Seeking Alpha

Robert Edwards'  Instablog

Robert Edwards
Send Message
Contrarian daytrading technician who specializes in locating high probability short term trades while predicting price movement directions with over 85% accuracy. Most of my trading involves either extremely short term micro scalping of stocks or commodities (using 1 minute bar charts), or swing... More
View Robert Edwards' Instablogs on:
  • Will Gold (GLD) Triple Bottom Around $109.75 Or Does It Have To Fall To $105 First?

    (click to enlarge)

    Avi Gilburt likes to use the GLD ETF as his proxy for gold so I will use it as well for this article. If you have not seen his latest article, I would recommend you read it here. In the article he basically states that as long as various resistance levels hold, GLD is headed down to the 105 region, which would be a price of around $1100 in gold. Avi prudently explains that it is too late to get on the bear side of the trade, as that train left the station long ago. We are very oversold and could get even more oversold, but soon we will hit a price that bottoms gold and GLD, at least temporarily. Better to book a ticket on the bull train, that will surely be heading this way shortly.

    For a historical perspective, take a look at the above weekly chart of GLD. You will see how in the week of July 26, 2010, GLD bottomed for the last time at $113.08, before making the historical move to all-time highs, reached the week of Sept 6, 2011 at $185.85. The move from $113 to nearly $186 is an increase of 64.4% in 13 1/2 months. Once GLD topped out, it would go sideways at elevated levels for 18 months, before finally breaking down soundly below the $150 level. Remember that $113.08 low back in July 2010? You probably don't remember but the market did remember. The market has perfect memory. It was no surprise that we would stop at just above that level at $113.68 in the week of June 24, 2013 at $114.68. After a bounce to above the $137 level, we would double bottom again in the week of December 30, 2013, at $114.46. After a rally back to the $133s, we would briefly triple bottom in GLD the week of September 29, 2014 at $114.42. The triple bottom only caused a 3 week rally back to $120.50, a gain of just 5.3%. It was a triple bottom none the less.

    Then on November 3, 2014, GLD set a new floor, when it bottomed at $109.67. That floor was substantial enough to allow for a January 2015 rally earlier this year to $125.58, a gain of 14.5%. We would sell off until the week of March 16, 2015, when we double bottomed at $109.77. The double bottom was only good for a rally to $117.88, a gain of 7.4%. Well, with today's action, we have now formed what should be a triple bottom in GLD the current week of July 13, 2015, at 109.58. If we do bottom here, we might only get a rally of 5% like we did in the last triple bottom, before falling a bit further. From the $1143 level we sit at while I type, a 5% gain would take August Gold futures back to $1200. That would be a very reasonable target. After that is accomplished, I would expect that we would then make a marginal new low in GLD like we did before, which would be Avi's $105 target. That would translate to about $1095 in August Gold futures, which would be a bottom right after running stops just below $1100.

    Well, whether we stop now and make the triple bottom and get our 5% bounce to $1200, or we continue on our current downward path to the next support level of around $1100, that is the next major support level in gold. I am hopeful that we stop by next Thursday, with a turn at the triple bottom level of $1130 to $1140 in August Gold futures. Running stops, I see us maybe hitting $1125. At that point we should be sufficiently oversold to get a bounce back up to the $1185 to $1200 area, where we will most likely roll back over to bottom around $1100. From the $1100 level, we should begin a bull market to new highs. I don't know if it will work out exactly this way, but you now have a roadmap to follow and you will know if gold follows the path or makes a detour.

    To follow along as we buy GLD, mining stocks and Gold futures, or trade crude oil (UWTI and DWTI), natural gas (UGAZ and DGAZ) and other commodities, join us in our private Short Bull Trading Room on WeChat. Just download the free app on your phone or tablet, and then add "bobed1". You can then send me a message so I can invite you into the room. Still plenty of room.

    You can also subscribe to my free weekly newsletter. Send an email to shortbull2020@yahoo.com if interested in subscribing. Again, it is free!

    Disclaimer:

    The thoughts and opinions in this article, along with all STOCKTALK posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Jul 16 9:20 PM | Link | 3 Comments
  • The Bearish Cycle In Natural Gas Ends Tuesday July 21st, So Be Cautious Trading DGAZ Over The Next 3 To 4 Weeks

    The above chart is a daily chart of August Natural Gas. Natural gas has rallied up 4 of the last 5 days. Recently natural gas has sold off whenever we traded into the $2.90s and traders have successfully bought the triple leveraged ETN (NYSEARCA:DGAZ) to benefit from the selloffs. For instance, back in early June we rallied from just above $2.60 up to $2.95 in three days (June 8th to June 10th). Then came Thursday's inventory report and we were knocked down Thursday and Friday to the $2.77 level. That was followed by a retest of $2.95 and roll over which brought sideways to lower action for 3 weeks. Now today is another Thursday inventory report and we are coming in on strength. It is anticipated we could again get a small selloff today and possibly Friday, since the expected 95 MMBtu number is slightly higher than last week's 91 MMBtu number.

    However, ben2008, the administrator at firstenercastfinancial.com is looking for 92 MMBtu today, and 64, 50 and 53 MMBtu figures for the following 3 reports. click here. These are low figures for this time of year and tells me that we are indeed headed to $3.00 and possibly to $3.25 or higher, over the next 3 weeks. Initially one might be able to successfully buy DGAZ as we are in the resistance level of the $2.90 to $2.95 level that has recently been resistance, but take your profits quickly.

    We are finishing up the last 4 days of a bearish cycle that occurs every summer from the 11th trading day in June and continuing through the 14th trading day of July. The dates this year are June 14th through July 21st. Thus, the bearish cycle ends next Tuesday. You can read about the cycle from Jay Kaeppel, click here. This year the pattern worked great until last Thursday's low. But we are now rallying and could in fact end up closing strong through next Tuesday which would cause the pattern to fail. What is most important for traders to realize is that the bearish cycle ends soon. Apparently it is common for weather to heat up beginning the middle of next week, which typically ends the bearish cycle in natural gas. Thanks to usage of air conditioners, there is a drawdown in inventories and natural gas has a seasonal strong rally period. With the heat wave forecast for the next 3 weeks, one would expect this year will show season strength through the first week of August. Enjoy your DGAZ trades for now, but realize that if we move above $2.95 and especially $3.00, one needs to abandon that trading strategy and join the UGAZ party.

    Last week on the Thursday inventory reporting day, we came into the report on the weak side, having fallen for the previous 2 days. I correctly recommended being short through the report using DGAZ for a daytrade, taking profits a few minutes following the report. That turned out to be the bottom at $2.644 and we closed up last Thursday and have rallied ever since.

    This week we are coming into the report strong, but could easily get a selloff since a number in the 90s is substantial. However, one needs to utilize any weakness one sees in natural gas over the next 2-3 trading sessions to position themselves into UGAZ as that should be the winning side as we move into August.

    To follow along as we short out-of-the money commodity puts and calls, or trade crude oil (UWTI and DWTI), gold, natural gas (UGAZ and DGAZ) and other commodities, join us in our private Short Bull Trading Room on WeChat. Just download the free app on your phone or tablet, and then add "bobed1". You can then send me a message so I can invite you into the room. Still plenty of room.

    You can also subscribe to my free weekly newsletter. Send an email to shortbull2020@yahoo.com if interested in subscribing. Again, it is free!

    Disclaimer:

    The thoughts and opinions in this article, along with all STOCKTALK posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Tags: UGAZ, DGAZ
    Jul 16 6:03 AM | Link | 1 Comment
  • Selling Out Of The Money December Lean Hog Puts For Income!

    I first posted this trading opportunity on Seeking Alpha on June 21, 2015, click here. If you did not see that article, you will need to read it so that you will understand the basic setup of the trade. This involves selling far out of the money put options (and possibly calls later) in December Lean Hog Futures. Here is the current daily chart of December Lean Hogs:

    When I posted my last article, December Lean Hogs had closed near their contract lows, around $61.50. The next trading day, Monday, June 22, 2015, we opened weak and then made a spike low at $59.17, which allowed me to sell several December 2015 Lean Hog 50 strike puts for over $1 premium. If you are familiar with options you know even on the lows of the day, I was selling something over $9 out of the money and getting $1 premium so there is a slim chance that I will get exercised and be put long in the market. $1 premium is worth $400 and the highest priced put I sold was $1.15 ($460).

    You can see from the chart that December Lean Hogs then stabilized and traded sideways for the remainder of the week. The following week, saw a sharp short-covering rally to just under $65, making my options lose in value. I was able to buy the options back at a much lower price than I had sold them for and I was able to pocket the difference. The options I bought were cheaper now because they were even further out of the money than when they were sold. Each day that we stayed around $64, additional slippage was seen. I figured we would roll back over and retest the bottom, which we soon did. For the past three trading days, December Lean Hogs have fallen hard and on Friday made a new life-of-contract low at $58.65 with a low close of $59.10. Before the $50 strike puts that were about $9 to $10 out of the money when I sold them were valued at around $1. Now that we are trading at lower levels, to get the option that is now about $9 to $10 out of the money, you would have to sell the $48 strike put. You need to go to www.cmegroup.com click here, to view the option prices. The December Lean Hog 46 strike closed at .775, up 10 cents, the 48 strike put closed at $1.10, up 22.5 cents on the day, and the 50 strike put closed at $1.450 up 30 cents on the day. As you move closer to $59 where December futures are trading and are closer to being "in the money" the price of the option increases. If I sell a 48 strike put on Monday to open a position, I am hoping that we open weaker and the premium I receive is closer to $1.30, instead of the $1.10 available on Friday.

    Looking at the pricing of the 48 strike put option, that closed at $1.10 on Friday, if we fall another $2 in lean hogs, the price of the option should rise to where the 50 strike option is valued right now ($1.45). Thus if I had sold the 48 strike option on Friday for $1.10 and Dec Lean Hogs fall $2 on Monday morning, the value of the option will rise to $1.45 and I will be losing 35 cents ($140). If however, we rallied $2 on Monday, the value of the option would decrease to $.775 and I would be making 32.5 cents ($130). If a $2 move up on down only changes the option value about 35 cents, then the "delta" is .175. Being so far out-of-the-money it takes a big move of $2 to get the value to change much. The margin I would be charged to sell this option is equal to the delta times the normal margin. Instead of risking a full contract if I was playing the futures and going long a contract, I am selling an out-of-the-money put that is equivalent of risking 17.5% of a full contract. If the full margin was $1200 to sell a full contract, it would only be $210 margin to sell this put. Also consider that if you sold the put for $1.10, they placed $440 into your trading account which is over double the margin. To prevent you from getting too many contracts, the system adds a little extra in there, where the margin may be closer to $400 to $500.

    Realize that as you get closer and closer to being "in-the-money" the delta increases. The options at the money typically have a delta of .50 so if Lean Hogs were trading at 58.00 and you sold a 58 put, you would make or lose about 1/2 as much as you would if you were playing the futures contract instead. The rate that the delta changes is called "gamma" but that is not important to understand the basics. For a quick review on the "Greeks" click here.

    I should also mention "Vega", which is the amount an option changes for a one point change in implied volatility. I think of Vega as how much air is in the balloon. Heat up a balloon and it expands but chill a balloon and it contracts. That is Vega. If the market is moving wildly up and down, the options are considered hot and the premiums expand. You want to sell options when the Vega value is large. Right now the Vega for December Lean Hog puts are going up in greater amounts each day than one would calculate based on the delta change. For instance, if hogs fell on Monday $2, I previously calculated the option premium should increase from $1.10 to $1.45. But what if it jumped to $1.60 or $1.70 instead. If sentiment turns more bearish the put buyers might bid up the prices beyond what they should have been because the implied volatility has increased. Put sellers are asking for more premium as it is riskier being short options when prices are falling fast and their is greater risk of the option going "into the money" where it might be exercised. When Vega values are low, that is when you want to buy options as they are very cheap (no air in the balloon). The two most important concepts to remember are Delta and Vega.

    When a novice first starts trading commodities they often purchase inexpensive calls and puts. This limits their exposure to risk as they cannot lose more money than the option purchase price. However, a vast majority of options expire worthless so the market has to move your way almost immediately. That is why I prefer selling far out-of-the money puts and calls. Sure, there is unlimited risk when going short an option, but there is the same unlimited risk when one buys or sells a futures contract. This so called "unlimited risk" is still a very known risk and the odds are stacked in favor of the seller just like odds are stacked in favor of the "gambling house" in blackjack or poker. If I am trading an option I would rather be the "house" rather than the poor gambler.

    To follow along as we short out-of-the money commodity puts and calls, or trade crude oil (UWTI and DWTI), gold, natural gas (UGAZ and DGAZ) and other commodities, join us in our private Short Bull Trading Room on WeChat. Just download the free app on your phone or tablet, and then add "bobed1". You can then send me a message so I can invite you into the room. Still plenty of room.

    You can also subscribe to my free weekly newsletter. Send an email to shortbull2020@yahoo.com if interested in subscribing. Again, it is free!

    Disclaimer:

    The thoughts and opinions in this article, along with all STOCKTALK posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Jul 11 9:54 PM | Link | 1 Comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.