The chart of silver may be depicting a buying opportunity with limited risk and a tight stop. Silver is in a down channel, but the current price may be suffering from an oversold condition. The market has seen this movie before. Silver saw a similar slump in December of 2012 where the metal fell over 10% as it traversed from the upper bound of the channel to the lower bound of the channel. The candlestick formation when silver bottomed during the aforementioned period is eerily similar to the ones at the present time. See chart below for specifics, but in essence, they are forming neutral dojis…an early indicator of a bottoming process.
Other drivers of the metals trade include push and pulls from the currency market. Over the same period mentioned above, the US Dollar index has rallied and the EUR/USD currency pair has fallen, giving more reason for the metal weakness. This may soon cycle back to prior levels, but is absolutely a risk to the outlined thesis.
I expect the performance of US indices this week to have a more honest QE3 reaction after exploding upward last week. Indices futures for the Dow, S&P, and Nasdaq are all down 21.00, 3.25 and 4.25 points respectively. Metals futures are all down slightly before the market opens with Platinum and Palladium losing the most, 16.10 and 11.70 respectively. Crude futures are down 0.20%.
One of my favorite ETFs to follow in the aftermath of QE3 announcements is SPDR Gold Trust (GLD | $171.8). GLD is down $0.35 in after hours trading after taking a $0.49 gain on Friday. The Oct ATM straddle is priced around $7.00 about a 4% expected move. After the QE3 announcement, a higher probability of currency manipulations around the world will have investors continue to invest in gold.
Apple stock (AAPL | $691.28) is up 2.68 points in pre-market trading to $693.99. Apple set a presale order record with the new iPhone 5. I expect the stock will jump over $700 before the end of the month but, due to the volatility over the past week or so, it may jump back and forth over the $700 line.
Google stock (GOOG | 709.68) was up three and a half points on Friday, only slightly short of its all time high. The stock has hit a resistance point below $715.00.
Alex Kalish has a master’s in economics from Suffolk U.
Questions, comments and suggestions welcome: alexk@keeneonthemarket.com
Fed’s current strategy of buying long-term securities and selling short-term is ineffective. Further policy accommodation is warranted, and the fed will expand purchases of securities while extending the current federal funds rate and:
The Fed will purchase 40 billion dollars a month of mortgage backed securities, which will be in an increase in holdings of long term securities of about 85 billion dollars a month till 2013
The goal is to increase downward pressure on mortgage rates and long term rates in general, providing support to the housing sector by encouraging home purchases and refinancing
If the Fed does not see improvements in economic and financial developments in the upcoming months they will continue purchasing MBS as well as additional asset purchases as appropriate, called unlimited quantitative easing
The Fed will continue to control prices but is focused on unemployment
Policy will continue passed recovery, to provide assurance to households and businesses, the target rates are 0% to 0.25% through mid-2015
Projecting unemployment rates of 6.0 – 6.8 by 4th quarter 2015
Projected inflation of 2% a year
Fed earnings are remitted to the treasury and will help reduce federal deficit and debt
With that news, the DOW was up 206.51, 1.55%, to 13,539.86, S&P up 23.43 or 1.63% to 1,459.99. Overnight, Dow and S&P futures gained 63.00 points and 7.25 points respectively. Crude oil futures are up 1.79% to 100.07. Yesterday before the announcement, our trade pick at KOTM was to purchase a call fly on GLD, a Gold ETF. After the 12 pm announcement, GLD rose 3.41 points, a 2.03% gain, and continued to gain points overnight up another 0.44 points. As the policies around the world try to keep up with the Fed announcement, investors will be looking for stable currency. I am expecting buyers to continue pushing Gold prices up, and GLD to move up into a range of 174.00 to 178.00 and higher by 2013.
What happens if Fed policy fails? Bernanke explicitly stated that the Fed will continue its easing until employment gets better, with no real time frame. At some point, if unemployment and GDP are not improving, uncertainty about whether or not the Fed can effectively change the economy will make for a strong bear market. Don’t lose sight of the Fed’s progress over the next twelve months.
Alex Kalish has a master’s in economics from Suffolk University.
Trade: Buying the $GLD August weekly 162 Straddle for $2.10
Risk: $210 per 1 lot
Reward: Unlimited
Notes: good risk vs reward with Bernanke speaking this week
UPDATE 9.11.2012 This trade was a Small Winner and Closed at $4.22, another Winner and Moving on.
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