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Marketwise Black Box - Six hours ahead of its time

By Rick Ackerman           Printer Friendly Version

September 10 2003

marketwise.com

No More 'Easy' Gold

TRADING NOTES: For investors grown complacent about buying gold's inevitable dips in this still-young bull market, a word of advice: We're not in Kansas anymore. The precious metal's powerful thrust yesterday in global markets should have shocked lackadaisical buyers out of the notion that there will always be opportunities to pick up gold at bargain prices. We were waiting for such an opportunity ourselves -- in the Comex futures. But instead of pulling back obligingly to a Fibonacci line $10 below recent levels, the December contract shot up nearly $8 on Tuesday following a stingy retracement the previous day.

What could have caused Tuesday's eruption, which pushed Comex gold futures to their highest close since 1996? One Black Box subscriber theorized that the smart money may be reacting to the Ponzi-like odor emanating from this week's Treasury auction of $29 billion in five- and ten-year paper. At the same time, the subscriber points out, the Fed has been soliciting offers for a "coupon pass" today, meaning that it is trying to buy notes and/or bonds from dealers. "It's kind of interesting to me that the Fed is lightening up the supply of longer-dated bonds while the Treasury is selling," he writes. "I'm thinking the Fed is trying to lighten Wall Street's load so that they can bid on the auctions [today and tomorrow]. We know the foreign central bank bid is drying up, and my guess is that is part of the reason the dollar is tanking and gold is flying."

Big News Downplayed

One wonders whether the coupon pass story is perhaps too subtle to have pushed buyers so dramatically into gold. If we are looking for other possible reasons, then far less subtle, perhaps, are the implications of a story discreetly underplayed by The Wall Street Journal on Monday. According to the article, which was buried on page A6, the Bush administration is going to recommend that Fannie Mae and Freddie Mac be regulated by the Treasury Department rather than by HUD, their current overseer. What might this portend? The Journal was forthright on this point, if tactfully unimaginative: "[It] could significantly strengthen the government's hand in dealing with the two companies." As for Freddie's response, it reads like something spun by a committee of bureaucratic stiffs: The company has "a long record of supporting a credible regulatory structure," and is "happy to work with Congress." So, at Freddie, evidently, happy days are here again. Fannie had no comment.

Meanwhile, whatever the reason for gold's powerful rally, I doubt it will prove to be a mere flash-in-the-pan. More likely is that we are witnessing the beginning of a tectonic swelling of bullion prices that will gradually end the dollar's hegemony as the world's reserve currency. Buying gold is the most logical way for countries that hold huge U.S.-bond portfolios - China and Japan most prominently among them - to hedge their dollar exposure. So from here on out, don't expect mining shares and bullion quotes to dip conveniently every time we want to replenish long positions that have shrunk because of profit taking. The bidding for gold assets is growing increasingly competitive with each passing week, and, more and more, it will be coming from some of the biggest players in the financial world

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[The + symbol means we have an open position, while $ means there is actionable advice.]

DJIA (9507.20): The first hint of a bearish change in the intermediate trend would come on an intraday breach of the 9233.08 low made on August 26. Otherwise, my immediate upside target remains 9807, a hidden pivot that could turn out to be a very important high.

SEP E-MINI S&Ps (1023.50): A print below 1004.50 today would trip a yellow warning light, but otherwise a hidden pivot at 1064.00 remains my minimum upside projection. Incidentally, yesterday's intraday high was just two ticks from the hidden-pivot target I'd flagged, so some of you may have been able to get short near the top. If so, please let me know via e-mail so that I can track and advise.

SEP BONDS (108.02): My immediate upside target is still around 109.04, where the futures topped early in August, but I am no longer recommending that you attempt to establish a short position there.

OEX (513.92): My upside target is still 537.86, a major hidden pivot, but we should be open to the possibility of a pullback first to as low as 502.40, a Fibonacci level. FYI, it would take a 484.67 print to signal a likely end to the bear rally begun in March.

$ QQQ (34.09): No change. My minimum upside target is still 35.27. We are trying to go short there by buying some October 34 puts. Once again, day order, bid 0.50 for four of them, contingent on the index trading 35.30 or lower.

DEC GOLD (383.80): The immediate outlook calls for a move up to at least 398.20, a hidden pivot well above the multiyear high recorded in February at 391.00. If 398.20 is exceeded by more than a point within two hours of when it is first touched, however, I'd infer the futures are bound for the 412.00 target first broached here in May.

$ SEP NASDAQ E-MINI (1371.50): Yesterday's high fell nearly 10 points shy of the 1403.00 target we've been using, but the decline would not invalidate the target unless it continues to at least 1332.50. Coming in this morning, my minimum downside projection is not quite so bad as that: 1357.00, a hidden pivot that you can bottom-fish at your complete discretion. A stop no wider than a point is suggested.

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BRCM (27.46): My minimum upside target remains 31.04, but if Broadcom closes below 26.66 I'd have to reconsider it.

$ FNM (68.36): If Fannie's weakness spills over into today, infer that the stock is on its way down to at least 65.04, a Fibonacci level that can be bottom-fished at your discretion when the opportunity arises.

+ C (44.28): We hold twenty-six September 40 puts for an average 0.60 as well as twenty October 40 puts for an average 0.43. With September expiration just seven trading days off, Citi ain't goin' nowhere. The stock is under quiet distribution, and so it is likely to remain, at least for the time being.

+ GG (13.84): We hold 300 shares for an average 5.34. Here's a target I have not broached before: 16.12. I am confident enough that it will be reached that I will not suggest that we take any profits below it. An alternative target if 16.12 is exceeded is just a tad higher: 16.59. Either could be followed by a correction lasting at least 3-6 weeks.

$ + HL (6.84): We hold fifteen Sep 7.50 calls for 0.15. My immediate upside target is 7.33, which slightly revises a longstanding target given here earlier. Continue to offer five of the calls to close for 0.45, g-t-c.

+ RANGY (13.35): We hold 200 shares for an average 7.48. We'll try to add to our position if RANGY should pull back, but be prepared to watch the stock lift off without handing us such an opportunity. I am now projecting a move up to at least 18.76 over the next 6-8 weeks.

+ RGLD (21.85): We hold 400 shares with an 11.88 basis. Royal is getting hit pretty hard, perhaps because it had gotten further ahead of itself than other gold stocks tracked in Black Box. There is an important hidden pivot well below, at 17.27, and although nothing suggests the stock is about to correct quite that severely, I would be tempted to back up the truck to buy more stock if it does.

KLAC (57.80): We're snoozing on the sidelines, albeit aware that the very boring picture would change on a two-day close above 60.00.

+ EBAY (50.87): We're long the Oct 60 - Sept 60 call spread eight times for 0.40. eBay's formerly enthusiastic sponsors seem to have dropped out of sight. Any stock sporting the kind of earnings multiples that this one does cannot afford to disappoint, even mildly, so it's safe to assume that Q3 earnings growth is going to be less than stellar.