Archive for the ‘Options Recommendations’ Category
Gold miners as evidenced by GDX double topped at 58. at the end of February and now appears to have bottomed at a major support level. Negative momentum is waning and while we do not have a completed MACD crossover, the MACD is turning up at a higher level than at the end of December when the index made a higher low. I have found this short term MACD divergence to be extremely reliable in calling turning points in the markets.
There was a breakdown of the rising head and shoulders pattern on GDX and the downside target of approximately 48 has been fulfilled. The minimum upside target of this run should be to the 200 day EMA at the 55-56 area. What happens past that point will depend upon the price action of oil and gold.
One way to play the rally in miners would be to buy Yamana Gold (AUY) either the stock or options. AUY has pulled back to the bottom of it’s well defined uptrend channel. The next move up should take it to the top of the channel at about 18.50.
Rising gold prices are good for miners but rising oil prices are not as they eat into the cost of production. Of course if the price of gold increases faster then the price of oil or the price of oil drops the 2 factors can negate themselves. Right now it appears that the price of both oil and gold are on the rise.
As I mentioned in my entry of February 22 GLD had broken through the neckline of an inverse head and shoulders pattern. That quickly reversed as JP Morgan apparently dumped a huge amount of gold on the open market. Any attempt at manipulation of the precious metals markets is doomed to failure as the laws of supply and demand will eventually win out. Central banks around the world are loading up on gold and China is an especially heavy buyer. China will be opening up it’s own gold exchange in June and the government is encouraging it’s citizens to load up on gold.
As a result of JPM’s actions there is an even larger inverse head and shoulders pattern forming on GLD. We have a left shoulder and head and the right shoulder is now forming off the 50 day EMA support line. If the pattern were to complete a successful break out of the neckline would bring gold to $2,100 per oz. With China opening up a gold exchange combined with the fact that Hong Kong will be opening up a silver exchange it seems highly likely that both gold and siver will be hitting new all time highs this year.
WTIC Oil has also formed an inverse head and shoulders pattern as evidenced by the monthly chart. The neckline has already been broken and the projected price target is 125.
Oil has been flagging since February as evidenced by the daily charts. Once oil breaks through the top of the flag formation it should make a quick run to 125.
As I also mentioned in my entry of February 22 bonds were in the process of breaking down but were taking quite some time to do so. Bonds as evidenced by TLT finally broke through critical support this past week and are now staging a counter trend relief rally. I expect TLT to hit stiff resistance at the downtrend of 116 or it’s 50 day EMA at 115.42. From that point on TLT should head lower and the stock market should continue to rally.
Conclusion: The Technical indicators are pointing to higher stock, oil and precious metals prices while bond prices are headed lower.
Above we have the 5 year chart of TLT, the Ishares 20 year treasury bond fund. The first thing we notice is that TLT may be double topping as it hit a slightly higher high than it did at the end of 2008 and it has now pulled back. Let us now compare it to where the S&P 500 was during these top formations. At the end of 2008 the S&P was in the 800-900 range. The S&P is now in the 1100-1200 range. This would seem to indicate that most of the money that has been piling into treasuries has been coming out of foreign markets. If TLT has double topped it could indicate that money is ready to flow into the U.S. stock market.
I have also drawn trendlines from the market top of 2007 to the current top of 2011 and fan lines from the market low of 2009 to points where the uptrend broke. So far we have had a break of 2 fan lines. It is generally considered that a break of the 3rd fan line is fatal but so far that one is holding up. The current trend along this line also looks similar to the one that occured in mid 2010 as the market bounced off that fan line and then started to move up.
The VIX also looks like it may have double topped at 48 but it has been staying persistently high since August, hence the huge swings in the market.
Conclusion: The stock market is at a major crossroads. There are a lot of negative technical indicators overhanging the market and the shorts are piling on to positions. We are heading into October which is generally feared but the fact of the matter is that statistically September is the worst month for stocks and not October. The market also has a tendency to frustrate the multitude.
There has been some recent positive economic data coming out of the U.S. in regards to employment and the Chicago PMI which seem to indicate that the U.S. economy is not falling off a cliff. The fact that bonds have rallied to their 2008 highs while the U.S. stock market is still way above it’s 2008 lows is another positive indicator.
China’s growth rate has been reduced from 9.6% to 9.5%, hardly the indications of a meaningful economic slowdown. The Fed has already revealed it’s hand with persistently low interest rates, Twist and the statement that it might do further monetary easing if necessary. Therefore the focus is on Europe.
If Europe can get it’s act together quickly and construct a meaningful financial back stop for the sovereign debt crisis that is emanating out of Europe then there is the possibility of an upside market surprise. If the S&P can manage to break through 1230 the shorts will be forced to cover sending the market even higher. A break below 1100 however would be bearish and confirmation that we are in a bear market phase.
If you’re a trader one possible way to play this market would be to buy out-of-the-money calls above 1230 and out-of-the money-puts below 1100 dated at least through November. That way whichever way the market moves the overall position should be profitable.