December Gold is up $4.40 per ounce this morning at $996.00 as I write. The enclosed chart shows that gold has been pulling back on profit taking over the last few days within the context of a major secular bull market. The directional movement indicators are still bullish but converging. Followers of this letter should be long one December Gold ($1100 strike) call option from $16.30 and short 2 December Gold ($1180 strike) call options from $8.40. Last Friday, I recommended to try to liquidate the two short $1180 call options at $2.30, but were unsuccessful. I recommend reentering that order again today, although it won’t get filled unless gold has another selloff. But just in case, I want to cover those short options.

Also, followers of this letter should be long one February Gold ($1270 strike) call option from $15.20. On Friday, I recommended liquidating the short two February Gold ($1400 strike) call options at $3.00, and that order was filled! That means that we made a profit of $8.10 per ounce (the original sale price of that option) minus $3.00 (the price we covered at on Friday) for a gain of $5.10 per ounce on two options which equals $10.20 per ounce. So, our remaining $1270 call options cost basis is now $15.20 – $10.20 = $5.00 per ounce. That means that we now own a February Gold ($1270 strike) call option for a cost basis of $5.00 per ounce free and clear and with all the unlimited upside potential. So if I am right about where Gold is going over the next several months, then this has the potential to be a big trade. We shall see.

If I see more spots in which to add on to our gold trade on the long side, I will. Stay tuned.

Sep. 28, 2009
David Hall

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The December Dollar Index is up 3 ticks at 77.045 this morning as I write. The enclosed chart shows that the dollar has been attempting a short covering rally over the last few days. The directional movement indicators are still bearish but have converged to the point that it won’t take a huge rally from here to turn the indicators to the bull side. I believe that the best thing to do right now is to watch from the sidelines. I am not getting any pattern looks that show me anything yet. So, until proven otherwise, this is just a dollar bounce in a longer term bear market.

Sep. 28, 2009
David Hall

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I am beginning to cover December Gold today. December Gold is down $10.00 per ounce at $988.80 this morning as I write. The enclosed chart shows that a major correction is underway in the gold market coinciding with yesterday’s sharp rally in the dollar. If you look at the overall angle of the uptrend, December gold could fall back towards the $950.00 area and still hold the uptrend line coming up from the April lows. The directional movement indicators are bullish but narrowing and the ADX line is falling, but not necessarily from an extreme level. So, I would classify this break in gold as a sharp correction that we need to watch carefully for places to add to our bullish outlook.

I like the positions that we have currently in the gold market. The long October futures contract was liquidated last night because our short call option was exercised and the October credit spread expired worthless, thus allowing us to keep the small credit. Now, the only positions that we have on currently is the December ($1100/$1180 strike) ratio call spread that was entered at a 50 cent per ounce credit, or $50 gross. We are also long the February ($1270/$1400 strike) ratio call spread from a credit of $1.00 per ounce, or $100 gross. So with these positions, as gold drops in price, we aren’t harmed in the least, and if gold finishes below the lower strike prices listed above by expiration, then we would keep the credits. If, on the other hand, gold has a major rally back into the ranges of the above listed strike prices, we have the possibility to profit greatly. Now, on the assumption that we continue to have a long term major bullish posture in the gold market, it may be smart and possibly much more profitable to buy back the short call options that we have while gold is on the down swing. This will enable us to lock in a profit on that part of the trade and leave us with pure long call options in gold at a lower cost basis and with much more power. Let’s review this idea right now, as I may make a recommendation.

Specifically, followers of this letter should be long one December Gold ($1100 strike) call from about $16.30 and short 2 December Gold ($1180 strike) call options from $8.40. If you do the math, we did the trade for a credit of 50 cents per ounce. ($16.30-($8.40*2))= +.50. Right now, the short $1180 strike call option is going for about $3.00. So, we could buy back those short call options at $3.00 which we previously sold for $8.40 for a gain of $5.40 on two options. That is really $5.40 gain times two which equals a total of $10.80 per ounce gain on one contract. The way I look at that is that I am just lowering my cost basis in the long December ($1100 strike) call by $10.80. So, the original cost basis in that option of $16.30 has been lowered to $5.50 after taking off the $10.80. So, if we do this trade, we will be left with one long December Gold call option from a ($1100 strike) price for a cost of $5.50 per ounce, or $550 gross. Now, we would be left with a call option that can only lose $550 gross, but have ALL the upside if gold rises above $1100 per ounce by the expiration date late in November.

So, the choice is to do nothing, and if gold doesn’t reach at least $1100 by option expiration in November, we keep the initial $50 gross credit and have the chance to make up to $8000 gross if prices rally to $1180, with the risk that if prices rally to $1180 quickly or pass that level, we could be exposed to loss. OR, we could cover the short call, risk $550 gross maximum, and have all the upside potential. It all boils down to how high you think gold can rally by late November. If you don’t believe that a rally to $1180 is possible or that the market may struggle to get there by late November, then don’t do anything. If you think that prices for gold could break out over that level by November, then it is important that you cover the short calls soon. My opinion is that this correction in gold could last a bit longer and that there is no great hurry in covering the short calls yet, but if those calls can fall back to the lower $2.00 area in the next few days, then I would want to cover. So for today only, I recommend trying to cover those 2 short December Gold ($1180 strike) call options at $2.30. If we don’t get filled on this trade today, I will look and see what it looks like on Monday and probably change the price. Stay tuned.

The same goes for the February spread. Specifically, followers of this letter should be long one February Gold ($1270 strike) call option from $15.20 and short 2 February Gold ($1400 strike) call options from $8.10 each for a total gross credit of $100 per ounce, or $100. ($15.20 – ($8.10 * 2)) = $1.00. If we could cover the 2 short calls at about $3.00, that would result in a profit on the short calls of $8.10 – $3.00 = $5.10 times 2 = $10.20 gross profit per ounce. Take that $10.20 away from what we paid for the one long $1270 call that we paid $15.20 for and you get a new cost basis of $5.00 per ounce or $500 gross total risk on the trade. That means that at expiration, if prices don’t reach at least $1270 per ounce, the option will expire worthless and we would lose the $500, but if gold prices go over $1270 before expiration, we would enjoy all the upside potential. I am still a believer that over the next six months, gold should rally at least $300 per ounce, so if you agree with me, then this is a smart thing to do right now as gold is under pressure. If you aren’t that bullish, then you should keep the trade on as is. So, I recommend covering the 2 short February Gold ($1400 strike) call options at $3.00 per ounce for today. I may adjust this price on Monday.

Sep. 24, 2009
David Hall

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October Gold is up $2.70 per ounce at $1015.80 this morning as I write. The enclosed chart shows that gold has been upwardly consolidating over the last couple of weeks, the bottom side of the consolidation is marked by the up trending red line. This is normally a continuation pattern before prices go higher. The directional movement indicators are bullish and even the ADX line appears to be flattening and trying to turn up once again. The turning up of the ADX line should coincide with a resumption of the uptrend momentum in gold.

Today is the option expiration date for October Gold. I outlined in yesterday what the results of our October positions will be depending on where October Gold closes today. Followers of this letter that hold the October Gold ($1045/$1060 strike) ratio call spread, should attempt to liquidate at a $3.00 premium today. If the October contract doesn’t reach $1045 today, then that spread will expire worthless and we will keep the $50 credit earned when we entered the trade.

I will begin covering the December contract tomorrow.

Sep. 24, 2009
David Hall

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October Gold is down $2.20 per ounce at $1012.20 this morning as I write. Gold seems to be sticking with following the opposite of what the dollar does. Yesterday, the dollar was sharply lower and gold was sharply higher. Today the dollar is mixed as well as gold. The enclosed chart shows that gold is in a bull market and, if you remember the look of the longer term weekly chart, has the potential to blow out in here somewhere. My projections are for gold to rally at least $300 per ounce over the next six months or less. To me, a weekly close below the $940 area would ruin the inverted head and shoulders pattern’s bullish outlook.

Followers of this letter have ratio call spreads in gold in the December and February delivery months that are far off. So, since the October gold options expire tomorrow, I will focus on those positions today.

In the October contract, you should be long one October Gold futures contract from $964.00, short one October Gold ($960 strike) call option from $18.50 and long one October Gold ($930 strike) put option from $17.00. If gold closes over $960 tomorrow which seems very likely, then the short $960 call option will be exercised and we will be short one October Gold form the strike price of $960. That sale at $960 will offset with our long position at $964 for a $4.00 per ounce loss. We will get to keep the $18.50 call premium, and lose the $17.00 put premium. The overall result will be a loss of $250 gross. Remember, this $250 loss is the overall result of the past short position in October Gold a month or so ago that would have been a $1400 loss until I flipped to the long covered call write trade we are finishing with here. If you have followed all my regular gold trade recommendations since I began covering gold in this letter in October of 2008, you would be several thousands of dollars ahead right now. Believe it or not, I keep a copy of every single letter I have written since then on my computer files.

The other piece is that we are long one October Gold ($1045 strike) call option and short 2 October Gold ($1060 strike) call options from a credit of 50 cents per ounce or $50 gross. In this case, if October Gold closes below $1045, then these call options will expire worthless and we will keep the $50. If gold closed over $1045 and less than $1075, we will make somewhere between $100 and $1500 depending on where it is inside that range, with $1060 being the most profitable finish. Above, $1075, we would lose $100 for every dollar per ounce gold is above that level, which seems very unlikely right now. For today, just as yesterday, if gold rallies, I want to try to liquidate that call ratio spread for a $5.00 credit if possible. Gold is probably going to have to rally about $20 for that to be possible.

Otherwise, for the rest of the positions, we want to keep the bullish bias. I will begin covering the December Gold contract on Friday after the October options expire.

Sep. 23, 2009
David Hall

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Overnight, December Corn was up 3 ½ cents at $3.19 ½ probably because of the weaker dollar. The weekly crop progress report yesterday showed that Corn in 80% dented (kernels hardened) vs. 93% normally, and 21% matured vs. 55% normally. So the report shows that corn is still behind schedule in maturing but beginning to increase rapidly, suggesting that a frost could do some damage. The problem is that there is no widespread frost forecast over the next two weeks. In two weeks, the corn crop will largely be fully matured. Accuweather, this morning, only shows the Chicago areas temperature lows getting below 40 degrees only once between now and October 6th, and for most of the period, the daily temperature highs will range between the upper 60’s to the lower 80’s. Low 80’s for Chicago is very warm for this time of the year. The corn crop looks like it is headed or a banner year of production.

Followers of this letter should be long one December Corn from $3.38 ¼ and short one December Corn ($3.40 strike) call option from 19 3/8 cents. Believe it or not, with all the selling that has happened lately in corn, the directional movement indicators haven’t crossed to the bear side just yet. Today, they could. Stay tuned, as I may wish to liquidate this trade this morning. I will wait for the market to open in 30 minutes.

Sep. 22, 2009
David Hall

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October Gold is up $13.50 per ounce this morning at $1017.40 just as the dollar is dropping sharply. The enclosed chart shows that gold may be resuming its uptrend and that new contract highs may happen very soon. Remember that the weekly chart suggests that gold is on the way to something over $1300 per ounce over the next several months. As you know, followers of this letter should be long a few different ratio call spreads. The October Gold ratio call spreads are the ones we have to watch carefully between now and Thursday’s option expiration. We are long one October Gold ($1045 strike) call and short 2 October Gold ($1060 strike) call options at a 50 cent credit. If October Gold reaches up to and above the $1045 level, then I will be putting out some liquidation orders. Specifically to sell the ratio call spread for some sort of credit depending on where the price is. I recommend that for today only, if you can liquidate the October ratio call spread listed above for a credit of $5.00, then let’s take it. It is nowhere near there right now, but you never know if gold will break out today or not, so we will let the order dangle out there just in case. Just for today only.

Sep. 22, 2009
David Hall

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Overnight, December Corn was down 4 cents at $3.14 per bushel. The enclosed chart shows that after last week’s near limit up day on forecasts for a freeze in the Midwest for this week, completely and immediately reversed and gave back the entire gain as forecasters abruptly change the forecasts back to warmer weather. Accuweather shows that the temperature for the Chicago area will trend lower over the next two weeks but no temperatures to or below 32 degrees are forecast. In the mean time, the daily highs range mostly from the upper 60’s to low 80’s. So, now it appears that the odds favor that the corn crop will be gigantic and not have any major problems getting fully matured.

The directional movement indicators, believe it or not, are still bullish, but barely. They may cross bearish with a lower close today. The question is, if corn does come in with a large crop, how low do prices have to go to discount this fact? I don’t know the answer to that but I do know that in the long run the world population continues to grow demanding more food, and export demand with the overall weak dollar seems to be good. Technically, the next major support level for corn is in the $2.90 area. Below, $2.90, then the next support is in the low $2.70’s, then $2.50. Where will supply and demand match up? Will the weather forecasters surprise us with another freeze forecast? Either way, corn is getting closer and closer to maturity where it won’t matter soon.

As of Friday, producers should be hedged about 75% of their production with either short futures contracts or put options or put option spreads.

Followers of this letter should be long one December Corn from $$3.38 ¼ and short one December Corn ($3.40 strike) call option from 19 3/8 cents. I may recommend liquidating this trade for a loss later if prices don’t rebound much today. Stay tuned.

Sep. 21, 2009
David Hall

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October Gold is down $10.90 per ounce this morning at $998.50 as I write. The strong dollar today is bringing in the weakness in Gold. The enclosed chart shows that the longer term trend for gold is bullish and that this is most likely a correction to buy gold. The directional movement indicators are bullish but narrowing and the ADX line is beginning to roll over, which is a negative near term sign. This coming Thursday is the option expiration day for October Gold options. Followers of this letter should be long one October Gold futures contract from 964.00, short one October Gold ($960 strike) call option from $18.50, long one October ($930 strike) put option from $17.00, and also long one October ($1045 strike) call option and short 2 October ($1060 strike) from a credit of 50 cents per ounce or $50. So, at Thursday’s close, if October gold finishes above $960 and below $1045, then the short ($960) call will be exercised which will give us a short position in gold at $960 that will offset for a liquidation with our existing long position at $964.00. We will keep the $18.50 premium on the short call, and also keep the 50 cent premium from the ratio call spread and lose the premium from the ($930) put option that we own. The best thing to happen by Thursday’s close for us, would be for October Gold to rally to near $1060.

Outside of our October positions, we do have some ratio call spreads in the December and February delivery months that are looking for bigger rallies in gold.

Sep. 21, 2009
David Hall

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The December Mini S&P Index is up 4.25 points at 1067.00 this morning as I write. The enclosed chart shows a similar pattern as what is happening in many other trending markets, and that is that almost every day the S&P index falls to or somewhat below the rising 5 day exponential moving average and comes back and closes above by the close. This king of action is very typical in strong bull or bear trending markets. The 5 day moving average will mirror the move very closely. That doesn’t mean that a close below the 5 day is a trend breaker, but it would signal at least some sort of pause at least in the trend. (An early warning sign of potential trouble). The directional movement indicators continue to be bullish and the ADX line is rising. I am currently flat in the S&P on the futures side. You should stay bullish in your own stock trading portfolios and use tactics like covered call writing, put buying or some profit taking if you are nervous. There is still a sense that large institutional traders are moving more money away from low interest paying money market funds over to stocks, so that they can show at least some participation in this 6 month uptrend in prices, on their 3rd quarter end investment reports. The third quarter ends at the end of September. The old sayings of “don’t fight the tape” and “the market is rising the wall of worry” all come to mind in this environment.

Sep. 18, 2009
David Hall

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