On the One Hand… On the Other… (GLD, SLV, GMCR)

There have been some tremendous developments in the precious metals’ market this week and we’re therefore obliged to start our discussion there.

To begin, let’s just say that the jump higher in both gold and silver last Thursday was exceptionally large and equally unexpected. It caught a tremendous number of shorts off-guard and also spurred a good bit of independent buying. But whether or not it marks a final bottom for the three-year bear market in the PMs is a question whose answer we don’t yet have. We’re perfectly ready to jump back on the gold bandwagon if the technical evidence is on offer and advises as such. But for three full years, it’s been absent.

Let’s see what it says now.

We’ll start with silver, because the chart there is somewhat easier to read.

Here it is –

silver
This is the iShares Silver Trust ETF (NYSE:SLV) for the last six months and it shows clearly a bullish break above three of the four most important moving averages in just the last seven trading sessions (in red). Two of those MAs were hurdled in a single day, as SLV rallied nearly 5% late last week.

But we should be quick to point out that Thursday’s wild climb on six times average daily volume (in blue) also put SLV’s Relative Strength Indicator on bed-watch, so to speak (in black). That is, we’re now flirting with a strongly overbought (+80) RSI read, and that should temper the buying, at the very least, over the near term. In a worst-case scenario, we could see a strong round of technical selling based solely on RSI.

If that, indeed, does happen – if price action moves back below the 274 day moving average and heads toward the key 137 day MA, we’ll lean toward last week’s price explosion as having been a short covering event and little more.

But if price stabilizes here above the 274 DMA (and that’s what MACD readings are indicating, having pushed above their midway waterline just last Friday) we should be in for a run higher to the long term (411-day) moving average, now at $22.65 and falling.

What about Gold?

The setup for gold is a little more complicated, mostly because she’s less temperamental than her silvery stepsister. He moves are less dramatic, produce a more muted technical reaction, and are therefore harder to gauge.

Here’s the SPDR Gold Trust (NYSE:GLD) for the last six-months –

gld623
GLD’s pop in price came on equally impressive volume, brought the metal above her same three moving averages, but didn’t set off the RSI alarm bells (in black) as silver did. The move was slightly more modest, at only 3.5%, and doesn’t look as endangered, technically, as silver.

Additionally, we may have an island reversal pattern (in red), a formation generally associated with a longer-term change in trend.

Taken together, that could mean imminent upside.

Warning: precious metals bears are going to have to tread VERY carefully here, as longer-term trend changes are very often presaged by technical bursts of the sort we witnessed last week.

The Verdict…

We are leaning ever so slightly toward reversing our longstanding bearish posture on the precious metals as result of last week’s move – we’ll quantify it by saying that we’re now holding 55/45 toward gold and silver having completed their bear market descent, though we caution anyone against taking a long position in either as yet. We want to see what silver will do next. She’s been the leader on the downside, and we suspect she’ll also lead higher when the time comes.

But we repeat: we do not yet see compelling enough evidence today to take that stand.

sword

All that said, we now turn to a number of gold related trades that require our immediate comment. Before we do, however, we would like to acknowledge a communication from good reader Larry Church, who, some ten days ago wrote us on the subject of the precious metals (we reprint the letter below in full) –

“Paralleling your mature admission of the bond market, I have repeatedly committed funds to puts on GLD with wrenching results. As seasoned responders I expect you will pull out the crayons and draw me pictures of the longer term trend (anything longer than the expiration date of my GLD puts) and then refer to the rate of decline (which again will be less than was required to make the puts work) and other aspects of your verifiable prediction. A long time back, I bought your recomm GLD June 21, 14-85 puts. I added to them as you reasserted your dire predictions. Later I bought your June 30,14 -85 puts and even more recently your July 19,14 – 112 puts. I will soon lose a bunch of money and appear to be on track to lose more. I would ask that you might want to rethink and perhaps temper your negative enthusiasm or at least change your time frame. Larry”

Point well taken.

Larry, dear, we make no bones about our GLD 85 PUT initiative being wrong, dead wrong. And we take full responsibility for this being one of our (very rare) errant calls. Mea culpa. We botched it. Had you purchased all the June 85 PUTs that we suggested, then as of last week’s expiry you were out $4.98.

In our defense, however, we would point out that on May 12th , in a letter called A Gold Pen, My Kingdom for a Gold Pen, when we saw that the June PUTs were in trouble, we advised you to sell six GLD May 127 CALLs for $0.53 each, for a total credit of $3.18 to offset any potential loss.

If you did so, that reduced your debit to $1.80. And we certainly intend to get that sum back for you, post haste, too.

Additional Losses

Gold’s burst higher also jeopardized our trade of June 6th. The letter was called Technical Analysis of Women in Jars, and there we urged the sale of the GLD June 124 CALLs against a purchase of the July 112 PUTs. The trade cost just a penny to open, but the Junes are now history, and coming out of the weekend with the stock at $126.50, we find ourselves short 100 shares of GLD at $124. That’s $250 in the hole.

It’s with our heads low that we admit defeat twice in one week, and adjure everyone holding GLD shares to sell them at the market immediately.

Again, we fully expect to recoup these funds. But we cannot again fail to acknowledge that our latest precious metals initiatives were just plain duds.

face

A final word that might encourage those who believe that we’re at the beginning of the next leg higher in gold’s bull run.

It’s very often the case that at major turns in the market, trading becomes more difficult, and that technical reads have to take a back seat to more dynamic sentiment changes that are taking place among traders. Unfortunately, it’s also more often the case that we only see in retrospect that a long-term change in trend was underway. And by then it’s too late.

That could well be the case this time, too. And if recent volatility is any indication, gold pushing toward $2000 and higher could be closer than we imagined just last week.

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Other Trades

We’ll close today with a look at a pair of trades that involve Keurig Green Mountain Coffee Roasters (NASDAQ:GMCR) – again, one of which went awry, and the other, which came through splendidly.

Here’s the first –

On April 28th we wrote a letter called Measuring the Worry One Cup at a Time in which we recommended you sell the GMCR May 80 PUT for $1.65 and buy the June 80 PUT for $2.86. Total debit on the trade was $1.21 and as of last week’s expiry you’re out the full cost of the trade, $1.21, a 100% loss.

On the other hand, after seeing the trend in GMCR was not as we first suspected, we wrote another letter on May 19th called Sitting Pretty on Three Open Trades, in which we recommended selling the GMCR June 125 CALLs for $1.39 and buying the June 135 CALLs for $0.36. Total credit was $1.03 per pair initiated, and we urged you to consider five pairs, for a purse of $5.15.

And…

It all came through. A 100% win that puts your net winnings on GMCR at $394.
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Other Trades

We’ll close today with a look at a pair of trades that involve Keurig Green Mountain Coffee Roasters (NASDAQ:GMCR) – again, one of which went awry, and the other, which came through splendidly.

Here’s the first –

On April 28th we wrote a letter called Measuring the Worry One Cup at a Time in which we recommended you sell the GMCR May 80 PUT for $1.65 and buy the June 80 PUT for $2.86. Total debit on the trade was $1.21 and as of last week’s expiry you’re out the full cost of the trade, $1.21, a 100% loss.

On the other hand, after seeing the trend in GMCR was not as we first suspected, we wrote another letter on May 19th called Sitting Pretty on Three Open Trades, in which we recommended selling the GMCR June 125 CALLs for $1.39 and buying the June 135 CALLs for $0.36. Total credit was $1.03 per pair initiated, and we urged you to consider five pairs, for a purse of $5.15.

And…

It all came through. A 100% win that puts your net winnings on GMCR at $394.
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Congrats to all who heeded the call.

Wall Street Elite offers no new trade initiatives this week.

With kind regards,

Hugh L. O’Haynew
Senior Analyst
Normandy Research

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