The age-old wisdom to get out of a hole...is to stop digging. The price application of that basic logic can be used to identify the bottom base in asset markets.
Action last week in gold, crude and stocks suggest that a reversal may be in the works.
Gold made a textbook turn with new lower lows November 5th at $1672 to power higher and close positive $8 on the session. The flush and reversal then confirmed the bottom with a run above the $1700 pivot the following day. This is how markets turn by exhausting the selling pressure.
Side note: the long held December gold call spread was sold last week at $4500 for a 180% profit instead of waiting until months end to capture the spread maximum. Forfeiting the potential $500 additional gains enabled entry into an April call spread now for immediate bullish positioning. The new April $1775/$1825 call spread sits only 2% below at the money with gold trading at $1740. A 5% move puts the spread fully in the money.
Crude has traded sideways for the last 14 sessions, almost three full trading weeks, after the decline to the $84 level October 24th. The same November 5th lows that put a bottom in gold led to a fake out breakout in oil. New relative lows at $84.35 finished that day positive $1.30. An ensuing rally run to $89.82 has voided that base with a drop back to new $84.05 last Wednesday.
Crude has more emotion than most markets and volatility is best measured on weekly action. New lows last week at July levels with a $1.20 gain for the five day period offer bulls encouragement.
Stocks got hit hard last week with a break below 1400 in the broad market S&P and 13,000 in the blue chip Dow index. The downside price over reaction with new lows Friday and a higher close sets up for a probable rebound run.
Bullish divergence with new price lows that did not accompany new volatility highs signal a turn. Even more interesting was the declining intraday CBOE Volatility Index (VIX) when the Dow was off 100 points Friday.
A June volatility peak at 28 and fall lows at 13 put the halfway resistance at the 20 level. The high Friday at 19.40 has backed back down to under 18 today Monday to begin a new week. The S&P support at 1363 is the critical level to watch the bottom to hold.
Across the Pond Perspective
Watch Sky News London video below for post election questions and some answers...
Euro Backoff Buy
Though the euro action has not formed the bullish base seen in other markets, buying long term options allows less precise prognosticating. The lowest volatility since 2008 makes outright euro call options a good value on the recent decline. The March 130 call was purchased at $1625 Friday.
Euro prices sat above 130 just October 31st to provide perspective on the close to the money option that has four months for development.
The 132 level was the original breakdown area back in May as well as the September resistance cap after the currency turn. The current 127ish level is the halfway support to lean on as retracement of the bull rally from 121. A breakout above 132 projects a 136 target.
The Cure for High Prices are Higher Prices
CNN MONEY - "U.S. to become biggest oil producer - IEA"
The United States will overtake Saudi Arabia to become the world's biggest oil producer before 2020, and will be energy independent 10 years later, according to a new forecast by the International Energy Agency.
The recent resurgence in oil and gas production, and efforts to make the transport sector more efficient, are radically reshaping the nation's energy market, reported Paris-based IEA in its World Energy Outlook.
North America would become a net exporter of oil around 2030, the global organization said Monday.
"The United States, which currently imports around 20% of its total energy needs, becomes all but self sufficient in net terms -- a dramatic reversal of the trend seen in most other energy importing countries," the IEA stated.
The U.S. is experiencing an oil boom, in large part thanks to high world prices and new technologies, including hydraulic fracking, that have made the extraction of oil and gas from shale rock commercially viable.
From 2008 to 2011, U.S. crude oil production jumped 14%, according to the U.S. Energy Information Administration. Natural gas production is up by about 10% over the same period.
Related: the facts about oil and gas under Obama
According to the IEA, U.S. natural gas prices will rise to $5.5 per million British thermal units (MBtu) in 2020, from around $3.5 per MBtu this year, driven by rising domestic demand rather than a forecast increase in exports to Asia and other markets.
"In our projections, 93% of the natural gas produced in the United States remains available to meet domestic demand," it said. "Exports on the scale that we project would not play a large role in domestic price setting."
North America's new role in the world energy markets will accelerate a change in the direction of international oil trade toward Asia, and underscore the importance of securing supply routes from the Middle East to China and India.
Current Portfolio Positions:
March 2013 Euro Currency (6EH13) 130 calls at 130 points ($1,625): The Euro declined to the lowest point since early September back down to the 127 level and the halfway support of the July to Sep move. The March option expires March 8th with nearly four full months for development. The first upside target is 128 then 132 resistance. The position sits at 130 points ($1,625), which represents unchanged. HOLD.
April 2013 Gold (GCJ13) 1775/1825 call spreads at 15.5 points ($1,550): The $1700 pivot was eclipsed last week to confirm a price bottom. The August Gold rally above $1600 projected $1700 that is now the key level to watch. A move above $1750 halfway resistance of this last decline sets up another attack on $1800. the spread sits at 16 points ($1,600), which represents a 3% gain. HOLD.
May 2013 Wheat (WK13) 870/970 call spreads at 32 cents ($1,600): Extreme highs Friday at $9.16 for the front month December Wheat marked a near term top. Prices closed lower with $8.80 support to watch. A breakout above the $8.50 to $9.50 range targets a $1 rally to $10.50 and put this spread fully ITM. The spread sits at 42 cents ($2,100), which represents a 31% gain. HOLD.
March 2013 Australian Dollar (ADH13) 104.5 calls at 160 points ($1,600): New month long highs peaked above 104.50 last week. The 104 resistance from September 28th is Key. The pullback to 102.50 support was a pause in the uptrend rally from 96 to 106. A push above 104.5 targets the 106 highs. The March option expires March 8th with nearly four full months for development. The first upside target is 106 with 110 after that. Support sits at the July breakout rally origin at 101.50. The position sits at 140 points ($1,400), which represents a 13% loss. HOLD.
February 2013 Crude Oil (CLG13) 100/105 call spreads at 160 points ($1,600): A sideways base at $84 for the last three weeks suggests a near tem bottom. Highs last week at $89 were voided by new lower lows. A move back into the six week channel from $88-$92 is constructive and projects a breakout to $96. The spread sits at 45 points ($450), which represents a 72% loss. HOLD.
December 2012 Gold (GCZ12) 1625/1675 call spreads at 16 points ($1,600): Sold last week at $4500 for an 180% profit. Entered into April spread for continued bullish positioning.
December 2012 30 Year US Treasury Bond (USZ12) 150/145 put spreads at 1 and 30 points ($1,468.75): Sold half the positions at $3000 9/14 to reduce overall trade risk to ZERO. New 4 month lows in September at 144 15 reversed higher to 150 in a few short weeks. Current price at 152 renewed bull trend. The 30-year yield sits right at 2.75. The spread sits at 12 points ($375), which represents pure position $375 profit after selling half at a 100% DOUBLE. HOLD.
December 2012 Silver (SIZ12) 33/34.5 call spreads at 29 points ($1,450): Silver gained over 5 percent last week to push above the $32 pivot once again. Six month highs were made Oct 1 above $35 before the downturn to below $31 last Monday. The move above $33 halfway resistance suggests another run to the September peaks. The spread sits at 35 cents ($1,750), which represents a 21% gain. HOLD.
It ALL Comes Back To Commodities!
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Alan Knuckman can be followed on Twitter at twitter.com/AlBk2Comodities .