9-26-2007

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.

What Now that the Fed move is in the history books…

The first thing I don’t want to do is get caught up in the daily financial reports that the government regularly issues. Why you ask. Because the Fed Fund Rate cut and the economic impact of it simply can’t be seen yet in terms of quantitative data. Emotionally we’ve seen an impact. But not yet quantitatively speaking. Most of the data that will come out in the next couple of weeks will concern itself mainly with the pre-cut time frame. You need to wait a bit to see the post-cut influence.

You will hear a lot more about falling home prices. Once a trend sets in, it’s hard to change. There is simply too much supply without enough qualified buyers or buyers who believe a bargain is at hand. I’ve speculated in real estate and have an understanding of the timing and cycles involved in it. Real estate “trades”, if trading is even the right word much differently than most futures traders comprehend. Think of it like a large oil tanker that takes miles to turn or stop.

Over the next 60 or so days, more economic data will come in. Christmas is around the corner. GM is saving jobs by ending the strike. Other auto manufacturers will now have a framework they will have to work in if the UAW agrees to GM’s terms. These are all positive things that down the road a bit will do our psyche well.

How to approach gold and silver…post Fed Fund Rate Cut

It’s been 8-calendar days since the Fed announcement, 6 of them trading days including today. December Gold’s highest closing price was 2-days after the Fed announcement, on September 20^th at 739.9. December Silver’s highest closing price was 2-days ago, on September 24^th at 13.64.

December Gold closed on September 17^th at 723.8. It rallied from there to a high of 747.1, a rally of $23.20.

December Silver closed on September 17^th at 12.90. It rallied from there to 13.535, a rally of 73.5 cents.

My point here is that in real Dollar terms, silver rallied more than gold. Nearly 50% more!

When you view the Seasonal Gold and Silver Charts below, it becomes evident that a pullback in October is not uncommon. Given the inflationary scenario I wrote about last week, I think the trading strategy needed is one that employs futures with a very tight stop, with the expectation that it may be it for a small loss. Counter that with an Option Strategy for the longer pull. In other words, I really want to see a price break to get long via options, but will use futures if I can keep my risk very tight.

December Gold

The Seasonal Chart below was provided by the Moore Research Center, Inc.

This Gold Seasonal Chart “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 and which some of you still hold.

Given the steep run up in gold prices, at any point gold may see some profit taking. It is to be expected. Therefore, it’s important to keep the longer term picture in mind when trading and to decide upon and take action on possibly two game plans. Let’s take a moment to look at a chart of December Gold, which is displayed below.  

For the past 5-days, gold prices have been going sideways. While this has been taking place, Stochastics (SSTO) have been starting to drift down. If the “K” line value, currently at 80.48 closes under 80, I would expect a break down to the 18-Day Moving Average of Closes. Currently that price is 718.7. Remember that the 18-Day Moving Average of Closes computes each day as a new value and is currently gaining about $2 a day, which means that this value is rising about $2 a day or so.

Conclusion and Recommendation

As I see it, there are 2 ways to play gold. One way is a bit riskier than the other.

Let’s first discuss the riskier way to get long, which is primarily a hit and run trade using futures contracts. As long as Tuesday’s low of 729.2 is not taken out, you can buy long using a 729.1 stop. If you do not get stopped out, be sure to look at the Stochastic “K” line reading. You do not want to buy long, even intraday, if this reading is under 80. No exceptions. Should you get long, your initial profit objective is 747.00. Should prices clear 750 on a closing basis, 765 is the next upside target.

The second method of getting long is more conservative, but requires the Stochastic “K” reading get under 80, which means the rule to initiate is opposite that using the futures market described above. If the “K” line reading gets under 80, I would place an order to buy the December 750 Gold Call at 11.00. If bought, look to sell short a further out Call Option against it. However I would not do so until you get a fill and I have a chance to see how the market handles the price break. Your risk is limited to the purchase price plus commissions and fees.

I will update this option strategy, if a fill is generated, in my Twice Daily Hotlines which all readers are invited to subscribe to. If filled I will also cover this strategy in my nightly Audio/Video Updates.

Silver

Seasonally speaking, silver is likely to run out of steam at any moment, at least in terms of the historical chart below, provided by Moore Research Center, Inc.

Take a look at what has historically occurred over the past 40-years. Prices basically lose their upside momentum in October. Yes, the Fed Fund Cut might change this due to the market’s concern about inflation, but history is against it. If I see no break coming, I will adjust my thinking. However, given that this is still September, let’s try to figure out a way to prosper using the upside momentum that typically occurs going into the end of the year and the weakness we expect to occur now.

Look at the Daily December Silver Chart below.

Like gold, the Stochastic study is in a precarious position. It can easily get under 80 tonight or tomorrow. If so, a price move down to the 18-Day Moving Average of Closes is likely. Right now, the 18-Day Moving Average of Closes is moving about 8-cents higher a day, due to the swift rise in prices silver experienced over the past month, so a move to just over 13.00 could easily occur, if a price break were to gain traction.

I do not want you to buy silver on rallies. In other words, at this time I prefer you take advantage of silver’s history of not having upside momentum. You can do this by looking at the Weekly Silver Chart, which I have attached below.

Silver has rallied from 11.06 straight up to 13.49, with but one week out of the past 6-weeks where prices closed lower on the week. This leads me to expect a price correction. As silver has a history of returning to the 18-Day Moving Average of Closes, I want to use that price as the zone from which to establish a long 1300-1350 Silver Call Spread.

Conclusion and Recommendation

Should December futures drop down to the 13.00 level, I recommend that you consider establishing a position in the December Silver 1300-1350 Call Spread. Below is today’s pricing. If prices drop down as I expect they will, the pricing for the spread should drop as well, making the spread less expensive to establish. Your initial risk will be limited to the cost of the spread plus commission and fees. I don’t intend on risking that full amount as I have no intention on hanging around until expiration if the spread is not performing well.

The Matrix above was complied with the help of Mark Pasek. I instructed Mark to build a Matrix that ran from 12.00 up to 15.00 so that you could have an idea on the expense and potential return if silver prices move up later in the year.

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 all futures and options related fees. IECo does not markup exchange fees in any manner. We pass along what is charged by the exchanges.

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