-- Posted Thursday, 31 January 2008 | Digg This Article
| Source: GoldSeek.com
1-31-2008
Rate Cuts….
Over the past 9 or so days, the Fed Fund Rate has been cut by 33%. Yes, 33%! And….the market opinion is that more cuts may be necessary.
Congress is set to vote on a stimulus package for either $150 billon or $157 billion dollars as soon as today.
As an economy, our hope is that these maneuvers will work and the economy stabilizes. Once stabilized, growth in our economy is the next goal. With that growth jobs will be created, people will have income to by goods, own a home, borrow from banks and most importantly, lenders will be willing to lend.
The issue I have with all this is this. I have yet to see a growing economy with deflationary prices. I’m certain it has occurred, as practically every economic scenario at some point in time has occurred. However, inflation is the likely outcome.
What I think is going to happen is that our economy will stabilize and once stabilized, grow. Given the resolve of our Federal Reserve, Congress coupled with an outgoing Presidency, I see rampant inflation on the horizon.
Inflation….
The Federal Reserve is working on making the cost of borrowing money, cheaper. Cheap money creates demand for that money. In a stable environment, banks lend money. That money is used to by “things”. More money chasing the same amount of “things” drives prices up for those “things”. This is what inflation is all about.
We’re all aware that it’s rare that prices move in straight lines for long periods of time. There are always ups and downs. However, in an inflationary environment, there are typically more ups than downs and higher highs and higher lows. That is what makes an uptrend. Expect to see this in a number of commodities as inflation goes hand in hand with higher prices.
As I see it, both gold and silver are in a win-win scenario. Growth propels demand for both. To obtain growth, the Fed has no choice but to lower interest rates, which will in time create demand for goods and services, which will lead to higher inflation. Yes, at some point in time the Fed will have to fight inflation, but that is much later, possibly in mid 2009. They Fed cannot fight this battle now since their main weapon to fight inflation is to cut off money supply by raising interest rates. They are doing just the opposite with the goal of getting our economy stabilized and growing.
Therefore, I look for gold to move up to the $950 price level and silver to get up to $17.00 very soon. From there I look for gold to chop around a bit, but after that to add to its price, moving in $25 increments until prices get up to $1000 an ounce. Silver will probably tag along, moving in 50 cent increments.
April Gold
Last week I wrote that I thought that February Gold would get up to the $920 level. It in fact got up to $936 just yesterday. It’s now time to turn your focus to the April Gold Contract and study a very neat indicator called “Slow Stochastics”.
Embedded Stochastics, the graph on the bottom of the above gold chart is displayed as a “Red” and “Yellow” line. The Red line is called “D” and is mathematically created by looking at today’s data and the past 2-days of trade data. The “K” line is displayed in Yellow and is mathematically created by looking at today’s data and the past 4-days of trade data. The difference in the line values comes from the amount of data used in each of the respective calculations. The Yellow Line looks at more historical data that the Red Line does. Therefore, the Red line, since it uses less data, has less of a “lag” and reacts quicker to what prices do than the Yellow Line. This is by design.
What is important to remember is that the Red Line moves faster and most importantly first into overbought and oversold territory. I teach much more about his in a course I created called The Futures Academy and have included access to a video of what and how I teach a short way down in this report.
When both the Yellow and Red Line are over an 80 for 3 consecutive days, I interpret that as a signal that means as prices are moving higher, innately prices are getting even stronger, meaning even higher pricing is likely. In other words, the uptrend instead of reaching an overbought status is instead innately feeding on itself, which in the end should produce even higher prices until Stochastics turn down.
When the Red Line turns down under 80, the embedded Bull Phase is over and a correction down to the 18-Day Moving Average of Closes is highly likely. It is at this point that a position in Put Options comes into play.
As long as Stochastics remain embedded, prices are likely to move higher.
Conclusion and Recommendation
If Stochastics embed, I think a long position in April Gold is warranted. In fact, a move over 934.0 on Friday will be a signal for a test of the contract high of 942.2.
Aggressive traders, those that wish to gamble that Stochastics will in fact embed can buy the April Gold 950 Call and sell short the April Gold 970 Call at a difference of $6.20. Look for a price of $12.00 to take profit at.
I will update this spread in my twice Daily Report if Stochastics embed.
Silver
Let’s spend a moment or two looking at a Daily Chart of March Silver.
Stochastics are fully embedded. Along with that, the seasonal trend moves up from here until mid-February.
The last break low as shown on the above chart occurred on January 22nd at 15.255. That is nearly $1.75 ago. Another way of saying this is that silver has moved up nearly 10% in price in but 8-days. Over the past 8-days those who follow my trades would have been long and hopefully enjoying what is going on.
Given that Stochastics embedded today, two things have to be taken into account. First, when Stochastics leave their embedded status it will be time to be fully out of your long positions.
Second, right now all of the technical indicators are in place to produce another serious run to the upside because that is what newly embedded Stochastics often produce.
Recommendation
Today was great. As many of you know, for many weeks I have been touting a Long Call Spread that those who follow my report were able to put on a while back. I have patiently been sitting, waiting to get you into a position where on a thrust up you could get on the market’s money. Today was that day!
In recent past Weekly Metal Reports and in my Twice Daily Reports I have been tracking a spread that followers of my reports should have had on. The long 1625 short 1675 March Silver Call Spread. This spread was recommended and put on at 18 cents. In my morning report today, which I publish at mid-day, I recommended taking 50% profit at 29-cents or better. Fills came in from 29 up to 30-cents. The market closed at 30.3 cents.
Those who followed this spread paid $900 for the spread not including commissions and took a 50% profit of at least $550. Not a bad return.
Those who follow my Twice Daily Recommendations know that unless I state otherwise, I always recommend two or more contracts. The idea is to try to get on the market’s money, but taking a partial profit and letting the other position run until a final liquidation signal is issued.
I recommend liquidating when Stochastics in March Silver turn down. Until than, hold tight. I may even buy more if conditions warrant doing so on a price break of sideways action so keep up with my Daily Reports.
The link to Ira Epstein’s Mid-Day Videos is below. Be sure to click on the RSS feed to be alerted to when a new video is posted. I do my best to record and get these posted by 1:00 P.M. CST. For metal traders this is a good way to keep up with mid-day Metal Market events as I present live charts and discuss current financial topics.
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I receive a lot of questions on how I use Stochastics in my price analysis. I teach how I use them in my trading course called The Futures Academy. I’ve created a short video that explains my teaching style. In the video I speak about The Futures Academy and the indicators I use in my trade analysis. You can click on the link below if you are online or simply type the link address below into your web browser.
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