate cuts are that the lowering of key US interest rates should cause the US Dollar to fall even more than it already has. The immediate impact of this rate cutting takes a bit of time to work through the economy. I’ve read reports that claim that we won’t see the full impact of these interest rate cuts for 12-18 months. However, without doubt the psychological impact of the rate cuts are immediate and that my friends is what I believe the market is trading off. The psychological impact of these rate cuts.

Here’s how I think things will play out. My guess is that as this moment in time the metal and stock markets are probably a bit overbought, given the spike up in prices on both Tuesday and Wednesday. New purchases at current price levels are highly risky. It is not uncommon for prices to bump up on news like this, only to retreat and base out at a bit lower level within a short period of time. That is what I think will happen and what I will be creating a trading strategy for.

I am on record and am repeating what I have been saying all year long. The US Dollar will hit an all time low this year against the Euro. This isn’t a bad thing in the short term since as the Dollar drops our goods are cheaper to export, many jobs won’t be lost and inflationary pressures will boil. It will be a case of money from all over the world chasing a fewer amount of goods.

As much as China is trying to slow down their economy, it is growing at a double digit pace. As the Chinese become richer, they compete for world goods and an improvement in their life style. Europe hasn’t been sitting still either. Now that money is becoming cheaper to borrow, the groundwork for an “Inflationary Storm” is at hand.

If I were a European with means, I would be coming to America and begin buying real estate. Given the value of the Euro, as it rises against the combination of a falling Dollar and falling US real estate market, it seems to me that this is a no brainer, as long as you buy good location, a quality property and hold the property for 3 to 5 years.

As for gold, my guess is that it will move higher in brackets of say $15-25 increments. Silver should follow gold’s lead for the time being, unless it becomes in vogue to look at 25-year highs in gold and question why silver is only $13 an ounce. What I don’t see is silver leading gold in an inflationary environment.

December Gold

I love when a plan works. I love it even more when I can explain, in charting terms, why. Look at the chart below which was provided to me by the Moore Research Center, Inc.

Above is a Gold Seasonal Chart, one that “measures market price momentum”. Momentum is strongly up at this time of year and yes, readers of this report did well if they were in the Gold Call Spreads I recommended getting into nearly a month or so ago.

Given that gold had rallied over $70 since its mid August break low, I told readers last week in this report to begin a scaled liquidation of their Gold Call Spreads going into the FOMC Meeting. If you had multiple positions on, you were to liquidate your positions sharply down. If you had but one position on, you were to liquidate it. Given the size of the gold move, the odds are you did very well if you followed my game plan. And yes, you might still be holding onto a small core position depending on how many spreads you had scaled into.

Now it’s time to come up with a new game plan.

To do so, lets start by looking at a chart of December Gold.

December Gold has moved up over $83 in the past 25 trading days. No matter what you think should be done, you have to take into consideration the fact that there has been little consolidation of this move, regardless of how bullish you might be. As bullish as I am, I am taking this into consideration.

Conclusion and Recommendation

As stated above, those who followed my recommendation might still be long part of their core position in their Gold Call Spreads. If so, simply hold onto them and keep up with my twice daily market updates. They will be covered there.

I’ve marked off the 712 level on the above chart. This is the most recent break low and currently represents to me the “chart number” that should not be broken, if the current Bullish chart pattern holds up. I see absolutely nothing bearish on the above chart. The very best a Bear should hope for right now would be a break back to the 18-Day Moving Average of Closes, which I’ve plotted for you in “red”. It is displayed as 704.1.

If prices were to fall back to the $700 level, I would recommend initiating another Bull Call Spread in December Gold Options. Should that occasion arise, I will offer strategies either in next week’s Metal Report or in my twice daily market commentaries.

Consider getting long on a pullback in prices at the $715 level, keeping a tight stop under 712. Should prices rally back towards the 735 level after you get long, consider partial reduction of your long position against the 735 level. Hold for a move up to 750. If you were to get long and be stopped out, be prepared to enter a Bull Call Gold Spread should prices drop down to the 700 price level. There will be more about this next week.

Silver

As we enter the end of this is the time of year silver prices normally rally. You can see that on the chart below, provided to me by Moore Research Center, Inc.

What we have to be concerned about is silver’s tendency to rally into the end of September, as it is now doing is and than drop off into early November, at least in terms of momentum.

Rarely are things always the same. If they were we’d all be the richest of the rich. Given the fundamentals at hand, I like the idea of using price weakness in silver after the end of September, to build a long Silver Call Position.

The Matrix above was complied with the help of Mark Pasek. I instructed Mark to build me a Matrix that ran from 12.00 up to 15.00. In this way you can get an idea on the expense and potential return if silver prices move up.

You can contact Mark directly at 1-800-284-1065.

E-Mail him at Markp@iepstein.com

The “All In” price is what the spread should cost you, including reasonable commissions, Exchange, Floor Brokerage, NFA and Transaction Fees. You can visit our website at www.iepstein.com to view these costs.

Let look at the Daily Chart of December Silver below.

Support on the Daily December Silver Chart is back at the 18-Day Moving Average of Closes, which is currently at 12.548 as shown in “red”. The most recent low is 12.49. Therefore, should prices begin to retreat, given the “current” chart pattern I would want to begin purchases in the futures market near the 12.55 level.  

Conclusion and Recommendation

Last week here’s what I said. “If prices break hard right after the FOMC Announcement, I think a position in a Long Silver Call Spread is warranted. In fact, I think that you should have your orders in now for the 13.00-13.25 spread.” Well as it turned out the market did not break, so we need to come up with a new strategy.

The neat thing about Call Spreads is that your risk is limited to the amount you pay. In addition, buy entering on a price break, if price momentum works as it historically has, there is enough time left to catch what has been a seasonal thrust up into late November, when these spreads expire.

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