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Kingsview Market Focus - Al Abaroa 10-13-2013

Market Perspective:

Following a trend and sticking with it can test your wits at times. Case in point, the S&P 500 has now gone on a 300+ point run since last November and along the way it gave in to several swift downdrafts. Corrections, as they are labeled by analysts, sometimes mysteriously adjust to the point of forming a line in the sand (aka. trend line). After setting off on its initial ascent in November, a higher low followed just before New Year's Eve. It's from this point that the lower boundary line for corrections had been established. Prices have advanced in a remarkable manner during 2013 and as the corrections came and went, and they always do, the line in the sand held up. Five times now, if you want to keep count. As a rule of thumb, the more touches on a trend line, the more important the market thinks it is. The market's wherewithal to flock to riskier assets was tested this past week as prices on the S&P closed below the potential trend reversing technical event for the first three sessions of the week. Concerns over the nine-day-old (at the time) government shutdown and the probable debt ceiling breach (just a week away) played a significant roll in aiding in the sell-off. But then, hope arrived. While, to my knowledge, no deal has actually been shook on, the hope that a deal was brewing between Congress and the President, as they agreed to sit down face-to-face, was enough to inspire a swift return to stocks. E-mini futures gained back two-thirds of the declines we've seen over the past two weeks in just two sessions. As we approach the debt ceiling deadline and a probable deal to extend it out six weeks, as well as another FOMC meeting near the end of the month, investors may continue to feel comfortable remaining friends with the current uptrend. While the previous FOMC meeting offered a bit of a shocker with the non-taper decision (the S&P topped the next day), it would seem that the expectation for this go around is another non-taper decision. If so, investors may feel more satisfied to pursue further stock market gains. If the government can manage to somehow take away some of the market risks and extend easy money policy, it could be just the recipe to keep this trend going for a little while longer. Stay tuned…

Option Volatilites:

Very much like the situation I discussed a few weeks ago in the E-Mini S&P options, Open Interest (NYSE:OI) of options on Gold futures have climbed sharply since the beginning of September. Adding to that, Implied Volatility (IV) has started to climb and is now nearing the 90th percentile of its range of the past year. IV still lags its historical counterpart, Statistical Volatility (SV), mainly due to the size of price movements to the downside that have developed since futures fell below the 1525 support shelf earlier in the year. While past performance is not necessarily indicative of future results, it has been a common theme in Gold options since the break of 1525 that SV and IV have risen sharply on each new downdraft in prices. Call and Put OI began to rise sharply after the last decent upward correction (July through August) showed signs of ending with a breakdown through the lower boundary line of its short term trend. Combined OI on 8/30 was just 101,002 contracts. By 10/01, OI ballooned five-fold to 575,893 and futures had plunged over $100/oz. With Friday's decline through monthly support, futures have now settled in at a three-month low. So, where do we go from here? When analyzing the December options that have 45 days to expiration, we can calculate that the options are currently priced in at having an expected move of just over $75 during the time frame. One easy way to calculate this is to add together the at-the-money 1275 straddle and the 1270/1280 strangle premiums and divide by 2. The information doesn't, of course tell you which way the market will make this probable move, but there is another piece of underlying information that might help in my opinion. OI in the 1200 strike price for December expiration is a mountainous 11,200 contracts as compared to its polar equivalent at the 1350 strike with 2,850 contracts. Just maybe more folks are concerned, or perhaps expecting, the path of least resistance is down.

Technical Analysis:

Let's follow-up on the Gold technicals again. As I just mentioned in the options' section, Gold settled at $1,272.6 on Friday, a three-month low, as it convincingly broke through the 10/02 low early in the morning. News channels confirmed that a large fund had placed a substantial order just after 8:30 AM, which led to a sub five minute $27 plunge in prices, which also included a ten second circuit breaker halt instituted by the exchange. Once the excitement ended, Gold went into consolidation mode and trended sideways for the remainder of the day. Looking back to a daily chart perspective, the break to new three-month lows may now allow us to hone in on where down trend resistance can be established as well as potential downside target prices. Since the August 28th high at $1,434.0 arguably confirmed a downtrend resistance line (five tests) that runs through the most recent test at the 10/08 high of $1,328.8. In my opinion, I would label this as critical resistance. Price action above this level may signify a more meaningful bottom is in place and prices may attempt to climb back above $1,400. For a downside target, we can look back at comments that I penned in the 9/7/13 Wire, "For the expected downside move to gain further traction, the trend line that formed from the 6/27/13 and 8/7/13 lows needs to be taken out in an impulsive manner. Over the next week, this line runs through the $1350-$1360 level. If so, the June low at $1179.4 will be our target and eventually a break to new lows." In my opinion, as popular opinion continues to side in favor of a congressional deal over the debt ceiling and non-tapering from the FOMC, the established downtrend in Gold futures will remain true.

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