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November 16, 2009

Antics and Expectations

Since my "retirement" from Citi's stat arb desk, writing this blog on a nearly daily basis has been a quite enjoyable part of my routine... even when my outlook turned out to be utterly incorrect! However, my attitude toward blogging in recent weeks has been less enthusiastic as my focus has turned toward new projects. The first is marriage, an endeavor which I suspect will have similar trials and rewards as trading. The second is my long-time desire to poke a keyboard for creative purposes rather than analytical ones.

I do not intend to quit blogging, but my posts will be... to use an intellectually pretentious term... more temporally interspersed. There are also plans in the works to add a technical analysis section to The DOCument... a sort of manual which will review major TA techniques along with my own spin on how to use each tool.

Speaking of spins, the market has been full of head fakes recently. Bears continue to call for a dramatic end to our historic equity rally, and precious metals have been volatile enough to keep weak hands on the wrong side of the trade. I was fortunate to have developed a game plan in which the 76 pivot on the DX also acted as a pivot for my position-sizing with regard to silver. As long as the DX remains below the pivot, I'm pushing my bets. This strategy has so far helped me avoid the noise emanating from PM price moves.

So for the moment, I remain heavily long silver and miners with a careful eye on the DX. At some point the buck will surprise everyone with a countertrend rally, and the end of that rally will present us precious metals bulls with the fattest pitch to date to knock one over the fences. With this scenario in mind, let's review some charts.

gold mining shares

I can't tell you how many times during previous parabolic runs in precious metals I saw people bailing on positions... or even going short... because they thought they saw a head-and-shoulders pattern forming in gold or silver. Said traders were licking sore wounds when prices broke higher instead of lower. I have a feeling this megaphone will offer the same result. I do not know whether the pattern will bust higher presently or whether we get another tag of the lower bound.

For what it's worth, I sold some calls against my GDX position just before Thursday's close when it became apparent we'd get an ugly reversal stick. The expectation here is that I'll eventually be able to close the calls profitably regardless of near-term direction. A break higher is likely to be reversed after the shorts are cleansed and so I would capture time and volatility premium. A break lower offer a similar benefit even if I miss the bottom for my exit.

silver chart

If silver can break out of the small consolidation formed over the last few weeks, don't be surprised to see a quick run to the next major pivot... around $19.50! By the way, platinum, gold, and palladium all closed at new rally highs, gold posting an all-time high. The rally appears alive-and-well, and at some point silver is going to play catch-up. I called this a while back, and today seems like a good time to reiterate: if I'm correct about seeing the largest of this bull's parabolic runs for PMs into next spring, $30 silver is in the cards.

There are a couple reasons to keep a cautious eye on signs of a reversal. First, gold is approaching a hard target for a recent pattern projection.

gold chart

If the DX posts a significant reversal pattern along with a rally failure in equities and perhaps a selling-on-strength day, further hedging would be warranted as such developmetns could signal the commencement of our elusive countertrend moves. The fact that small caps are severely lagging clues to to the potential for an approaching correction.

Regardless of what happens, the Docfolio will remain heavily long precious metals. These antics and expectations are all about dancing around leverage in an attempt to maximize the ride. My large base position ensure I participate even if I screw up my timing.


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