FMX | Connect – www.fmxconnect.com - (Reported 4/5/2011)
Over the past 4 weeks we have said repeatedly that Gold has an excellent chance of a $75.00 to $150.00 rally from the area of 1410. We picked $1550 as our home run scenario. It is time for an update.
First our initial chart and prediction from Feb 24th:
“FmxConnect uses several proprietary indicators to predict volatility trends. One indicator, the TrendVol actually gives directional signals as well.
Simply stated, if this week closes above 1416, there is a high likelihood of a 75 to 175 move higher in gold over the next 2 months. Although if the indicator hits, we'd expect the move to happen in a more compressed time. The signal does not usually waste time letting you know if it is right or wrong.
The indicator combines Bollinger bands, implied volatility, skewness, and historical volatility to determine speed and direction of a potential move. The actual calculations involve using these indicators to create and proprietary oscillators.
Volatility breathes (i.e. Bollinger bands) and FMX Connect believes that Gold volatility is getting ready to exhale in a big way.“
Next James Turk’s assessment:
James Turk’s recent call for a hyperbolic move is 100% consistent with our trend-vol breakout, hyperbolic moves are in our words, volatility exhaling. This observation means that the gold price is rising at an accelerating rate, so there is in my view only one logical conclusion that can be made from this chart. Given that gold remains the world’s numéraire by which things are measured because it is money, the other so-called ‘money’ being measured in the above chart – namely, the US dollar – is losing purchasing power at an accelerating rate. In other words, we are rapidly approaching the hyperinflation of the US dollar. In fact, the below chart illustrates that it has already begun. The dollar’s hyperinflation will worsen if gold keeps climbing within the hyperbola on the chart.
We can’t be sure of his hyperinflationary stance. But let’s say his track record is pretty good.
Here is where we are now:
The bands do not lie. As long as the lower band moves away from the direction of the market and we continue to settle near or above the upper band, there is little to stop this market form going hyperbolic. We believe volatility is just starting to exhale.
Technical Observations
Rallies from here should extend quickly, as in gaps higher. If they do not, be cautious. A close under 1440 reverses the breakout. Pullbacks to 1447 should be bought aggressively with 1440 as the stop out area. Odds of taking out yesterdays high are in the 70% area according to GRI’s report last night. Our next target level is 1477. Remember Goldman called for 1480 in the Dec contract. We’re sure there will be some selling in that area.
Options Plays
We are an options data firm, and based on our data and market intel, we are comfortable with the following comments.
We believe that, as there were no good buys in options for the last 3 months, that there may be no good sales as this market is headed for gap territory. We could be in a blow off pattern (initial-breakaway-exhaustion gaps), which is all the more reason to express directional bias with options. This may end in washout, so we prefer options.
Front months: there will be opportunities to buy as two-way business will be there. Long liquidation should make for dips in vol. if you intend to buy a May straddle, buy half now and half when it gets slammed form some random sell order.
If you are a call buyer in June, the 1500 and 1550 will give you tight markets and two-way business. There are huge longs in the June 1600, so while that option may seem appealing, it could get slammed if the long liquidates
Recommendations:
· We like the 1510/ 1530 call spread in May for a cheap shot (around 2.00)
· The June 1500/ 1550 call spread at 9.00
· The June 1550 call
Back months: unpredictable but we believe most fresh directional plays will be expressed in Dec 11 and Feb 12. Therefore, selling will have to be by dealers and marketmakers, which means entry will have a lot of Vig. But it may be justified given the added time value.
We like the 1900/ 2000 call spread here in the 3.50 area (the Z 2000s are a big short in the ring and consequently that call spread trades cheaply). 100 of these spreads gives you the equivalent of 3 futures exposure but you will benefit if volatility expands as well.
We also like the Dec 1500/ 1600/ 1700 butterfly in the 1300 area. 100 of these give you a 5 futures equivalent exposure.
Please direct your comments and questions to support@fmxconnect.com
Disclaimer: The FMX|Connect staff may hold positions in commodities and commodity-related assets in their personal accounts.
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About FMX: FMX Connect is an information, data, and analytics portal for Commodities. The portal provides an all-in-one package including essential market data, independent third party research, industry news, and commodity trading tools. FMX Connect provides efficient, effective, and thorough data that bridges all aspects of commodities onto one screen. The Result; A user friendly application for hedge fund traders, OTC brokers, individual investors, and industry participants
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