Wednesday, May 25, 2011

50 Day Moving Average Offering Support in Gold

Gold futures closed the day above the 20 period moving average on Monday and are extending gains today. Gold did not sell off to the same degree as silver and so far the 50 period moving average on the daily chart has offered key support. I would not be surprised to see the rally in gold continue in coming days and weeks as the situation in Europe will likely be in the forefront of headlines in the near term.

It is possible for gold futures to push higher and possibly attack and test the recent highs. If we do get a strong extension higher in gold I would expect a blow off top and a subsequent selloff that is quite deliberate and nasty. I think in the short term we could see gold put in new highs and possibly climb above the key $1,600 an ounce price level. However, if we do get a strong extension higher I will expect to see sellers beginning to step in if price gets above the $1,600 price level. The daily chart of gold futures is shown below:




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Sunday, May 15, 2011

George S. Patton....Take calculated risks. That is Quite Different From Being Rash.....HI YO Silver, Away!

Last week silver was the focus of incredible price swings which left many licking their wounds and shaking their heads at the trading losses they had incurred. This sell off was likely triggered by the increase in margin requirements for futures contracts, but the stunning price decline extended to all vehicles like exchange traded funds use to trade the glimmering metal.

I recognized the potential opportunity early in the week, and began to look at various position structures using options on Tuesday morning. In order to understand the thinking behind this trade, it is necessary to understand the concept of implied volatility of an option contract. Implied volatility, together with time to expiration and price of the underlying security, form the three primal forces that rule the world of option pricing. This measure of volatility is best described as the collective opinion of traders as to the future volatility of the price of the underlying. Implied volatility is the variable which determines if options are priced cheap or overvalued.

One of the fundamental behavioral characteristics of options is the reaction of implied volatility to rapid price change. As a general rule, implied volatility goes down as the price of the underlying increases and vise-versa. Another functional characteristic is that it tends to revert to its historic mean once rapid price movements have moderated and actual price volatility returns to its historic range. The chart below is from a historical database of SLV implied volatility. Note the dramatic rise, indicated by the blue line, beginning in mid April and reaching historically unprecedented levels in early May.



Books have been written to describe details of various option trade structures, and a discussion of all potentially useful strategies is beyond the scope of my mission today. Suffice it to say that individual trades can be structured to respond either positively or negatively to reductions in implied volatility. Given the extremely elevated state of the SLV implied volatility, which side would you want to take? Hint: Volatility doesn’t remain elevated forever. A well-established characteristic of implied volatility is its tendency to revert to its historic mean.

The trade structure I chose to use was that of a calendar spread. This two legged spread is constructed by selling a short dated option and buying a longer dated option. The options selected to construct each spread are at the same strike price and are of the same class, either puts or calls. Maximum profit of each spread occurs at expiration of the shorter dated option when the price of the underlying is at the strike price of the spread. The main profit engine for this spread is the more rapid time decay of option premium in the shorter dated option relative to the longer dated option. My trade plan was to buy the May monthly option series which had 18 days of life remaining and sell the weekly options, an option series with only 4 days of life remaining when the trade sequence was started. An essential part of my plan was to adjust the spread as required by price movement to keep in the profit zone of the P&L curve.

It is important to recognize the “secret ingredient” of the spread that put the wind at my back; this special ingredient was the much greater implied volatility of the option I was selling compared to the option I was buying. In the language of the option trader, this situation is termed a positive “volatility skew”. This positive volatility skew increases our odd of success because we are selling a richly priced option and buying a more reasonably priced option; the old adage of “buy low, sell high” applies to volatility as well as price.

The trade that I will discuss began mid-morning on Tuesday, May 3 when SLV was trading around $42.50. My opening traded was to establish the calendar spread at the 42 strike, in options peak, this is known as an at-the-money calendar spread. The opening trade is displayed below:



Price continued to decline for the next several hours and by mid afternoon, SLV was trading around $40. This rapid decline was beginning to approach my lower breakeven price point at $39.24 and I felt I needed more room to allow for price action movement. At this point I chose to add an additional calendar spread at the 38 strike using puts to create a double calendar spread. The resulting trade lowered my breakeven point on the low side from the original $39.24 to $36.21. The new spread’s profitability curve is graphed below:



Price action the next day, Wednesday May 4, was a bit more subdued, and price remained within my profitable zone. Time decay of the short option premium was accelerating and no further action was required. All systems were “go”. The following day, Thursday May 5, price movement resumed its rapid decline and price had moved beyond the profitable zone of our double calendar spread. Action was required; “wishing and hoping” in these situations is strictly not allowed

The original position needed to be modified in order to re-establish a new zone of profitability surrounding the current price of SLV. Because SLV had moved well below the lower breakeven point of the double calendar, radical surgery was necessary. I chose to remove the entire position and re-center the spread. I closed both the 42 call calendar and the 38 put calendar and bought 2 put calendars at the 34 and 35 strikes. As Thursday ended, I had the position illustrated below:



Price movement during the next day, Friday, remained within the range of $33.60 to $35.57. These price extremes for the day were within our limits of profitability of the new double calendar. I closed the spread by mid afternoon when the time premium of the options I had sold short had largely eroded.

This trade had a profit of 15.9% net of commissions for trade duration of approximately 72 hours. I think the lesson to be learned from this trade is that a knowledgeable option trader can survive and prosper in a variety of market conditions. This demonstration is, I think, an example of the tremendous power of options to mitigate risk and provide controlled risk trading opportunities in fast moving markets.
This trade has been part of a strong period of performance for members at OptionsTradingSignals.com

Recent performance has been outstanding as 6 out of 7 trades have produced profits while the final trade remains open. The following returns are based on trade entry and executions. Commissions have not been factored in as option commission structures are different and members may have received a better or worse trade execution. With that said, the gross returns are listed below:

GLD Call Calendar Converted To Vertical Spread – 58%
RUT Call Calendar Spread – 12%
SPY Call Vertical Spread – 32%
SLV Call Calendar Spread Converted to Double Calendar Spread – 18%
AMZN Call Calendar Spread – 37%
SLV Call Calendar Spread Discussed Above – 20%



The cumulative return of the most recent 6 trades is 177%. Obviously the recent track record has been strong and the overall return for members would differ based on position size, risk tolerance, and account size. Since the beginning of the service in December, the overall win / loss record is 14 winning trades, 1 breakeven trade, and 8 losing trades. The overall successful trade percentage based on the trades that have been closed is just shy of 61%. In full disclosure, two trades remain open at this time.

Recently I have used a lot of calendar spreads due to the low volatility environment we have been trading in. The trade constructions that I use adjust based on volatility levels of underlying assets and the VIX index in general. Essentially the service does not use the same trades over and over unless the volatility environment is little changed. Recently we have had consistently low volatility levels and calendar spreads have been attractive. In the future, volatility levels will likely change and other trade constructions would be warranted at that time.

The special offer currently being presented to new members is an extreme value. Most long term members have pointed out that they would be willing to subscribe just for the daily technical analysis provided as well as the 2 – 3 weekly videos that members receive that contain technical analysis of key indices, futures, and ETF’s. My primary focus is to deliver value to members beyond just solid trade management and performance.

I am focused on performance, but my greatest thrill is watching novice option traders start to learn how to trade options in spreads effectively and for consistent profits. Options are one of the most overlooked trading tools in financial markets and the power they offer individual investors is consistently overlooked. Options are more than just hedging tools; they offer individual investors the power to diversify away from standard assets.

Join J.W. Jones at Options Trading Signals.Com and learn to harness the power that options offer investors and traders alike!



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Tuesday, May 10, 2011

COMEX Drops Nepalm Bomb on Silver, What Next for the Precious Metals?

What was David Banister thinking......


What was I thinking trying to forecast a normal “wave 4” correction in Silver without the required insider information that the COMEX was going to raise margin/equity requirements four times in a week? My pullback silver low target of $40.10 was obliterated after two consecutive days of equity requirement increases early last week, knocking silver into the low 33’s before it got off the mat and staggered around a bit. Gold followed right behind as margin calls and stop losses required over- zealous traders on the long end to liquidate everything they could find to avoid complete meltdown of their trading accounts.

That is all well and good, but now all of my subscribers want to know just one thing…what now? For starters, Silver had completed an A B C rally pattern from around $18.50 in late August to $49.90 about eight Fibonacci months later. I had written about that coming rally late last August with Silver at $18.73, so we were prepared for the opportunity. I even looked for long term targets as high as $45. That rally was pure crowd behavior in motion, and when you reach the extremes of a “C Wave” in optimism, the next leg down (Which I call the “D wave”) is extremely difficult to predict. I trade A-B-C patterns all the time, looking for that imminent “C wave breakout”, and last August I forecasted a huge move in Silver mostly because a very long B wave triangle had just about completed, and the powerful C wave rally was nigh.

Now that we ended that rally by touching the all time highs near $50 from 1980, it was clear we would have a corrective pattern, and the problem was trying to come up with a reasonable “Crowd Behavioral” bottom pivot forecast amidst the COMEX interfering. This D wave ended in catastrophe for those who were over exposed, or shall I say… “Greedy”. You know what they say on Wall Street, Hogs get fat and pigs get slaughtered. Well, for those who want to dip their toe back in the water, here is the likely path going forward.

1. I expect Silver to recover over several months and re-attack the $50 zone again.
2. Silver will get past $50 by year end and probably reach $60 before the next strong correction.
3. With three years left in the Gold and Silver bull cycle from 2001, there is a very good chance silver will be well north of $100 an ounce by 2014, but one week at a time.

I do not trade Silver or Gold futures, and never have… I just forecast direction and price as best as I can for my subscribers. Probably one of the reasons I’ve been lucky and accurate for many years is I have no bias, as I am not forecasting my own book… just what I see. Near term look for Silver to try to rally back to about $38 to $41.50 ranges, with another pullback to follow.



Gold should have bottomed at $1462 in what I call an “A wave” down, with the “B wave” currently bouncing to about $1520 if I’m right. Once this bounce is completed, I look for a soft pullback to $1489 or so, followed by a strong rally to re-test the $1577 highs. Gold should reach a minimal target of $1627 on this final 5th wave up from the January 1310 lows, with potential to spill higher than that.

Silver has tripped on itself for now, and Gold will probably move a tad smoother over the near term, but look for Silver to regain it’s sprinting abilities this summer-fall and re-take the baton from Gold and continue it’s out-performance. If you would like to have frequent updates during the week, lots of good charts, and avoid scratching your head while the action unfolds, take a look at Market Trend Forecast.Com for a special coupon offer today, or sign up for our occasional free reports!


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Sunday, May 8, 2011

J.W. Jones: What's Next For The S&P 500, Gold, & Crude Oil

Brokers have made it easier then ever for the average investor to get started trading options. Don't even consider trading options without subscribing to J.W. Jones newsletter. Here's his weekend post that will prepare you for trading the amazing moves we are having in commodities this week......

The price action in precious metals and oil this past week has been breathtaking. The last time we have seen this much volatility in commodity prices was amidst the financial crisis in 2008 and the early part of 2009. Does this mean we are at the brink and risk assets are going to decline precipitously? Obviously that question cannot be answered with any certainty, but the underlying price action in the S&P 500 has been relatively strong compared to gold, silver, and oil.

Talking heads everywhere are predicting the commodity bubble has burst and pointing fingers at excessive speculation in silver and oil. Margin requirement changes in silver futures have been fingered as the primary catalyst for the nasty sell off. Silver had gotten way ahead of itself in terms of price and parabolic moves higher are usually followed by parabolic moves lower. For silver buyers on Friday, April 29 a painful lesson has been learned as their investment has declined more than 30% in 5 days.
It doesn’t take a genius to realize that we are going to bounce higher at some point. With a sell off of this magnitude it would not be shocking to see at least a 50% retracement of the entire move in coming weeks. 

It is also possible that this is a buying opportunity for precious metals and oil. It is too early to be certain, but a bounce next week is likely as silver went from being severely overbought to severely oversold on the daily chart in one week. The chart below illustrates the 50% retracement and the RSI reading for silver futures:
In the month of April OptionsTrading Signals members were able to capitalize on rising silver prices to close a trade that produced an 18% return in less than 5 days using a double calendar spread in order to produce outsized profits based on maximum risk. Members regularly receive trade alerts focusing on gold and silver using ETF’s GLD & SLV which have extremely liquid options.

While silver prices have been absolutely crushed, gold prices have held up a bit better. In fact, in this selloff gold has been less volatile in terms of intraday percentage price movement and has not suffered from near the losses that we have witnessed in silver. The gold futures chart below illustrates key price levels:
Members of the OTS service received a trade alert on April 6th for a calendar spread that was converted to a vertical spread. When the vertical spread was closed on April 26th the members realized a gain close to 56% based on the maximum risk of the trade.

Recently we have received some poor economic data which has put a drag on equities the past few weeks. This morning we are seeing a strong bounce in the S&P 500 futures and if we have another light volume Friday prices tend to drift higher throughout the trading day. The S&P 500 futures spiked to around 1,370 on the news of Osama Bin Laden’s death and then sold off from that point. The chart below illustrates the S&P 500 futures rally and subsequent sell off highlighting current key price levels:
Members of Options Trading Signals received a trade alert on April 12th to put on a call vertical spread to capitalize on rising prices. On April 21st partial profits were taken and eventually stop orders closed out the position on May 4th locking in a total gain of around 32% for the trade based on maximum risk.
Oil prices have sold off sharply, albeit not as sharp as the downside move in silver recently from a percentage standpoint, but a significant amount of the risk premium has come out of oil prices. I continue to believe that oil prices over the long term have only one direction to go based on tightening supply / demand going forward and lower production levels in the future. Similar to silver, a .500 retracement of the entire recent move is rather likely in coming weeks. The daily chart below illustrates key price levels in oil futures:
I continue to believe that oil prices are going to work higher over the longer term for a variety of reasons, but a drop in gasoline prices would not hurt U.S. Consumers and the domestic economy. Higher oil and gasoline prices weigh on the U.S. Economy heavily so this sudden decline in price is beneficial to most Americans which could juice consumption if prices stay lower for a longer period of time.

Overall, price action in the commodity space has been extremely volatile the past week with silver and oil really getting hammered lower. Gold and the S&P 500 held up a bit better and it would not be shocking to see the S&P 500 put on a rally from here if oil prices stabilize. However, if the U.S. Dollar continues its recent rally it will force the commodity space as well as equities lower. The daily chart of the U.S. Dollar Index futures is shown below:
In closing, I am expecting a bounce in coming days and a .382 or .500 retracement of the entire move in gold, silver, and oil would make sense so I would not be too aggressive shorting. However, I would not necessarily be an aggressive buyer either. It is going to take time for market participants to digest the recent moves. In weeks ahead it will be more apparent what price action is likely to do and I would be shocked if we did not see a few low risk, high probability trades setting up.

Speaking of low risk, high probability trades, the month of April was the best performance for the Options Trading Signals service so far year to date. Seven total trades were opened and six trades have been closed with sizable profits. Recent returns included an 18% return in SLV, a 56% return on a GLD trade, 32% return on an SPY call vertical spread, a 12% return on a RUT Calendar spread, and a 37% return on an AMZN calendar spread. The total cumulative return in April was 155%.

Assuming a trader had a $10,000 account and risked a maximum of $1,000 per trade, the gross gains would have been well over $1,400 in April alone. The overall service is up over 15% year to date handily beating the S&P 500 return while assuming less risk. Take advantage of the special offer going on now where new members get 3 months for the price of one!

To Get J.W.'s Free Trade Setups visit Options Trading Signals.Com

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Thursday, May 5, 2011

Parabolic Moves are Only Temporary for Silver and Gold

The past few weeks we have been seeing the US Dollar slide to new lows at an increasing rate. The strong devaluation of the dollar has sent precious metals like silver and gold rocketing higher out of control sending them parabolic!

During the past 6 weeks both silver and gold have been rising in a parabolic formation. Meaning the price is going straight up with strong volume as everyone gets greedy and buys into the commodities at the same time. Most of you who follow my work already know that if the general public is piling into an investment rocketing prices higher, you better start focusing on tightening your protective stops and or taking some profits off the table before the price collapses.

Take a look at the weekly chart of Silver below:
Silver was grinding its way higher from July into March of this year. Only in the past 6-7 weeks did we start to see silver open up and run with expanding candles growing at an accelerated rate. This virtually straight up rally is a signature pattern and tells me that price action is now VERY unpredictable and anyone getting involved should be tightening their stops and or taking partial profits on price surges.
Parabolic moves can provide some big gains but most traders end of giving it all back and then some because the price can drop very abruptly as seen on this chart.


The weekly chart of gold below shows much of the same thing but without the extreme volatility that silver has.


Now, if you take a look at the US Dollar chart it’s starting to look very bullish in my opinion. The chart shows a falling wedge which typically means the selling pressure should be coming to an end soon. I’m not sure how large the bounce/rally will be. I do think a quick move to the 75 level is very likely in the near future though.

I find that metals tend to turn just before the dollar does. So I’m very cautious here on buying any stocks or commodities at the moment. The past 2 years we have seen stocks and commodities have an inverse relationship with the dollar so a rising dollar means a market pullback will take place. Sell in May and Go Away…?


Mid-Week Trading Conclusion:
In short, we exited our SP500 position this week for a nice 6% gain in a couple weeks making that our third profitable back to back index play. At this time I’m not ready to buy or short the market until all the charts line up for another low risk entry point. Things are 50/50 odds here and that’s not good enough for me.

You can sign up for our free trading reports each week at The Gold and Oil Guy.Com



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Monday, May 2, 2011

Understanding Where we are in the Silver Bull Market

Last August David Banister told my subscribers to prepare for a monster rally in Silver. What else does Banister have to say?

From guest analyst David Banister........

At the time of my forecast silver was $18.73 per ounce. I drew up a chart and predicted a huge rally to $29 an ounce, and we ended up at $31 or so just a few months later. This was entirely a crowd behavioral move that I foresaw in advance, based on patterns that R.N. Elliott developed in the 1920’s and 1930’s. My theory was besides the crowd pattern (a 20 month odd Triangle consolidation), that investor’s would begin to view Silver as “Poor man’s Gold” and buy it. Literally, the idea is as simple as investors will simply think that “Gold is too expensive, but silver is cheap”. That is the explosion power that is behind this move from $19 to $50 an ounce since late August 2010.

Below is the original chart I sent to my subscribers outlining this triangle pattern and the likely move:

After Silver ran hard and fast, it left a lot of talking heads on CNBC and everywhere else scratching their heads and wondering what just happened. If you learn and understand the basics of Elliott Wave Theory, you can begin to foresee what is about to happen and stop scratching your head all the time. Watching the analysts on CNBC is like watching the Monday morning quarterbacks following an NFL Sunday. After that massive silver run from $18 to $31, it was time for a correction and I called for $25 to $26.50 as likely in a normal pessimistic crowd wave 2 pattern down. Once that completed, I sent my subscribers the chart below outlining another Bull wave to $39-$45 per ounce:


Silver then eventually ran to $45 per ounce in April of 2011 and had a brief spike to near $50 to test the all time highs just in the past week or so. The action has been wild since then, because after a wave pattern from $18 to $31, then back to $26, then up to $47… the crowd will begin to turn mildly pessimistic in a current “wave 4 “ correction pattern. This is when you will begin to hear excuses for Silver dropping, including believe it or not blamed on the death of Osama Bin Laden. In truth, whatever happens near term to explain the current correction in Silver is simply Monday morning quarterbacking. Using the current days headlines to explain the action that I already know is coming. Other excuses are the change in margin requirements on silver contracts and the squaring of positions at end of month etc.

I expect Silver to correct to the 40 to $42.75 areas based on my Fibonacci work and Elliott Wave views, and after this 4th wave consolidation we will see a surge to as high as $60 per ounce. Any pullbacks in Silver should be bought here and same with the Silver stocks post haste. Below is my latest chart forecast on Silver:


If you would like to stop scratching your head, get more comfortable where the markets are heading in both Gold , Silver, SP 500 etc in advance, then take a look at Market Trend Forecast.Com , and take advantage of a 24 hour coupon special to subscribe, or just sign up for the occasional but not always timely free updates. Our subscribers learn and earn!


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