THE OPTION CADDIE'S MARKET SUMMARY
T.J. Jolicoeur
Gold
Gold continued to sell-off until today, when a small rally emerged. This rapid, almost $50 move lower occurs even as the 'other war commodity' crude oil continues at contract highs almost every day for the last two weeks. Chartwise this is a normal 50% retracement. Last week the Option Caddie targeted the April gold contract at $345. We hit $342.40 at today's
low but closed almost $8 above that. A good sign that the slide is over. We previously added April 385 calls for $700 and a call spread of the April 365 call we bought for $1100 and the April 380 call we sold for $700, a $400 call spread. This spread has a maximum risk of $400 and a reward of $1500. A very good ratio. April options expire March 26. With this massive pullback, look at adding calls. April 365 calls closed at $500. If you see a $10 up day based on news events, jump in quickly!
News Comments--Continued uncertainty on the geopolitical front also maintained buying interest after President Bush declared Tuesday that while a second resolution from the United Nations on Iraq would be sought, it was "not necessary"--spurring concerns that the U.S. would "go it alone." However, the safe-haven type buying remained in check as the outlook regarding Iraq remains cloudy and difficult to gauge. This ensured that April futures lacked the legs to decisively clear the $350 mark, and that level remains a key near-term obstacle on a closing basis that April needs to overcome should an upward path be regained.
Seasonally, gold has 61 seasonal trades of less than 30 days in length that start in February. All are bearish. Being short from February 3 until March 1 has worked 19 out of 27 years (70.37%) for an avg. profit of $1554.
Refco Global Research last stated, April gold looks somewhat oversold with its RSI near 30. The open interest is down over 40,000 since February 5th. We think a conflict in Iraq still looks likely, beginning in late March. That said, short-term, UN negotiations to achieve a more unified approach to dealing with Saddam Hussein will continue. If these talks lessen the odds
of unilateral U.S. action, gold could suffer. We would buy 1 April gold at market; risk close under 345 and expect 365. Resistance for April gold at 353 and support at 342.5 and then 340.
Refco Research Trade Recommendation--Buy April gold at Market. Risk close under 345 and expect 365. Gold looks oversold with RSI near 30. Risk of war in Iraq remains supportive.
Silver
Silver has pulled back even further gold and it's 50% retracement. Chartwise this move to the 449.5 level (if it holds) is a good buy sign as previous support points were 444 and 432. With solid support near-by, adding a long May futures below 460 with a 430 stop looks good. We previously added the May 500 call we bought for $650. These expire April 24th. Look for May call options worth about $500 to enter this market. The May 480 call closed right above $500 today.
Seasonally, silver has 36 seasonal trades of less than 30 days in length that start in February. The first 18 are bullish. Being long from February 1 until February 15 has worked 21 out of 29 years (72.41%) for an avg. profit of $1725.
Refco Global Research last stated, with industrial demand suspect, March silver must count on spec demand from higher gold to provide lift. We remain long March silver from 4.53. Support basis March at 4.55 and resistance at 4.65.
Refco Research Trade Recommendation--Long March at 4.53. Target 4.80. Stop close under 4.45. Geopolitical risk and terrorism threats are a plus to move gold higher. We expect silver to follow. Its lower RSI makes silver look the more oversold of the metals.
Stock Market
The stock market had a mild rally as traders took profits before the weekend. The rise continued on Tuesday (markets were closed Monday) before encountering losses today. With a possible triple bottom in place (796.80, 774.20 and 805.30) traders might feel this market is ready to move dramatically higher. In 'normal' times I might agree. These times are far from normal. As with so many other markets, until the war issue has some finality (or simply starts) the stock market is at its mercy. Chartwise the triple bottom wouldn't be considered in place until the 867.80 level is surpassed to the upside. If that occurs, a run at the triple top (961.60, 953.50 and 936.50) is very likely. With quite a few economic reports out Thursday and Friday and option expiration Friday, look for quite a wild finish to the week. We previously added the February 820 put we bought for $2250 and the February 800 put we sold for $1500, a $750 put spread. February options exercise into March futures. If we are not below 830 by the close on Thursday, look to leg-out and exit the February 820 put and let the 800 put expire worthless. Adding a $500 put Thursday at the close if it is more than 20 points down could be very lucrative by Friday at the close. This same trade in January was very successful as the January 910 put we bought for $500 expired worth $1725!
News Comments--But the overwhelming influence on the market remains war and terrorism. "The market isn't going to go anywhere until we have a clearer sense of the war," said Uma Rajeshwar, first vice president of Glenmede Trust Co. "There's no doubt that investors are going to stick to the sidelines." The reluctance to invest in the market was reflected in the
lackluster volume recorded Wednesday. Volume on the New York Stock Exchange was 1.08 billion shares, with down volume outpacing up, 736 million to 326 million. That's the lightest volume on the NYSE year-to-date, below the 1.139 billion shares on January. 3 as market players trickled back from the New Year's holiday.
Seasonally, the S&P has 6 seasonal trades of less than 30 days in length that start in February. All are bullish. Being long from February 1 until February 7 has worked 14 out of 19 years (73.68%) for an avg. profit of $1640.
Refco Global Research last stated, Perspective--S&P's are expected to trade sideways today. Pressure will come from yesterday's small reversal pattern, while support will come from the February 13th bullish reversal pattern. Trade the market as a trading affair.
Refco Research Trade Recommendation--Short technical trade entered on 2/7/03 at 840, target 767.50 and stop at 840. Pressure will come from recent breaks of key lows and falling channel pattern. Move target down to 767.50 from 794.00.
U.S. Treasury Bonds
Bonds have rallied back towards the contract high set last Thursday. Today's sharp rally came on the realization that not much has changed geo-politically and war may still occur. Continued rally into March option expirations is expected. This triple top area near 114 could lead to a rally and test of the all-time high at 115'04. We previously added the March 114 call we bought for $218.75. These options expire this coming Friday. Look to exit by Friday at the close. I do not recommend they be exercised. News Comments--"There's a flight to safety," said Astrid Adolfson, financial economist with MCM. "That's on all the war talk and the fear that (President) Bush and (U.K. Prime Minister Tony) Blair will take us to war." Some of the support came from a warning from the U.K. government for its citizens to start getting out of Iraq and other Gulf nations, said Adolfson. All these worries weighed on stocks and corporate debt, prompting market participants to move into Treasuries and debt futures, she continued.
Seasonally, bonds have 68 seasonal trades of less than 30 days in length that start in February. All are bearish. Being short from February 3 until March 5 has worked 17 out of 24 years (70.83%) for an avg. profit of $2300.
Refco Global Research last stated, Perspective--Bonds are expected to trade higher today. The market is expected to test resistance at the 11326 level today. Support will come from Tuesday's bullish reversal pattern as well as its hold at 11124 support. Hold long position established on February 7th at 11115 to 11500. Hold long 10-year established on February 3rd at 11322 to 11614.
Refco Research Trade Recommendation--Technical trade entered on 2/7/03. Support will come from buoyant nature of recent trade. Target raised to 11500 from 11326.
February 19, 2003
T.J. Jolicoeur, The Option Caddie
Advantages In Options
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