PM Daily Market Commentary - 11/18/2015

davefairtex
By davefairtex on Thu, Nov 19, 2015 - 3:31am

Gold rose +0.20 to 1069.50 on heavy volume, while silver fell just -0.01 to 14.13 on moderately heavy volume.  PM traded mostly sideways, making a new low early in Asia but then getting a bit of a lift after the FOMC minutes were released at 14:00 Eastern.  Both gold and silver printed doji candles on the day - potential reversal bars.  It would not take much to confirm a swing low tomorrow.

After yesterday's slow-motion breakdown, gold may have marked its low today.  There was no massive follow-through as I had feared there might be, and the market's reaction to the FOMC minutes was even slightly bullish.  Its not the reaction I'd expect from a market about to collapse.  The volume was relatively heavy, which underscored the "reversal" nature of the doji print today.  Even though price didn't rise, there were definitely buyers at the COMEX.  My guess, based mostly on the slow-motion nature of yesterday's breakdown and the COT report: commercials are closing their short positions, ringing the cash register like mad, in contrast to Managed Money who are loading up short.  Have the commercials covered enough?  If so, we will see price move higher in the near future.  A close above today's high of 1074.60 is needed to confirm the doji.  My computer isn't so good at tracking gold - but it went long gold today.

While this marks red day #15 for silver, I actually drew encouragement from the price moves intraday.  Silver sold off before the US session started, hitting a low of 13.99 twice; then buyers appeared and pushed prices higher.  Once FOMC minutes were released, prices continued to rise into the close.  To me, that's all a good sign.  Market seems a little bit relieved by whatever it read in the FOMC minutes.  There was no massive rally - but it appears mildly positive.  We may need gold to drag silver higher, but I believe silver will come along if gold moves up.

The miner magic is back!  GDX rose +3.13% on moderately heavy volume, while GDXJ climbed +1.56% on moderate volume.  To have this happen on a day where gold and silver closed flat suggests the miners are sniffing out a possible low in gold and silver.  Of course they did this same trick just last week and nothing good came of it, but hopefully this time is different.  There is also a bullish divergence in the RSI - downside momentum has reversed while price continued to drop.  This "bullish divergence" pattern of price vs RSI sometimes leads to a trend reversal.  Computer is now long miners.

The buck made a new high by a slim margin, climbing +0.05 to 99.75.  Intraday, the buck tested the 100 level but was unable to move through it, falling back and printing a doji candle.  When a doji candle appears after a long rally, its a bearish reversal bar.  The buck may have put in a high today.  The fact that the rally stopped at "round number 100" reinforces this.  Often round numbers act as support or resistance.  I can't explain why - no doubt it is something about human nature.  "I'm going to sell if the buck hits 100."  Even though many people think the world is run by computers, the market is ultimately still about people - their greed and fear.  As a result, the round number 100 acts as a resistance level.  Computer is now short USD.

Equities overcame yesterday's failed rally and shot higher, with SPX climbing +33.14 [+1.62%] to close at 2083.58.  SPX blew through the 200 MA, the 9 EMA, and now appears to be on track to re-test the previous high at 2035.  I say this only because of the strength of the rally I'm seeing off the modest correction.  VIX dropped -1.99 to 16.85.  If you are short, you should have bailed out today on the move through the 200.  My computer is now long equities.

JNK rallied +0.20%; JNK is now more or less tracking sideways, and is not showing any signs of risk on.

Bond ETF TLT climbed +0.20%, a small move but possibly significant because the rally happened at the same time equities moved up strongly.  Perhaps bonds are improving.  TLT is now back above its 9 EMA.

The CRB dropped just -0.06% - no material change from yesterday.  Commodities remain in a strong downtrend.

WTIC rose +0.86 to 41.98 - but the move was entirely about contango and the contract roll that took place today.  The "active contract" moved from December to January, contango (price difference between Dec & Jan crude) was about $1.00, and so that means oil really lost about 10 cents on the day.  Even with that, it was still a decent day; oil sold off hard after the Petroleum Status Report proved to be less bullish than expected, but then rallied back by end of day to close almost flat, printing a doji.  My computer is now long crude - although it doesn't know about contango, or contract rolling, and so it might be a bit too enthusiastic.  There are still some things I need to teach it.

Platinum and palladium are both showing bullish divergences; only copper continues to look bearish.

While not everything has aligned perfectly, there are indications that we might be at a reversal point for PM.  Things tend to happen after FOMC meetings, and after FOMC minutes are released.  The whole gold sell-off happened immediately after FOMC, and its quite possible this cycle ends on the release of the minutes from that same meeting.  Gold COT shows the shrinking commercial short position is getting close to a turning point.  Gold's break below the previous low resulted in a big non-event.  These are all positive signs.  The buck is a wildcard.  If it has topped out, at least for now, that would help a great deal.

My computer is also showing a surprising congruence as it is now long miners, gold, crude, and short the USD.  We'll see if it plays out that way - sometimes the computer is early on its picks.

While we are still in a downtrend in all timeframes, if you are looking to buy more of something for your coin collection, now might not be the worst time to do it.

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11 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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pretty as a picture

Gold and silver liftoff this morning 30 minutes before market open.  Buck is off 0.5%, that's certainly helping. If we close at these prices, gold will have its swing low today - and its first real green day in weeks.

 

charleshughsmith's picture
charleshughsmith
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Posts: 716
glad I bought GDX calls yesterday

Thanks to Dave''s careful framing of PM dynamics, charts, and commercial COT, I bought GDX calls when it dipped below $13.  This is not a recommendation, just a report of what I decided to do based on charts presented here... sometimes instinct helps in these situations....

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
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charleshughsmith
charleshughsmith wrote:

Thanks to Dave''s careful framing of PM dynamics, charts, and commercial COT, I bought GDX calls when it dipped below $13.  This is not a recommendation, just a report of what I decided to do based on charts presented here... sometimes instinct helps in these situations....

If you don't mind answering, may I ask what strike and expiration month? 

Depending on historical price movement into the purchase, I typically buy in the money if the movement has been steady, or 1 strike out if I deemed the movement "volatile".  And I ALWAYS buy at least 6 months of time.

Thanks in advance.

 

 

charleshughsmith's picture
charleshughsmith
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short-term, long-term

Going out 6 months is certainly a good strategy if you conclude the trend is longer-term, I tend to buy 1 month out but only when I feel the trend change is imminent (within days). The premium for going out many months is pretty steep, but with options, you get what you pay for. I bought Dec. $13, which were basically at the money when I bought.  The miners are so beaten up I have even considered LEAPs (one year or longer), but I'd like to see a definitive multi-year low before paying such a high premium.

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
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Thanks
charleshughsmith wrote:

Going out 6 months is certainly a good strategy if you conclude the trend is longer-term, I tend to buy 1 month out but only when I feel the trend change is imminent (within days). The premium for going out many months is pretty steep, but with options, you get what you pay for. I bought Dec. $13, which were basically at the money when I bought.  The miners are so beaten up I have even considered LEAPs (one year or longer), but I'd like to see a definitive multi-year low before paying such a high premium.

Thanks Charles.  I look more for movement confirmation than a trend's expected lifetime.  Buying 6 months of time almost always eliminates the loss of principal due to time decay, so the "premium" is worth it for the way I trade.  That said, I am NEVER in a trade for that long.  Depending on the time of year, and the chart interval I use to call an entry point, my time in a trade can vary from 3 candles on short charts (<233) to 6 weeks.  And the moment a position starts to back up on me, I'll watch like a hawk to assess if it's likely to back up to resistance and move back my way, or if it's broken - in which case I just close the position with most of my money intact and look for the next trade. 

davefairtex's picture
davefairtex
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Posts: 5418
doing the numbers

So Dogs-

So I haven't done the math - I'm guessing you have - what's the increase in leverage from a six-month ITM option vs just going long?  Let's use these GDX calls as an example.  June GDX 14s. I'm not saying they meet the criteria for you as a buy right now, I'm just curious about your math.

Right now GDX Jun 2016 14s are 1.80/1.90.  So...if GDX drops a point (lets say - again just curious about options math, not trade viability) how much is the expected loss, vs GDX rises three points - what's the expected gain?

And how does that compare to just a straight long?

My issue is, I just don't have a sense as to how long-dated ITM options move - how much gain gets eaten up because of the premium already built into the option.

timot78's picture
timot78
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Posts: 11
Looking at LEAPS (Jan 18) GDX call options

Dave,

 

 

Dave, I took a look at the following scenario: 1. Purchase of 100 shares GDX @ $ 13.97 and looking at : A/ 100% profit vs. B/ profit @ $30/share 2. Purchase of 4 contracts of GDX Jan18 Call @ $15/sh (LEAPS options) , responding to A vs. B scenarios. These cost today $3.40/share, or $340/per contract of 100 shares. In both cases the up front cost is about $1400.

Case #1 is below. A1: 100% profit is achieved at ~ $28/share. B1: @ $30/share, the profit is ~$1600/100 shares (red arrows).

 

Case #2 (2018 Jan. LEAPS options) below: A2: 100% profit is achieved at $22/share B2: @ $30/share , the profit is substantially higher, i.e. ~ $4,500 per 4 contracts.

However, for those not familiar with options, the catch is in break-even point and expiration date. If we assume that in jan.2018 price of GDX is $17/share, then straight purchase of 100 shares of GDX results in us having ~$1700 per 100 shares. The LEAPS options, on the other hand, @ $17/share expire worthless, i.e. we have nothing to show for our investment of original $1400 for 4 contracts. So this is another extreme -looking at long-term LEAPS options. Under certain circumstances this might be a winning scenario, although time decay will lower the value of the LEAPS options.

-Peter

charleshughsmith's picture
charleshughsmith
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Posts: 716
thanks Timot78

I think your example sums it the tradeoffs and time decay very well with options. If the issue advances in the direction you expect, options generate huge returns. If it doesn't, you can exit with a loss but retain some value for time, if you paid a premium for time.

I use shorter term options to maximize my return, but this requires being right about the trend (not that easy, heh). the GDX $13s I bought for $71 per call yesterday when GDX was $13 are today worth $129, an 80% gain. $2000 invested in GDX at $13 now that GDX is $14 would have gained about $150, while $2000 in calls would have earned about $1700.

This is why trading options is a siren song. Gains can be big or a complete wipe-out. I play small.

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
I hate math now

Dave -

I didn't do any math either.  I never do math.  I simply trade price movement.  Subject to a very specific rule set, I enter a trade based on technical indication coupled with "what" the market is doing.  If the market looks toppy on a chart, I'm very reluctant to enter a call position.  But if I'm within a candle or two of a market turn to the upside (or downside) and I have concurrent trade entry indicated on the equity, that's when I get in and trade in the direction of the movement - Calls up, Puts down.  If earnings is coming up, I'll assess the amount of possible movement into the earnings announcement, but will look to be out by 2:00 PM on the day before the announcement.  Earnings announcements are unknowns.

Nothing like being in a beautifully moving Put position and have a company blow earnings out of the water and guide higher for next quarter.....shareholders love that.  I hate it.

The biggest reason for buying time (for me) is that for the expected duration of the trade position, there will be very little erosion of the value because of time decay.  Time value is back loaded into an option's price - the closer you are to expiration, the more time value you will lose.

Underlying all of this of course is the fact that when I get into a trade, I do so expecting to be correct "right now".  Catching a falling knife is dangerous and even though I am a certified instructor in the Filipino knife fighting art of Pekiti Tersia, and can in fact catch a falling knife, it's much easier to let it fall to the ground and walk over and pick it up.  So if I get into a position, I expect it to start moving my way immediately.  If it does, I check it periodically - typically no more often than every 233 minute candle.  I watch the price movement and when the trade is over, I close it.

And I never do math.  At least not since I retired....I had to do a lot of reactor physics and weapons effects physics then.  But that was fun math.

Trading is about as exciting as putting on socks.  Putting on socks while doing math is unfathomable.

You have my contact info if you want to discuss further off line and eliminate the Q&A post lag.

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
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Posts: 2606
Dupe deleted

Duped.

Must be that quantum entanglement stuff....

timot78's picture
timot78
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Joined: Sep 18 2010
Posts: 11
Volatility as a maybe major factor in Options

Charles,
There is of course one additional factor that can dramatically change the value of the option.
This is historical/implied volatility. I remember the recent (Aug.25th) one day dip in the markets,
and the implied volatility shoot through the roof on that day. For the traders who had put options
on SPX or any market index, the payout was very significant due to two factors: 1/ underlying security dropped over period of ½ hr by 20%-30%, and the implied volatility went up maybe 300%-400%.

So, if we will experience dramatic change in volatility (due to geopolitical or monetary issues), the put options for market indices or probably call options for PM-s will significantly go up in value. Probability of such an event is not zero.

-Peter

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