Pre Week Market Analysis and Price Forecasts

Chief Strategist Chris Vermeulen of TheGoldAndOilGuy.com ETF trading alert service has been on fire lately with not only recent price action in the SP500 and Dollar but also with his trades. He recently traded the last rally in gold for a quick 10% gain, then shorted the SP500 pocketing another 7.3% profit and to top it off his subscribers are long the UUP dollar ETF with 1.4% gain in the SCO oil etf pocketing 7.4% profit this morning in less than two trading sessions.

Chris has put together a short video explaining what took place on Friday and what to expect going forward along with a possible trade setup this week!

Here are the points he covers:

1. The US dollar index has moved nicely in our favour in overnight/pre-market trading and will gap up this morning.
2. Crude oil has also moved nicely in our favour to the down side and resting on the support trend line.
3. Both gold and silver are trading with a short term bearish pattern but I am not willing to short them at this time.
4. The strong move up in the dollar has put pressure on equities which are trading down 1.5% in pre-market.
5. We could be shorting the index later today or this week depending how things unfold moving forward today.
   

WATCH HIS DETAILED VIDEO HERE: http://www.thetechnicaltraders.com/ETF-trading-videos/index.html

Hedging on the Cheap

There are ways to safeguard a stock portfolio while keeping options-related trading costs down.

As stock indexes sag under dour European economic news, investors are turning to the options market to hedge their portfolios.

A simple strategy can be used so investors will not feel like they are buying fire insurance in an inferno.

By buying one bearish put, and selling another, investors can lower hedging costs, and still protect their portfolio from big declines.

With the SPDR S&P 500 Trust (SPY - News), a popular exchange-traded fund, trading at about 114, investors can buy the October 114 put, and sell the October 108 put. The position cost $1.91 compared to $5.07 for just buying the SPY October 114 put.

We do need to point out that in return for hedging at a lower cost, investors limit the effectiveness of the hedge. The spread strategy — selling one option and buying another with a different strike price — offsets losses to 108. Buying a solo SPY put offers unlimited downside protection.

Still, the spread's maximum return is 200% if SPY drops from 114 to 108.

Investors who expect sharper declines can buy a stand alone option contract, like the SPY October 114 put and pay the extra money. If you think the stock market's decline will not be catastrophic, use the spread strategy. Such conversations about hedging and pricing are occurring all over Wall Street.

Institutional investors — hedge funds, pension funds, mutual funds, and others — are asking trading strategists how to cost-effectively protect their portfolios. They are being told that customized hedges can be created for little cost in the "over-the-counter" market that banks operate for their best customers. Barrier options, which his a popular institutional hedge, pay off if the Standard & Poor's 500 Index falls to a certain level determined by the client.

"While barrier options don't provide crash protection, they do offer a low cost way to position for downside within a range and can lower implementation costs by 80% to 90% versus vanilla puts or put spreads depending on the volatility environment," Krag Gregory, Goldman Sachs' volatility strategist, advised clients early Monday.

Gregory is also telling clients to consider buying October 40 calls on the Chicago Board Options Exchange's Volatility Index (VIX.) With VIX at about 39, the VIX calls pay off with VIX at 40.

Since the VIX, the stock market's so called fear gauge, tends to climb when stock markets fall, this is another way to hedge a stock portfolio.

Trading VIX options can be tricky. Many investors intuitively think VIX options are based on the widely quoted VIX fear gauge, but they are based on VIX futures. Anytime you buy VIX options, you are expressing a view that VIX futures will rise or fall in support of your investment thesis, and that the fear gauge will be higher than the VIX strike price at expiration.

To be sure, market conditions are dour. If the Standard & Poor's 500 index breaks 1,140 — it was recently at 1153 — some technical analysts think the index could drop to 1,000. This is why hedging is a hot topic, and why it is worth thinking about the return of capital versus the return on capital.

US home builder outlook worsens in September

The U.S. homebuilders' outlook worsened in September, as foreclosures and anxious buyers hurt construction and sales activity.

The National Association of Home Builders said Monday that its index of builder sentiment in September fell to 14 from 15. The index has been below 20 for all but one month during the past two years.

Any reading below 50 indicates negative sentiment about the housing market. It hasn't reached 50 since April 2006, the peak of the housing boom.

Last year, the number of people who bought new homes fell to its lowest level dating back nearly a half-century. Sales this year haven't fared much better.

Builders are struggling to compete with foreclosures, which have made the price of re-sale homes more competitive. Many buyers are having difficulty obtaining loans or meeting higher down payment requirements. Low appraisals are scuttling some deals after contracts have been signed and some would-buyers who want to purchase a new home can't sell their old one.

David Crowe, the group's chief economist, said a weakening U.S. economy and high unemployment has made the short-term prospects for the homebuilding industry "fairly bleak." The low indexes reflect "builders' awareness that many consumers are simply unwilling or unable to move forward with a home purchase in today's uncertain economic climate."

While new homes make up a small portion of sales, they have an outsize impact on the economy. The builders' trade group says each new home built creates an average of three jobs for a year and generates about $90,000 in taxes.

Separate gauges of current single-family home sales and foot traffic of prospective buyers each fell two points, to 17 and 11, respectively.

An index of builders' outlook in the Midwest rose one point to 11. In the Northeast and South, the index fell two points to 15 and in the West it fell three points to 12.

CDNX at 2003 Levels Despite ‘High’ Metals Prices

From the Chart Book. The view from 30,000 feet of the Canadian Venture Exchange Index or CDNX reveals a startling fact. Today, in September of 2011, the CDNX is trading at levels first reached eight years ago despite gold being more than $1,400 higher and silver being more than $35 higher in price.

The chart just below brings the notion into bright focus.

(CDNX, 10-year, monthly. If any of the images are too small click on them for a larger version.)

Continued…

The CDNX is home to, and indicative of, many of the smaller, less liquid and more speculative miners and explorers that we love to ‘game’ here at Got Gold Report.

By comparison, the larger, more liquid and better capitalized mining shares have done a better job of maintaining their relative-to-gold value in this Great Gold Bull market, but nearly all analysts agree the big miners are undervalued relative to metals prices. Just below is a similar chart of the Amex Gold Bugs Index or HUI for comparison.

(HUI, 10-year, monthly.)

With so much anxiety and concern about the future; with mind bogglingly difficult challenges facing policymakers both here in North America and in Europe amid festering discontent by the voters; with the memory of the 2008 Panic still fresh enough to be a huge drag on investor confidence, we reckon there are ample ‘reasons’ for the small mining company shares to be so inexpensive at the moment.

The 24-carat question looking ahead is if the small miners will remain so bloody cheap on a relative basis, or if they are instead staging for a reversion to the mean. Until we start to see more investor confidence, however, there are excellent bargains to be had. That goes for ordinary investors as well as for the larger predatory mining companies looking to purchase future feed stocks from the beaten-down juniors.

When we look at a simple ratio of the CDNX and the HUI, the two charts above merge into the depressingly weak ratio below.

(CDNX:HUI Ratio, 10-year, monthly.)

Clearly the small mining companies we often refer to as “The Little Guys” have been mistreated by a scared and troubled market.

We think just as clearly the Little Guys offer tremendous, compelling opportunity for traders and investors looking ahead, if, that’s IF, the world manages to hold itself more or less together. As it is the smaller companies seem to be discounting a bleak tomorrow, if relative price is any guide. Over time, however, we expect that the world will find ways to resolve the issues that have it so vexed at the moment. And, we figure that gold will continue to play a very important role as a store of value and as the best-respected international “currency.” We see more demand for gold not less.

Therefore we view now as a time for accumulation of undervalued resource company bargains in anticipation of a less-fearful investing public sometime in the future.

American Powder Keg: Black Panther Chairman Declares “The Hour of War Is At Hand”

Race war, class war, anti-government riots – you name it. All of it is headed our way.

The sentiment across the nation, as Michael Bloomberg suggested in a recent interview, is that Americans know something is wrong in this country. For every individual and the groups with which they affiliate it’s different. For the black panthers it’s racism and poverty. For unions it’s benefit cuts, wage cuts and free market solutions. For Tea Party members it’s an intrusive and socialist government.

The majority of America is not happy and they’ve lost hope, because regardless of what group you identify with, what color you are or what way you lean politically, you’re losing jobs, falling behind on essential bills, having difficulty putting food on the table and are constantly being accosted by government on all levels.

When the riots start – and they will – the core motivators for individuals who hit the streets will be similar. Where the difference will arise is who each person or group will blame. Those elites in the upper echelons of our command and control apparatus thrive on hate, confusion and panic, and they will use our own ignorance against us.

When we discuss the coming civil disobedience and unrest in America, we may find ourselves visualizing protests where the people join together to oust a tyrannical government. Be forewarned. This is not the most likely outcome – at least not at the outset. With so many different ideologies in this country, every one of us interprets the problems and directs blame a different way. These differences will be used against us; they’ll be used to turn us against each other.

As you watch the following short speech from Black Panther National Chairman Malik Shabazz, consider that, while you may disagree with his solutions to the problems or where he places some of the blame, his core message is very similar to those of others that are fed up with what’s going on in this country.

Our message to the State Department, our message to the CIA, our message to Homeland Security, our message to the government today, is that your enemy is not our enemy.

Your enemy in Afghanistan, your enemy in Iran, your enemy that you are bombing in Libya today – those are not our enemies. Our enemies are right here in the United States of America. Our battle is not against Ghaddafi. Our battle is against police brutality right here at home. Our battle is against budget cuts right here at home…

…

A message to the President, Barack Hussein Obama. We elected you. But we did not elect you to bomb your homeland. We did not elect you to bomb Africa. We are pleading with you Mr. Obama.

You cannot make a compromise with the devil. The bible says resist the devil, and the devil shall flee from you. You can’t cut a deal with Satan, Mr. Obama. You got to stand up for God…

…

We have to fight. Gird up your loins college students. Gird up your loins young black man and young black woman, for the hour of war is at hand.

America is a powder keg. The fuse has been lit.

The Dutch Ask Their Central Bank: "Where Is Our Gold?"

Think Ron Paul is the only person asking questions about the actual gold supposedly backing the currency in circulation. Think again: the "ask your central banker where his gold is" tour just went global after the Dutch the Dutch Socialists Party (SP)’s spokesman for financial affairs, Mr. Ewout Irrgang, asked the Dutch Secretary of the Treasury 10 detailed questions about the gold supposedly held by the Dutch Central Bank. Questions vary from: where is the gold? why are gold and gold receivables one line item? how much gold is loaned out? As Dutch website Vrijspreker.nl points out, "This is potentially a big breakthrough for global awareness on how central banks hide crucial info from the public and the disastrous effects central banks have on society." Is Belgium next to ask the same question in a vain attempt to understand just how much of its gold is permanently "lent out"? And after Belgium, everyone else with a central bank perhaps?

The Questions:

1 Did the Dutch Central Bank (DNB) loan part of their gold? If yes, how much and to whom?

2 Why are gold and gold loans stated as one line item in the annual report 2010 instead of mentioned as 2 separate items?

3 Can you give an overview of the yearly yields of the gold loans during the past years?

4 Where IS the physical gold of DNB? At which locations and how much is where? What is the reason that the gold is still at these locations?

5 What was the most important reason for DNB to sell the gold in the past? Are the storage costs a reason? What are the actual costs to store the gold?

6 Can you confirm that since 1991 of the 1700 tons of gold about 1100 tons have been sold? Is the remark of journalist Peter de Waard correct that because of these historic sales there is a loss of about 30 billion euro? If not correct, what is the right amount?

7 How much of the National Debt has during the past 20 years been paid off with the proceeds of the gold sales? Are you of opinion that the sustainability of the national debt will be improved by paying off the debt and at the same time selling the gold?

8 What is in your opinion the present function of the gold stock?

9 What is the relation between the size of the market of the gold stock and the size of the market of gold derivates? What are the possible consequences of this?

10 Can you confirm that recently a number of countries have even enlarged their physical gold stock? Do you have an explanation for this development?

Technically Precious With Merv Burack

Strength: As gold broke below that second FAN trend line on Thursday gold’s short term momentum indicator moved into its negative zone. On the Friday bounce the momentum moved back above its neutral line but the indicator remains just below its negative sloping trigger line. Of concern is the fact that even though gold bounced upwards on Friday the short term momentum remains below its level from the previous August low although gold is above its August low.

Volume: The daily volume action remains low and below its average 15 day volume value.

The short term rating, at the Friday close, is now a full BEARISH rating. This is confirmed by the very short term moving average line which is now below the short term line.

As for the immediate direction of least resistance, that should be to the up side as the latest price move seems to be in that direction and the Stochastic Oscillator is also turning upwards BUT I just think that the price will hit the resistance of the second FAN line and not go any further. For that reason I will go with the lateral direction until the second FAN line is decisively breached or gold turns back to the down side.

SILVER

As with gold, silver couldn’t seem to make any headway this past week. It continues to show weakness despite the Friday advance.

LONG TERM

Trend: On the long term silver continues to trade above its positive sloping long term moving average line.

Strength: The long term momentum continues to move in a basic sideways direction but above its neutral line in the positive zone. It has, however, dropped below its long term trigger line and the trigger is sloping downward.

Volume: The volume indicator was not able to make any headway this past week in keeping with the price trend. It remains just above its positive sloping trigger line.

At the Friday close the long term rating remains BULLISH.

INTERMEDIATE TERM

Trend: Silver dropped below its intermediate term moving average line on Thursday but moved back above the line on Friday. The line itself is still in a gentle upward slope.

Strength: The intermediate term momentum indicator remains in its positive zone but had dropped below its trigger line with the trigger now pointing downward.

Volume: Although the volume indicator is basically moving sideways it did drop below its intermediate term trigger line with the line sloping downward.

On the intermediate term at the Friday close the rating remains BULLISH but is in a very precarious state. This bull is still confirmed by the short term moving average line being above the intermediate term line.

SHORT TERM

As with gold, silver is not in all that good shape from the short term standpoint.

Trend: Silver dropped below its short term moving average line early in the week and has remained there all week. The line itself is now sloping downward.

Strength: The short term momentum indicator was in its negative zone for most of the week but did cross into the positive zone by just a hair on Friday. It remains below its trigger line and the line is pointing downward.

Volume: The daily volume action is very low as could be expected when the price action is towards the down side.

Putting it all together at the Friday close the short term rating was BEARISH. This is confirmed by the very short term moving average line tracking below the short term line.

Merv’s Precious Metals Indices Table

Well, that’s it for this week. Comments are always welcome and should be addressed to mervburak@gmail.com.

Merv Burak, CMT