11-1-2007

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. These 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 my 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

The Fed signals that rate cuts are now in balance with inflation…….

Yesterday the Fed cut the Discount Window and Fed Fund Rates by ¼ of a point each. The Fed also signaled that they believe that the risks to growth and inflation are now roughly equal.

Going forward, I will be paying strong attention to job growth, Christmas sales and the Subprime issues. Each will play a major role in what the Fed does or doesn’t do going forward. Should Subprime issues become worse, the Fed may have no choice but to come to the rescue again by reducing interest rates in some manner. Given all that I now see, the issue as I see it is one of expecting more rate cuts, if events warrant them. Events I believe will unfold over the next 90 or so days.

Last week I wrote about “other shoes dropping” due to Subprime issues. Since I wrote that report the head of Merrill Lynch has lost his job. Rumors are now circling about Citibank’s exposure to mortgage and SIV loan losses. The stock price of Countrywide Mortgage continues to unravel. Expect the news mill to go into high gear, naming even more financial institutions that are in trouble. I do not see this fallout being anywhere near over.

The US Dollar

As many know, a catapult for higher gold and silver prices has been the relentless decline in the value of the Dollar against most major world currencies. The aftermath of yesterday’s Fed actions has today produced a short covering rally in the Dollar, which I believe is due in large part to the adage; Buy the rumor sell the fact.

I don’t see a change in trend for the Dollar on the horizon. In fact it’s highly probable that the Dollar sees some rather aggressive short covering going into Friday’s job data. However, I don’t expect the rally to produce anything more than an aggressive short covering rally from which to add to short positions.     

February Gold

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

I think anyone following market momentum would agree that for the past several months, gold has followed the above Seasonal Gold Chart momentum very nicely.

According to the above chart, gold prices often begin to rally in November, which I’ve highlighted in the above chart. As I don’t see a change in fundamentals, I see little reason to not believe that a year end rally is in the cards. The key will be posturing yourself to get involved at lower price levels, not higher ones. Yes, lower price levels as I believe that some form of a price correction is in the cards. The reason I am looking for a correction is due to my belief that the current rally has “spent” the Bull Market News. In other words, how long can the market discount the news of a Fed Fund Cut and sharply higher energy prices? I don’t think very long. Therefore the market needs more “new” bullish news to keep the rally going. News it doesn’t have in hand today.

What I want to wish to do is figure out where support comes into play and from that number decide on a trade strategy using both Options on Futures Contracts and futures. Given the current Dollar risk I see on the charts, I prefer to use Options on Futures Contracts at this time.

Let’s look at a Daily Chart of February Gold.

Stochastics as shown on the above chart remain embedded. They become no longer embedded if the “D” line, the one in “red” with a current value of 83.86 as of this writing gets under 80. Should they lose their embedded status, look for a move down to the 18-Day Moving Average of Closes, currently at 775.3.

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Conclusion and Recommendation

Today’s price break is in my opinion a profit taking break, one which I want to use to establish more long Call Spreads.

My new recommendation will again use a February Gold Call Spread. The reason is the amount of time this spread offers. Given that gold was able to breach the $800 plateau this past week, I want to use the $800 level as a base level to work from.

Regular readers of this report who have followed my recommendations may still be 50% long the February 760-780 Gold Call Spread at $8.00. On Monday of this week I recommended taking off 50% of this position. If you had but one spread on, this meant taking the whole spread off. The close on Monday was $12.90, which resulted in an approximate profit of $4.90 per spread, assuming you followed my recommendation. Those that had multiple positions on are still 50% long and should hold on.

My new recommendation is to add another spread. However, this time I intend on scaling up a bit in price, using the $800-$820 February Call Spread. My recommendation is to establish this spread at $600, not including commissions or other fees.

Your total dollar commitment is limited to your cost per spread, which if you get filled will be $600 plus whatever commissions and fees you pay.

Silver

 Let’s look at the seasonal chart of silver below provided by Moore Research (MRCI).

As I wrote last week, silver has shown a strong tendency to bottom out toward the end of October. So far, this fits right into the current momentum pattern seen on the above chart.

Let’s look at the chart of March Silver below.

Prices are overbought, with the “K” and “D” lines both having readings in the mid-seventies. The way markets handle this if often by prices breaking down. Another way charts correct his is by having Stochastics embed. I do not see this chart attempting to embed, so a price break is what I expect to occur. For those who do not know what “embedding is”, here is a brief description. Stochastics are made up of two lines. A “K” and a “D” line. The ”K” line whips around the “D” line. In order to embed, both the “K” and “D” lines must either be over 80 three days in a row or under 20, three days in a row.

Since Stochastics are not embedding just yet, the way this market corrects its overbought status is by breaking down in price. The support as I see it is the 18-Day Moving Average of Closes, shown in red as $14.07. Keep in mind that the 18-Day Moving Average of Closes changes daily, as it uses 17-past days of Daily Closes along with the current market price. The 18-Day Moving Average of Closes is currently advancing approximately 5-cents per day.

If prices hit the 18-Day Moving Average of Closes without Stochastics breaking down, I would not be a buyer until Stochastics are no longer in the 70’s. In my twice Daily Updates I will update how this is doing as well as in my Nightly Video’s.

The key is that I am recommending Silver Call Spreads using the March Silver futures as the basis.

Recommendation

With the help of one of my broker’s, Mark Pesek, we created the following table.

My recommendation is to enter the 14.50-14.75 March Silver Call Spread at $10.00.

I have no intent of risking the $500 you pay plus commission, exchange, NFA and transmission fees. What I intend on doing is recommending you build a core position now, that I trade off of.

Given the amount of time premium in this spread, unless something dramatic occurs to negatively affect silver, I think you have plenty of “wiggle” room to play with. In any case, should silver fall dramatically in price, your total risk is limited to the price you pay for the spread plus commission and other fees.

To discuss these Gold Call Strategies in more detail, either 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

This leads me to explain how I view “Dollar Risk”, as I do use Dollar Risk as a trading tool. Here is how I label Dollar Risk:

Definitions of Initial Dollar Risk:

Low-Risk Definition:
A Low Risk Trade is defined as one having an approximate initial dollar risk of $0 to 150.

Medium-Risk Trades Are Broken Down Into 3 Categories:

Lower-Medium Risk:
A Lower-Medium Risk Trade is defined as one having an approximate initial dollar risk of $151 to $250.

Medium-Risk Trade
A Medium-Risk Trade is defined as one having an approximate initial dollar risk of $250 to $350.

Higher-Medium Risk Trade
A Higher-Medium Risk Trade is defined as one having an approximate initial dollar risk of $351 to $500.

High-Risk Trades
A High-Risk Trade is defined as one having an approximate initial dollar risk of $500 to $600.

All dollar-risks are calculated with no allowance for slippage of fills, gaps in the market and commissions.

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