8-21-2008

Are you hearing the other shoe drop?

Today’s rally in Gold, Silver, Copper and energies is a move away from currencies into hard assets. The move is not because of inflation. Rather the move into hard assets is because of:

• Russia not pulling out of Georgia
• Pakistan now being up for grabs
• Fannie Mae and Freddie Mac in need of a “bailout”
• Lehman Brothers on the ropes
• Rumors swirling around Wachovia ills

It is now 8:00 AM CST and Crude Oil is up to $120 a barrel and Gold is up to $835 an ounce. The Dollar is down and foreign currencies are rallying, in some cases very hard as investors seek refuge.

Do not expect today’s action to have long lasting affect. Rather look at it as a run to preserve assets. Until the above issues settle down and the markets “know” more about their outcome, uncertainty will drive hard assets.

The Technical’s

Over the summer I have written a number of articles, mentioning in many the impact of a Technical Study called Slow Stochastics. The beauty of this study is that it often leads price movement. It did so clearly yesterday and this morning.

As you will see in the Daily Gold Chart below, Stochastics lost their embedded status yesterday. An embedded status occurs when the two lines that make up Stochastics, call the K and D lines stay under a 20 reading for 3 or more consecutive days. When the K line closes over 20, the market often rallies.

If you look at Gold, Copper or Crude Oil you will see this phenomena. The trick of course is in recognizing what you see and learning how to play it. That is something I teach in a Video Course called The Futures Academy. If you click here you can read about the course and view a short Video I prepared explaining in detail how and what is taught.

Let’s get back to Stochastics. My theory is this. When the K line closes back over 20, I believe the market is set to run up to the 18-Day Moving Average of Closes, wherever it may be. Once hit, the Stochastic objective is met.

Take a look at December Corn, November Soybeans, December Soybean Meal and December Copper. Be sure to apply the Slow Stochastic reading and look to see where these markets rallied up to.

What Now for Gold and Silver

The big question now is what propels the markets going forward. While Crude Oil this morning hit its upside objective, Gold and Silver have not and in my opinion have room to move higher, in Gold at least up to the 18-Day Moving Average of Closes. Silver is just coming out of its embedded Stochastic reading and if it closes today with the K line over 20, the odds favor a move there as well to the 18-Day Moving Average of Closes.

Given the history or market momentum, this may be the beginning of a year end run up in both Gold and Silver, at least according to their seasonal tendencies.

Gold’s Seasonal Story

Here we are at approaching the end of August. Look at the Seasonal Chart below provided to us by The Moore Research Center…www.mrci.com. The timing could not be better, at least historically speaking for a surge to the upside. One that could move large into and possibly through a good part of September.

December Gold

Lets now look at a Daily Chart of December Gold Futures

The Stochastic Study has lost its embedded status as shown with the aqua circle on the chart above. This means that in theory, prices and the 18-Day Moving Average of Closes should converge and hit at some point very soon. In addition, the chart pattern as displayed by the “yellow line”, which is the Swingline Study, has begun a pattern of higher highs and higher lows.

If I am correct, once prices hit the 18-Day Moving Average of Closes, market momentum will stall out for while. It is at that point that the Seasonal Tendency of the market must take over to carry the market.

I look for higher prices into year end based on the credit crisis which is both getting worse and spreading around the world, the seasonal tendency of prices to rally into year end and the current chart pattern.

Conclusion and Recommendation

Admittedly I was much too early in getting into Gold Call Spreads. Given that amount of time left on them, nearly 90 days, I believe that time is on your side. The question of course is: Will Gold rally as I expect and to what price? It has to rally nearly $200 an ounce to make this spread work.

In the meantime, those of you that get my Twice Daily Updates were told yesterday to purchase December Gold 850 Calls under 31.00. This should have easily been done. As of this writing that Call is up to $40.00.

While I expect more gains, I wish to also mitigate the open loss in the Call Spreads by having you take partial profit now of at least $600 if you are in the Gold Call Spread. Keep 50% of your position on. (In The Futures Academy and in my Twice Daily Update I recommend trading two or more contracts at a time.)

This should leave you with one 850 December Call and the Call Spreads. These cuts down your exposure and leave you with some upside.

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

Like Gold, Crude Oil and a host of commodities fear about the US and world economies are ruling the day. As such, the Dollar is falling against practically every major currency.

In last night’s Twice Daily Update I told my customers to cover short positions in the Aussie Dollar, the currency we had been short because I believed a surge in metals was upon us. That surge hit this morning and customers who followed my recommendation did very well.

How far Silver will rally is anyone’s guess. Crude Oil is now up $5 a barrel. When I was writing the Gold commentary it was nearly $1.50 lower.

Let’s look at a Seasonal Chart of Silver as provide to us by The Moore Research Center…www.mrci.com.

It looks like the upsurge is beginning a bit early. In other words the seasonal is early just a bit.

This doesn’t matter all that much, as long as the larger picture works, that being a strong September and strong move into year end.

Today has the element of early panic. Grains are moving sharply higher. All of the softs which are made up of; Cocoa, Coffee, Sugar, Cotton and so on are higher off of a sharply lower Dollar, sharply higher energy prices and soaring metal prices.

December Silver

Let’s look at a chart of December Silver.

The thing my eye goes to is the graph on the bottom of the page, that of Slow Stochastics. They are trying to turn up. If by late in the day they do turn, I think a run to the 18-Day Moving Average of Closes is in the cards.

At the time I am writing this report, the 18-Day Moving Average of Closes is approximately 1.50 away. Therefore unless Silver simply runs to the moon, it will take a combination of the 18-Day Moving Average falling a bit and prices rising even more. I calculate that the 18-Day Moving Average of Closes is falling at the rate of 15-cents a day.

Therefore when I try to estimate where price and this average will meet, you have to do some guesswork. That is the “art” involved in trading.

Recommendation

Latter this morning, assuming Stochastics remain un-embedded, my intent will be to issue a buy recommendation in a Silver Call. I think it prudent to buy the $15.00 December Silver Call as that allows nearly 3-days of the 18-Day Moving Average to fall as prices move up. In other words a move in the futures up to approximately $14.75-$15.00 would be the first profit objective.

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