Commodity Resurrection (KOL,GLD,GS,XLP,XLF)
The process has taken a while to unfold and may require another few weeks to gather momentum, but there’s no longer any doubt.
Grab some more popcorn and licorice. The commodity horror show is winding to a close.
Before we get there, however, we have three trades to close out, with a nice, net take-home for the trio.
Let’s start with our October 11th initiative from a letter called Multiples, Expanding Multiples and the Energy Spectrum. In that missive we recommended you buy one KOL January 12 PUT for $0.90 and sell one KOL January 12 CALL for $0.85. Total debit on the trade was $0.05.
Unfortunately, the dang thing is not moving according to the ‘Normandy Will’ and we’re therefore forced to close it out for what may end up being a loss. We emphasize the ‘may’, because anything can happen in a week in this market, and by Friday’s expiry we could, in fact, see a profit.
That being said, the short CALL is now trading for $1.25, and we’re forced to buy it back in case the stock moves any higher and puts us into a willy of a predicament.
The long 12 PUT remains open through week’s end. Feel free to close it out later in the week if it brings in some cash. But because we won’t be in contact with you again until next Tuesday, we’ll just have to wish you the best of British luck and call it a day.
Our total outlay on the trade as of this writing is now $1.30. This also represents the trade’s maximum loss.
We’ll be in touch a gain in seven days’ time with a final tally.
Second trade on the day was our effort from December 13th. The letter was called Now Underway: Massive Market Fake-Out, and in it we suggested you buy the GLD June 111 CALL for $5.60 and sell the GS June 280 CALL for $5.80. Total credit on the trade was $0.20.
And wouldn’t you know it, everything came up roses.
The GLD CALL now trades for $6.85 and the GS CALL has fallen to $4.10. Sell off the former and buy back the latter, and you net a total of $2.95 on absolutely nothing expended. Adjusted for minimal commissions gives you a return of 1867%.
Our final trade of the day involves our December 20th letter called The Finale. We urged you at that joyous juncture to buy the XLP January (2018) 47 PUT for $1.67 and sell the XLF January (2018) 23 PUT for $1.72. Total credit on the affair was $0.05, and we’re extraordinarily pleased at how it has played out.
We should mention that we originally figured this trade would take several months to develop, but the wizards and necromancers of the market temple have apparently been divining in our favor.
Consider – the XLP PUTs are now fetching $1.53 and the XLFs just $0.52. Sell off the first and buy back the second and you achieve $1.06 on nothing laid out. Again, adjusted for commissions, your return is a giant 607%.
In four weeks.
Do you like money?
Moving on to our trade for this week, as we mentioned at the top, we’re going to recommend a commodities-based initiative.
Quite simply because commodities are on the move.
You heard us. After nearly five damp years in the rusty shackles of a medieval downdraft, the commodities are now stepping into the light.
What the hell!?
Take a deep breath, Nero. Not the entire commodities complex, perhaps, but certainly on aggregate, we’re looking at higher prices for the tangibles starting right now.
And we’ll begin our investigation into the matter with a look at the daily chart of the PowerShares Deutsche Bank Commodity Index Tracking Fund (NYSE:DBC), among the best known and widely traded of all the broad commodity ETFs.
As you can see, the commodities have been stepping higher for the last twelve months, and in December, DBC managed to leap-frog above all her salient moving averages.
That’s bullish, and so is the crossover of the 137 day moving average (deep red) above the long term MA (in yellow) seen below. It’s all part of a slow unfurling that should be complete within a few weeks if price continues to hold her latest gains and remain above strong support at $15.50 (in red).
Incidentally, the action since the beginning of December, when price jumped above an eight month resistance line at $15.50 should also be heartening for the bulls.
RSI and MACD are also supportive of a continued advance, being above their respective waterlines but not too hotly so (in green). RSI is trending well below its ‘overbought’ 80 line.
Pulling back to look at the weekly chart offers a further dash of optimism.
Below is DBC for the last five years. Pay particularly close attention to the reverse head and shoulders bottom that has formed over the last eighteen months. We like long-forming technical patterns, as they generally prove more reliable than their will-o’-the-wisp counterparts.
Most important here is the upside break through the descending neckline (in black), a signal that the formation is now complete and that imminent buying is likely at hand.
The reverse H&S pattern has an upside count equal to the distance from the bottom of the head to the neckline, or $11.70 to roughly $15.90. That puts the target at roughly $19.80 for the stock, well above the descending 137 week moving average and well on its way toward $20, where the longer term weekly MAs are now bunched.
RSI and MACD are both above their waterlines and both have diverged positively against price for the last 24 months (in green), another bullish sign for the longs.
In sum, according to the weekly chart, we should see a break higher for the whole commodities complex in the very near term.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
And if it doesn’t work, blame the Russians.
With kind regards,
Hugh L. O’Haynew