THE OPTION CADDIE'S
MARKET SUMMARY NEWSLETTER
T.J. Jolicoeur, Advantages In Options
Gold
Market getting close to critical chart point! Gold has exploded upwards off a weak U.S. Dollar and a fake break of nearby support. This sudden 2-day surge has put the market precariously close to a critical chart point. The
weekly chart has a double top just below 389. A break of that signals a test of the all-important $400 level. It has been 13 years since gold has been above $400 two months in a row on the monthly chart. Additionally, the daily chart has a contract high at 394.8, just below the same psychologically important, $400 level. There isn't much to trade at the 386ish level we
are at now. A stop loss would need to be below 366 and resistance is so close (395) that the risk versus reward is upside down. But, as we approach resistance, watch closely for a sign. Failure to break $400 is a plea to short the market, a break above $400 is a screaming buy signal. Also keep an eye on silver for breakout clues in that market, as these two markets are likely to follow each other.
News Comments--COMEX December gold futures settled $4.80 higher at $386.80 per ounce Wednesday after a pronounced slide in the U.S. Dollar sustained bullion bank and speculative buying. The anemic performance across the equity markets also served to steer investor attention toward gold, particularly as concerns arise that the markets may have factored in too strong a recovery for the time being. A scarcity of potential sellers also paved the way higher. Prices remained well bid throughout the session as buyers sought out offers of the metal. The $386.80 settlement is December's highest in 20 trading days and brings into view upside targets such as $390, $395 and eventually $400. However, as December stalled ahead of the $395 mark on the latest rally in late September, a pause for breath and regrouping may be on the agenda over the short term, dealers said. "There's definitely a bullish tone to things right now, but there's also a sense that we don't need to rush but rather get things steady and then proceed higher in a determined and orderly fashion," said a dealer with a West Coast brokerage house. "I think the market senses that it's only a matter of time before we get to $400 but that maybe some more consolidation might be needed before we get there," he added. Other sources agreed that the scaling of the $400 mark was not a matter of "if" but "when," but added that there should be more opportunities to buy
nearer the $380 mark before that occurs. "We've climbed steeply and might have gotten ahead of ourselves, so we may not make it to $400 before we pull back again," said a dealer with a large precious metals refiner. "But if the dollar keeps weakening the support will remain in place and we'll get to $400 eventually," he added. In the meantime, all eyes will remain fixed on the U.S. currency and equity markets for signs of further influxes of buying interest, as well as for profit taking among the already heavily net-long gold speculative community. Open interest rose 9,217 contracts during Tuesday's fund and dealer-led buying spree, bringing the total to 252,897 contracts. Spot gold also enjoyed further advances Wednesday and scaled a 16-day high in the process of $387.45. The $390, $392 and $395 levels are deemed the next major upside targets, although much depends on the near-term tone and direction of the U.S. Dollar, dealers stressed. Support is seen in place around $380.
Silver
Watch gold for clues as to direction of silver! Silver has also moved up with gold, breaking above $5 after a rapid fall earlier in October. Chartwise this market appears headed for the 539.5 contract high. As with gold, breaking those levels is a buy signal. Failure to get above 540 is a sell signal. Watch gold for clues on silver and vice versa. Last week the Option Caddie wrote, "A break above 500 signals more rallies." We hit 515 today. Traders who added long futures on the 500 break should tighten stops to just below today's 505.5 low.
News Comments--December silver was also higher as funds regained their appetite for it as well. December settled 6.7 cents higher at $5.135--the highest close since September 26. The next upside targets are $5.15, $5.17 and $5.20, although like gold some profit taking could emerge to slow any further progress over the short term. Open interest Tuesday was 572 contracts lower at 90,599 contracts.
Stock Market
The stock market has fallen off the recent rally high and appears headed for a 50% retracement. The key for bears will be a break under 1020 and then 1000. No new positions recommended at this time.
Bonds
Bonds have now reversed and appear to be heading for a 50% retracement of the 112'11 slide to 105'22. That places the target at 109'06. Today's high of 108'24 nearly reached that. We could also be in the early stages of a channel between 105 and 112. Go with the retracement theory. Aggressive traders should look at adding the November 108 put for $300 or better. These exercise into December futures Friday at the close. I prefer doing a put spread. Buy December 107 put and selling the December 105 put for $500 or better. The most we have at risk is $500 and our maximum profit is $1500. A very acceptable 3:1 ratio. To get filled at our price the market will have to move a little over 109.
News Comments--Equities' losses were debt futures' gains Wednesday, as fixed-income prices were boosted by reallocation flows, analysts and traders said. Some of the disappointing corporate earnings reports in the last couple of days might have left some traders wondering if the economy is recovering as quickly as previously thought, said one contact.
Another suggested the debt market might be in for a period of range trading until future economic direction becomes more clear. Throughout the day, analysts and traders cited the weaker tone in equities as one of the factors that was helping push interest rate futures higher. As the debt pits were closing, the Dow industrials were down by around 140 points for the day. Mark Ungewitter, portfolio manager for Investors Bank & Trust, said that perhaps the stock market had already discounted the good news going into the corporate earnings reporting season, resulting in a recent pullback in equities. "There's sort of a buy-the-rumor, sell-the-news (move)," he said, explaining that this is resulting in an inverse move in the debt market.
"There's not much economic data, so its stock-market related," said Holly Liss, vice president with Citigroup Global Markets, about the rise in bonds and notes. "Initially, earnings were coming out really good at the start of the season. Now that we're in the main portion of the earnings, they have not been coming out as well. Yesterday started it and today accelerated it. I think as a result, you're seeing some people think that the economy is not necessarily on solid footing just yet." She characterized the volume in the futures pits as heavy during much of the day, before lightening this afternoon. Some of the key technical levels that were broken, thus enabling the market to accelerate upward, were touched Tuesday more-so than today, she added. Ungewitter said that after a big sell-off in debt futures over the summer and partial recovery this fall, prices might be in a period "where maybe we're going to go back and forth for a while before the market decides which way it wants to go." Turning to the cash market, he suggested that the yield--which moves inversely to the price-may be caught between a 200-day moving average and a trendline. As prices were bouncing back this fall, they came to a halt right around the 200-day moving average, said Ungewitter. "Maybe we'll range trade for a while until we decide if we're going to get traction on these measures that have been taken to boost the economy," he continued. "There is some argument that maybe they gunned it (the economy) too early. Maybe the economy will start to slow down again before you get to the (2004 presidential) election season, which is a big fear right now." After a light week for economic data so far, the market will finally get another report at 0730 CT (1230 GMT) Thursday, when the Labor Department releases weekly jobless claims.
October 24, 2003
T.J. Jolicoeur, The Option Caddie
Advantages In Options
109 Via Promesa, Paso Robles, California
800-780-7001
www.optioncaddie.com
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