Before we get down to the business of war, money and making a killing in general, we have a number of trades that require your attention.
We start with our December 1st initiative from a letter called Why Go To Hell in a Golden Hearse, wherein we urged you to sell the GLD March 109 CALL for $1.17.
Now, it goes without saying that we missed the bomb-blast higher in the precious metals that began just a few weeks after we entered the trade. So with just a week to go before expiry and the initiative in a losing position, we’ve got no choice – we’re rolling up and out.
We still believe the rise in gold was a flash in the pan (and we’ll show you why in a moment), so we’ve no problem buying the CALL back at its current $9.00 and selling the May 110 for $8.85. We recover $0.15 in that manner and prepare for further downside in gold.
Further downside?! What the sheet!?
That’s right, as the charts below show, gold bullion, silver bullion and the goldminers were hit with bearish engulfing patterns over the last week, all of which point to some serious selling in the immediate future.
Have a look –
What’s evident from the above overlay is that at different times in the last week, the three most important precious metals ETFs have been slammed with bearish engulfing patterns, days when the trade opened higher and closed lower than the previous day’s highs and lows.
Lest anyone scream ‘coincidence!’ – to which we would respond ‘phallux in the anux!’ – there’s little gainsaying the fact that this is a technical nightmare for the gold bulls.
Bearish engulfing patterns are reliable. One might have been prepared to write off one as a mere mote in the eye, but three are hard to ignore. There’s little more to be said. The enthusiasm was there. But the follow through wasn’t.
We’ll keep an eye on the sector and update you as to any changes in our outlook. For now it’s bearish.
Trade Number Two
We’re going to close our second trade today for a very nice profit. It was launched just a week ago in a letter called Spy vs. Spy, in which we urged you to make a trade in high yield.
There, we wrote as follows –
Junk is now as cheap as it has been at any time in the last decade… With spreads currently at 750 bps over Treasuries, the time is ripe to be a buyer of high yield. [W]e’re big proponents of the ‘Buy Wide, Sell Tight’ approach to the junk sector. And we’re confident spreads are as wide as they’re going to get for a while.
No sooner did we write those words than a little leprechaun appeared and goosed junk bonds nicely higher.
The original call was to buy the HYG June 79 CALL for $2.62 and sell the HYG June 81 PUT for $2.73. Total credit on the endeavor was $0.11, and here’s how it turned out.
The long 79 CALL is now trading for $3.55, while the short PUT goes for $2.05. Sell the former, buy back the latter and you come away with $1.61 (including the initial credit) on nothing down. Call it 973%.
And call it a day.
Trade Number Three
On the 15th of December we set a trade using Netflix (NSADAQ:NFLX). The letter was called The Great Wall Street Book of Revelations, and it went like this – we recommended you sell the at-the-money NFLX June 120 CALL for $20.12 and buy two out-of-the-money NFLX June 145 CALLs for $10.30 each. Total debit on the trade was $0.48.
And where’s it stand today?
Well, the charts show that Netflix is primed for a pop. So we believe it’s prudent to buy back the short CALL and leave the longs open.
Have a gander at the chart –
The large pennant (in red) is understood as a continuation pattern by chartists. The way we read it, the pennant formed as part of the retracement from the last high at 133, and should therefore send the stock back toward those highs as soon as the pennant is broken to the upside, which we foresee happening before the week is out.
But what if it breaks lower?
Anything is possible. And we don’t discount the possibility of the pennant morphing into something new, but we deem it highly unlikely.
- First, because the short term moving average is now ‘scooping’ price (in black), a development that almost always leads to price gains in the short term.
- Second, the move higher developed from a bounce off the long term moving average (green arrow), generally a sign that the decline has run its course and represents no more than a normal pullback in a longer term bullish move for the stock.
- Third, we note that the RSI indicator has ascended above its midway waterline, and that MACD is set to follow in the next day or so. This is a technically bullish development that should trigger significant buying as soon as it occurs (blue boxes).
Once the pennant is broken to the upside the volume and price gains will likely come quickly, which is why we urge you to act fast in buying back the 120 CALL. It now sells for $3.00.
Get it done, and leave the two 145s to ride.
This Week’s Barn Burner!
Our trade for this week is more and more Netflix. We like the setup so much, we’re going long CALLs and short PUTs to pay for them. Details are like this –
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Wall Street Elite recommends you act as stipulated above with regard to your GLD, HYG and NFLX positions. Also, buy the NFLX April 29th 98 CALL for $8.35 and sell the NFLX April 29th 98.50 PUT for $8.30 for a total of debit of $0.05.
With kind regards,
Hugh L. O’Haynew