Quick HUI Gold Bugs Index Update...
I've got an hour lunch break, let me toss out a few thoughts
on where we are, how we got here, and what to do about it...
First, here's my HUI chart from December 1st, when the HUI
was rallying into the upper band of it's trading channel,
and approaching triple resistance of it's prior YTD high
of 494.38, the 500 barrier, and it's former all time high
from March 2008, of 518.
Message 26140007
From: SliderOnTheBlack 12/1/2009 8:35:31 AM: Post #20222
With gold then hitting new highs, I was looking for HUI 460
(old resistance) to become new support, and to serve as
a pivot point for the HUI, with the gold rally helping to
pull the HUI through key resistance.
And that's exactly what happened as the HUI bounced 42 points from
the intra-day Dec 1st lows, to the intra-day Dec. 2nd highs (HUI 474 - 516).
But, as the upper band of the HUI's trading channel directly
intersected the old all time HUI high of 518, the key was
to immediately move stops up tightly behind that 42 point,
24 hour pop, which I talked about here...
Message 26143700
From: SliderOnTheBlack 12/2/2009 8:26:50 AM: Post # 20255
"Move stops up tight, (I've raised them from HUI 460 to 480).
Add a few puts for insurance.
And nothing wrong with taking a few chips off the table into
further strength. But when you got the Mo, you got the Mo.
You have to give gold the opportunity to pull the gold stocks
through that HUI 518, prior all time high."
Mechanical Trades vs. Emotional Trades
Taking a few chips off the table, buying some puts for insurance,
and raising stops with both gold and gold stocks hitting
new highs was a "mechanical" trade. And what I mean by that,
is it's a trade you always make out of discipline, while
ignoring emotion.
It's an all the time trade, not a some of the time trade.
And the reason it has to be an "all the time trade," is
because the trading gods will punish you 99.99% of the
time, whenever you decide to make an exception.
And sure enough, just a few days later, we had a big gap
down open and blew through those stops.
That then brings us to planning a re-entry trade.
The first place I always look at in planning a re-entry target
is a 50%ish retracement of the preceding move.
But, that's just an "initial" re-entry target. It's where
"if" the underlying fundamentals for gold are still positive,
you begin to look for days when gold is up and the shares
sell off with the market, or ideally when the dollar is down,
gold is up, and the shares are down. Or, when the shares seem
to sell off disproportionately to gold, the dollar, to the
market, or to news.
We had one of those situations with gold and gold stocks
selling off in advance of the Fed meeting, worrying that
Bernanke may change either rates, or his rhetoric.
Neither occurred and we had a nice day trading pop yesterday
in both gold (up $13+) and gold shares.
But now today, with the worries over Bernanke's confirmation,
with the DOW down, and another intervention in the dollar, and
jawboning about the carry trade - gold shares gap opened down
hard, and we gave it all back.
So what to do here?
Well what I'm doing is looking at what I see as a disproportionate
sell off in the shares vs. the metal, and since we also
have a broad market that everyone seems to be waiting to
see correct, I'm looking for put "sales."
And I want to buy some time to be right, and given this
big gap down with put premiums soaring - I want to be
looking for some big phat premiums.
Look at the AEM LEAP puts, the Jan 2012's offer a $12 premium
at the $50 strike (would you be a long term buyer sub $38 AEM?),
and the $60 strike offers a $16+ premium.
If you believe the long term fundamentals of the US Dollar
are negative, you're getting very well paid to take on a
moderate risk, and getting a strong enough premium that you
can even buy some shorter term puts to hedge the trade, or
to buy some nearer term calls for more upside leverage, if
you anticipate a bounce off the bottom of the HUI's trading channel.
I'm just using AEM as an example.
HL is offering a $1.65 premium on the Jan. 2012 $5 strike
as another example.
The downside to options is that the vast majority expire
worthless. With buying time via LEAPS you greatly minimize
that.
The gold sector has had roller coaster volatility since the
cycle began in December 2000. And I don't think it's going
away time soon -- so using LEAPS to buy yourself "time to
be right" should be something to look at.
We should see strong technical support at the bottom of
the HUI's trading channel shown below.
If you'd like to play this conservatively, if you're worried
about a continued short-covering rally in the dollar, or the
broad market rolling over here, maybe sell a few LEAP puts,
and use some of the premium to buy a few nearer term calls
for leverage into any snap back here, and just sit tight,
and wait for the old highs to be taken out...
Message 26167907
From: SliderOnTheBlack 12/10/2009 2:25:34 PM: Post # 20386
"It's also obvious that foreign central banks wanted to
put a stop to the dollar's slide, which is wreaking havoc
on their exporters.
While nothing has changed in the long term fundamentals
for the US dollar, it's clear there's a concerted effort
to remove gold's rise and the dollar's collapse from
dominating the daily headlines.
And since this isn't the first time gold shares have been in
this territory, I wouldn't take on too much risk, or exposure
here over the next few weeks, fighting for ground we've already
taken on more than one occasion.
I'd rather wait patiently for a really attractive risk:reward
re-entry buying opportunity, or buy the technical breakout
above the HUI 518 prior high."
----------
For short term trading, before you really jump back in with
both feet, I'd wait for the US Dollar to break this uptrend.
USD 78 should bring some resistance, and may mark the end
of gold's pullback.
I'm selling some puts for lunch <vbg>, and taking some of the
premium (some, not all) and buying some nearer term calls -
Feb, March, April 2010's, in fav's like AEM, KGC (cheap),
and SLW.
Nothing in the negative long term fundamentals for the US Dollar
has changed imho, so it's a matter of implementing good
money management, forming an unemotional, well thought out
re-entry strategy, and structuring trades that allow us
"time to be right" and also give us a little near term
leverage, just in case we get a nice snap-back rally,
but yet not overly increasing our exposure after
protecting the gains from this move with our HUI 480
stop out.
That's my .02 cents anyway.
Mo later,
SOTB
PS: re: Nat Gas & UNG, sound's like many of you did better
than I did. I pretty much stuck to my LEAP Put sales,
and it wasn't that big of a position for me.
Natty was looking like a helluva contrarian trade, and
the key, is you can't be afraid of being wrong.
And if virtually everyone isn't telling your why you're
wrong when you make the trade, you probably won't end
up being right.
...I think that's the best takeaway in the Nat Gas/UNG trade.
PPS: One of the members of our trading group brought in
a top currency trader as a guest, and tomorrow morning
we'll have a big session on the dollar and the "carry-
trade" - which I think is way, way overblown, as I think
the US Dollar carry-trade is just getting started, and
is going to be a multi-year trade.
I'll update you on what he has to say when I get back,
later this weekend.
Long term, nothing's changed...
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