COMMODITY FUTURES FORECAST WEEKLY REPORT
Silver And Gold Divergence
Philip Gotthelf
Adding to overall confusion is divergence between silver and gold. While oil moves to test record highs, silver displays a technical uptrend and gold is stuck in the trading range doldrums. This raises the question, "Will gold rally or has silver made a double top?" This question assumes a tandem link between the yellow and white precious metals.
Technically, we see a rally from the May 55000 low. A mild uptrend develops until the July breakout above 62800 resistance. It looked like silver was seeking to fill the April gap, but both attempts fall short of the mark. This hints that those seeking the gap are being conservative. They are placing sell orders shy of the complete gap to avoid slide after the gap is filled.
This means a double top may have formed. In particular, gold's failure to respond can hold silver back. Admittedly, I have been seeking a flat to falling silver market. This is why I placed the short options that ended up short September silver at net 61400. Given our current exposure, the question is whether to cover or actually add to our position in anticipation of a failure to breakout above the assumed double top.
Adding to our short poses more than the usual risks because it is simply bad policy. When trading, the usual objective is to cut your losses on losing positions not add to it. When we acknowledge that September silver is above the 20, 30, and 40-day moving averages, there is more of a reason to get out than there is to sell more. But, the divergence with gold confounds the usual assumptions.
It would be wonderful if the dollar would give some support to our decision, but the Dollar Index is stuck in a range with little to help us decide if we will have a basis for buying or selling silver/dollar parity.
A case can be made for a descending triangle with 9075 resistance and 8950 support. This market is watching interest rates for its clue and everyone is waiting for July's unemployment figures to see if any flies are in the ointment so to speak.
Without a thrust above 9075, the triangle is not a continuation pattern. Alternatively, the Dollar index can settle into an 8950-9050 range. This places metals in the same boat as interest rates. I am not expecting employment to significantly sway one way or the other. Even with a surprise, I believe employment will take a back seat to energy until crude oil falls back toward OPEC's target range. Lest we forget, that range is still between $22 and $28 per barrel!
When we examine gold's pattern, we finally see a volatile upward channel with 39800 resistance challenging forward progress. If there is a breakout, the price should be contained below 41000 resistance. Here, we can try to sell the October 400 call at about 6.50 while buying the 410 for 4.50 giving a $2 credit. At the same time, we can sell the 390 put for 8.00 while buying the 380 at around 5.00 to yield a $3 credit. If we can get these prices, the gross credit should be around $5, while the exposure is from 400 to 410, or from 390 to 380. Subtracting our $5 credit from the $10 gross exposure gives us a net $5 exposure. If the credit spreads expire out of the money, we collect $10.
August 6, 2004
Philip Gotthelf
Commodity Futures Forecast
P.O. Box 566, Closter, New Jersey
201-784-1235
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