8-14-2008
Technically Speaking
Last week I spent a lot of time surmising the reasons for the break in commodity prices. Since than the grain markets have or are in the midst of bottoming out. Sharply lower days in energies are now being met with sharply higher days, almost back to back. The stock markets are also either sharply higher one day, or sharply lower the next.
So what’s going on? In part it’s the end of summer, but there is more.
It’s my opinion that the energy and metal markets are in the early stages of trying to see where a tradable bottom is. Rallies are met with deeper probes down. When the market makes a higher high, most likely a bottom will be in place.
A look at Corn, yes Corn and even Soybean Meal over the past two days tells the technical story. Both had what I call “Embedded Stochastics”. For those that don’t know what a Stochastic is a Stochastic is a technical trading study that is used by many technicians and me to measure a market’s profile. A market can be:
- Strong
- Getting Stronger
- Overbought and….
- Embedded
- Weak
- Getting Weaker
- Oversold and…
- Embedded
As such, many traders find this a very useful tool to measure where the market is in terms of momentum. The fascinating thing about Stochastics is how many things they tell you.
A Stochastic is made up of two lines that criss cross each other on a graph that runs from 0 to 100. The lines have names. K and D. The K line always moves faster above and below the D line on a chart graph. A reading over 70 is overbought and a reading under 30 means things are getting oversold. In between the 30 and 70 the lines move up and down, showing upside and downside momentum.
When both K and D line stay under a 20 reading for a series of days or over 80 over a series of days, they are said to be Embedded. Embedded means more strength up when over 20 and more strength (pressure) to the downside when under 20.
When the faster K line leaves it’s less than 20 reading, on a close, expect a rally. When the faster K line leaves it over 80 reading, on a close, expect a price break.
Metals and energy markets at this moment have Bearish Embedded Stochastics. This means that both K and D lines in these two complexes have readings under 20. When the K line moves over and closes over 20, my expectation is for a sharp rally up to the 18-Day Moving Average of Closes.
Fundamentals
As I see it, this being August and many traders away for holiday and as such reaction to the fundamentals aren’t having a serious impact. Most of the fundamentals have been bullish, such as:
- War in Russia and Georgia, no impact on oil or gold.
- Israel and Iran, no impact on oil or gold.
- Inflation readings at the highest in year around the world, no impact on gold or silver.
However, the strong Dollar is overshadowing all this. What’s funny is that the Dollar is not getting stronger from its own internal measurable readings. Rather, competing currencies are now seeing their economic readings soften. As we’d been in the “toilet” so to speak, seeing Europe and Asian currencies come under pressure has provided the Dollar with a bottom.
Gold’s Seasonal Story
Like a broken record, I feel it important to point out that gold typically does poorly in August and things begin to turn up in September. Look at the Seasonal Gold Chart, provided to us by the good folks of Moore Research Center…www.mrci.com
August is rarely a strong month. Its September that I am counting on to move things higher. As such, the lower Gold now goes, the stronger the expected rally into year end.
December Gold
Lets now look at a Daily Chart of December Gold Futures
As you can see the Stochastic Study has not lost its Embedded reading. In fact, since July 30th both the K and D Lines have stayed under 20. As such rebounds have been few and far between. On July 15th prices hit $999.4. Today’s low is $810.
Without Stochastics turning up, it would not surprise me to see more downside pressure. How much more is what I don’t know.
The 18-Day Moving Average of Closes, show as a bold red line over the Daily Chart is falling at the rate of approximately $8 a day. This leaves lots of room to jump into a Call or Call Spread when Stochastics turn up.
Conclusion and Recommendation
Admittedly I recommended getting into Gold Call Spreads way too soon. Given that amount of time left on them, nearly 100 days and the seasonal likelihood of another move up before time runs out, I recommend that you hold onto and possibly add to this or an other Gold Call Spread, once I issue a signal to do so.
Those that follow my Twice Daily Updates are long the December Bull Call $1000-$1025 Spread at 6.30.
This spread has until the end of November. If the seasonals in gold and silver take hold and Crude simply holds steady, the gains ahead could be very substantial. If you or I am wrong, your risk is limited to the cost of the spread plus fees. Don’t forget that this strategy is not a do or die situation. You have the flexibility to get out at any time prior to expiration for whatever the spread is worth. Expiration is in late November, so you have a lot of time to see trends develop.
My recommendation at this time is to hold tight.
Silver
My comments on Silver will mirror those of Gold. The technical studies are in the identical predicament.
