Short Covering or More in Gold and Silver
Thursday, June 05, 2008
by Ira Epstein of Ira Epstein & Company
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6-5-2008 The link to my "Mid-Day Videos" and all our other new videos is below. http://www.iepstein.com/videos_start.aspx Many new daily recorded videos are now located on our website. These videos cover: - Daily Opening Calls
- Intraday Market Commentaries
- Day's End Wrap Up with Point and Counterpoint Conversations
- Interviews with market technicians, floor traders and industry experts
The Metal Markets I find it rather fascinating to listen to market commentators try to create a "Dollar" event, that simply isn't occurring. If you listen to CNBC as I do, I would like to know how gains or losses of 30 points in the Dollar are breakouts. They aren't. As I stated in last week's letter, the Dollar is caught between 74.50 and 71.05. The bias is to the upside both on the charts and fundamentally speaking. Inflation is a large issue both here and abroad is now taking center stage with Central Bankers around the globe. To me this means higher interest rates will be forthcoming. The value of the Dollar will be in part determined by the course of the Federal Reserve in coming weeks. The ECB came out today with very hawkish comments, meaning it is very likely that the next move out the ECB will likely be a rate increase unless inflation pressure subsides. In order for the Dollar to mount a sustainable rally, the prospect of higher interest rates in the US has to take center stage, which is in line with what Chairman Bernanke spoke about earlier this week. The Fed is still dealing with issues caused by the Subprime mess which has created a credit crisis. Should Moody's lower the ratings of two bond insurers, the Dollar will most likely come under pressure. CFTC Pressure The CFTC (the Commodity Futures Trading Commission) is looking into the role of index funds, how large they trade and their impact on the markets they trade in. This has caused heavy liquidation in a number of markets, including energies and metals since the goal of the probe seems to be to see if index funds artificially caused a rise in those commodity markets. Should the CFTC determine that position limits or margins need to be altered for index funds, some market analysts believe such a move would stop prices from moving higher. I do not agree with that analysis. Rather, I believe the system in place is working just fine. Tweaks to more add more transparency on what the funds are doing might be welcome, but causing index funds to hamper what they trade will in my opinion simply give them reason to move their operations overseas, away from CFTC control, where they will find another way to do whatever they do. There is precedent for this as we've seen this happen before. My point here is that I do not believe that index funds are "the" cause of the run up in energy and other commodity market prices. Rather, I believe Supply and Demand to be the cause. Tampering with what index funds can and cannot do in terms of "size" is in my opinion not the answer since what they do creates liquidity and opportunities for hedgers, which in large part is what the futures markets were created for in the first place. Oil, the Dollar and Metals The liquidation caused by the CFTC probe is in my opinion the main reason for the break in Crude Oil and it's by products. Demand for energy remains robust. Weather patterns are now becoming a concern. The consumer is still spending but is showing that he can be flexible and cut back on driving and on what he drives. Without doubt, the price break in energy added to the weakness in gold and silver. However, from a historical perspective, both normally break at this time of year, so the catalyst for the break is not as important to me as is what the seasonality of the market is. It is down as shown on the Seasonal Gold chart displayed below, provided to us by the Moore Research Center...http://www.mrci.com/ The Seasonal Chart below shows what Gold has done over both a 15 and 34-year time span in term of price momentum. I use the comparison to view and compare longer-term historical data versus shorter-term, more recent data.
Gold is not rallying yet. It often does so at the beginning of June and rallies through mid month, only to fall back into early July where it often bottoms out and rallies into year end. The key here is that I think we are coming to the end of the break in Gold and will soon be buying either futures or Gold Call Options. August Gold Let's look at a Daily Chart of August Gold. 
Here's what I wrote last week: "The issue now is one of a lack of fundamental support for gold with the Bears in control for the near term. I expect rallies back up to the 18-Day Moving Average of Closes, near 897.5 to be short sale opportunities with the Bollinger Band Bottom to be the initial downside target." As you can see on the above chart, the rally went to the 18-Day Moving Average of Closes, the "red" line and has fallen back. My expectation was for prices to fall back to the Bollinger Band, but I am now concerned that is a bit too aggressive a wish. If you are short, I would cover right now. Here's why. Stochastics are oversold with a reading of 22.01. Crude Oil has toppled and is now beginning to act as though it has gotten oversold. Silver acts like it has bottomed against the 16.50 level and the US Dollar came under selling pressure today when the ECB made it known that instead of a break in interest rates, they may increase them to fight inflation, taking away the interest rate differential play that many had hoped for to prop up the Dollar. Even if the Fed were to raise interest rates, if the ECB does so the Dollar at best is at status quo. 
Last week I was hoping the market would rally and fall back to the $860 level. It rallied right up to the projected resistance point and broke hard, falling within $7 of my downside target. That is close enough for me. Cover your short positions now if you followed my trade idea. I am not yet bullish. Rather outside influences and the oversold condition of Gold make it prudent to cover short positions. Rallies back up to the 18-Day Moving Average of Closes, currently at 898.9 should prove difficult to hold. My thought is that the market needs more time to go by to get past the June time frame, where prices are often weak. Today's $5 rally in Crude Oil and the rally in its by-products should add support to the Metal Markets late today and tomorrow.
I receive a lot of questions on how I use Stochastics in my price analysis. I teach how I use them in my trading course called The Futures Academy. I've created a short video that explains my teaching style. In the video I speak about The Futures Academy and the indicators I use in my trade analysis. You can click on the image below if you are online or simply type the link address below the video image into your web browser. 
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Silver is acting stronger than Gold. However, like Gold, Silver often breaks into late June. Look below at the Seasonal Tendency of Silver. 
Historically speaking according to the Seasonal Silver Chart, Silver prices often peak at the middle of May and break down until the end of June. A retest of lows often occurs at the end of August and prices risk into the end of the year. July Silver Silver followed Gold and the Energy Markets down last week. However, unlike Gold, today Silver made a stand against the multi-tested zone of $16.46, shown as a light blue thick on the chart below. 
Unlike Gold, Silver until today did not get back up to the 18-Day Moving Average of Closes. Rather, it went sideways from $17.00 down to $16.46 and broke out of that trading range today to the upside, where prices stalled against the 18-Day Moving Average of Closes, shown on this chart at $17.198. Silver is no longer oversold. It has been since my report last week and only today did it begin to correct this condition. The trend in Silver is at this point in time, "neutral". I say this because of the chart pattern. Today's rally caused a "higher-high" to be made. By this I mean that the last high at 16.95 was taken out today. An Uptrend is comprised of Higher-Highs and Higher Lows. Today began the Higher-High part of the Uptrend definition. It remains to be seen how a break low is handed. As you can see prices are still under the 18-Day Moving Average of Closes. Yes prices rallied up to this number, but that's about all it has done so far. I do not see Silver as being a buy just yet but one cannot be Bearish as long as the chart pattern is one of Higher-Highs. I am simply neutral at this point in time and prefer to see how Silver handles its seasonal tendency, which is to stay weak in June. 
I think by year end Silver prices will be sharply higher. The question is one of getting long as best we can. Should prices drop and close under 16.46, a "Head and Shoulder" chart formation will have occurred, which would be very bearish for Silver prices. Given the seasonal weakness Silver often displays in June, I am sitting on the sidelines until I see more proof that Silver has a base from which to work higher. I see no reason to go short given the current chart formation of Higher-Highs, but would consider doing so if prices got back under today's low of $16.505.
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Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from Ira Epstein & Company or Shatkin Arbor, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are no indication of future
Recent articles from this author
- Another Buying Opportunity is looming around the corner - Thursday, August 28, 2008
- Is the break in Gold and Silver a "Buying Opportunity"? - Thursday, July 17, 2008
- Energy....the New Currency? - Thursday, July 03, 2008
- Time to Buy Gold Call Option Spreads - Thursday, June 26, 2008
- Short Covering or More in Gold and Silver - Thursday, June 05, 2008
About the author
In 1984 Ira Epstein & Company was founded by Ira Epstein. Ira was a highly successful retail futures broker, having mastered TV to showcase his talents, which in turned helped Ira develop and create a very large customer following. Many of you may remember his TV show "Stocks, Options and Futures", which was one of the most popular Finance Television shows on what was then called The Financial News Network, which is now known as CNBC. Ira showcased his talents in many other TV markets as well, including Los Angeles where he was a regular guest on KWHY-TV as well as WCIU-TV in Chicago, where he was on the air for nearly 20 years. Ira Epstein...the man behind Ira Epstein & Company Ira's background...written by Ira I was born in Chicago in the mid-forties. A War Baby. Graduated High School in Park Ridge, Ill and went on to college. I obtained my Bachelor of Science Degree from Arizona State University, majoring in Marketing and Economics. I completed courses toward a Masters Degree and attended John Marshall Law School in Chicago. When in Law School, I needed a part-time job. While my family helped with my schooling costs, they simply could not carry the continuing financial burden of Law School. I needed a job. Ira discovers the Futures Market One day I found myself looking for a job on the Law School's Bulletin Board. I noticed a job offer for a "Runner". I had no idea what that meant, but I was thin and in good shape. Ready to run. Few people outside of Chicago knew at that time, 1969, knew much about the Futures Markets, including me. I applied for the job and was hired at G.H. Miller & Company. They were a clearing firm at the Chicago Mercantile Exchange(CME), specializing in the trading of Eggs and Broilers...chickens. Turns out they were pretty good at what they did. So I began running. Orders were phoned in by brokers to Miller's trade desk on the exchange floor. My first job was to "run" the order into the appropriate filling broker. I had a knack for it, but have to tell you that running wasn't really allowed. Just fast walking. Very fast walking. I also became the designated employee to take Polaroid Pictures of the chalk boards. No computer boards on the exchange back then. Rather, the exchange had employees who used chalk to write on blackboards the price a trade took place at in the order they were called up to the chalkboard writer. It looked very very chaotic, but it worked. As the blackboard filled with prices, those boards were handed down to ground staff who took Polaroid photo's of them to both track official pricing and provide member firms with trade records. The boards were than washed and put back up. My job was to take pictures of the boards or photo's of the pictures themselves. Fun times. All the while I was still in Law School. School began late in the afternoon and the markets back than ended at 1:00 P.M. I was burning the candle from both ends, studying hard, writing legal brief and whatever. Who cared. I was young and eager. I found myself liking the market. Really liking it. I was fortunate to find that making contacts with "important people' in the business was easy on the exchange floor. In fact, many of the owners of trading companies you know of quickly became influential in my life. Keep in mind that basically I had "nothing", and here I was talking and soon socializing daily with multimillionaires. I remember making $35 a week gross, owning 6 shirts and 3 pair of pants. all specific to work. My boss, Gil Miller continually told me I was being overpaid given the education I was getting. It was mind boggling, but true. Promotion and more... In a very short time promotions began. First to Order Taker and than to running part of the trade desk. I became very good at it and was assigned to one of Gil Miller's largest clients. His name was Ray E.Friedman. I worked as his personal trade deskman. Ray later sent his son to Chicago to learn the business. I shared a small office with his son, Tom Dittmer for quite a while. Today you know that company as Refco. I found Law School less and less appealing. I'd made a lot of friends and acquaintances early on at the exchange. I was never bashful and constantly asked about the markets. I needed to learn and who better from than the pro's. I was surprised at how helpful some were. Leo Melamed, the founder of the IMM division of the Chicago Mercantile Exchange and Barry Lind of Lind-Waldock offered solid advice early in my career. They were always there, answering all my questions. I watched these men, what they did, how they did it and followed my closest mentor, Gil Miller into the unknown. My parents at that time were convinced Futures Brokers were professional gamblers. The big event... O.K. Here I am watching everyone getting rich but me. It looked so simple. I had to try it. After all, I was on the trading floor, in the thick of things and couldn't miss. I had a few months of learning under my belt and "knew" how to do it. I won't bore you with all the details. You already know how it turned out. My family gave me some funds they really couldn't afford to lose. Market went against me, I had no stop, the market was of course "wrong", but I had lost more than I had in the trading account. All in but a few hours. Quite a feat. Had no way to pay it back. In panic I even resorted to calling my college roommate, pleading for help. His dad said he'd come to my aid...partially, but couldn't cover the whole loss. After exhausting all my resources, which didn't take very long, I came to the dreaded realization that by the morning my goose was cooked. I could not cover the debit and was in deep trouble. I couldn't let that happen. Late in the day, that tragic day, I walked into Mr. Miller's office and asked to speak with him. We sat down and he began talking about my progress. I didn't know if he knew about my debit or not. I then, practically choking to death, broke the news to him about the debit, hoping for some mercy. His reaction surprised me. He got up and asked me to follow him. I did. He showed me his personal shower, his sofa, stereo equipment and asked how I liked his office. I of course told him I "loved it" and was so thankful for the opportunity he had given me. He smiled, went to either his drawer or a closet, I forget which, brought out an old hotplate and handed it to me. I must've thought he was giving it all to me. Well, he said something like, "I'm glad you love it. You now live here. You can use the shower and sleep on the sofa. Be out when I get to work. Now go to work and pay me back". I ended up living in that office for a bit of time. I do mean living...not just working. One of the best times of my life. By the way, looking back on it, I know he knew before I ever walked into his office, about the debit. Did I say I also got a raise? Maybe he liked how I handled myself in terms of being honest and addressing the situation head on... or maybe he knew I couldn't afford food after my trading fiasco. I quit Law School. Had to. Didn't have the funds to continue, owed too many people money and frankly found something I had really had a passion for. I turned my attention full time to the markets. I registered and became a licensed broker. Back then there were no exams to become a broker. No studying. You simply signed up at the front desk of the exchange, listing your name, social security number and an address on a white legal pad. You were a broker. How things have changed. The rest of the story... I worked for several years both on the trading floor and up in the office as a registered broker. I discovered I had a knack for marketing, but wasn't the best trader. I knew enough to go looking for help. I learned a lot from the "old-timers" in the building, and there were plenty of them. They never seemed to go home. I remember spending literally hundreds of hours in Barry Lind's offices. I found traders everywhere. They saw I was interested and many took the time out to teach me trading disciplines. I wish there were space to name them all. In any case, I think of them often. Eventually my turn came. I had a membership at the Chicago Mercantile Exchange. My dream had come true. Or had it? The rest of the story... I vividly recollect my early dreams. I, probably like many others before me envisioned my life in the trading pits as something very different than it turned out to be. Being a runner, phone clerk and customer's broker was one thing. Trading in the pits another. It didn't take long for me to discover I liked trading outside of the pit way better than in it. The screaming and intimidation when I was trying to buy or sell a few contracts, while watching the multimillionaire trader next to me offering hundreds of contracts on the other side of the trade can shake the strongest of wills. Needless to say, I didn't stay long in the pits. As it turned out, that was a smart move for me. Skipping forward.... For 15-years I honed my talents at G.H. Miller & Company. I developed strong marketing and trading talents, which enabled me to develop and build a large retail client base. My business eventually grew too large for G.H. Miller & Company to handle. When that happened it was Gil Miller who setup my move to Shatkin Trading, with partners Hank Shatkin and Pat Arbor. Pat was recently past Chairman of the Chicago Board of Trade and Hank is one of the most well known and liked traders at the CBOT, running a large floor trader operation. The rest is simply history and my other accomplishments...well there's been a lot. Ira Epstein & Company continues to flourish and grow. What makes us unique is how quickly we adapt to change and embrace technology in the market place. I can't emphasize enough the word "we". The staff at Ira Epstein & Company is dedicated to our clients. Our staff realized that to survive, one has to evolve. We do just that. However, along this ever changing trip, we stay fixed on who we are and who we service. The Futures Academy Life has changed a lot since I began in this business. One of the things I notice is that because of technology, specifically the Internet, personal contact is lost. When I was trying to learn trading, I could knock on doors and speak with seasoned traders. That can't be done today. Most traders now have computers at home, making long hours at the office a thing of the past. There's a void that needs to be filled. Win or lose, you the client pay commissions to trade. I'd rather take the commission out of winning trades than add them to losing trades. I have no "Holy Grail". No get rich quick system. What I do have is a trading discipline that I believe in and that can be easily taught. Years ago I learned that most good traders are disciplined. They work off a checklist. That list can be written or innate. A few years back I co-authored a book called, "The Psychology of Smart Money". The premise was a comparison of professional traders versus amatures. We looked for differences in each group. What we found was profound... and obvious. The pro's had discipline. They worked at maintaining their discipline. The average trading client, the amature, had little or no discipline. Rather, they often just took "shots" in marketplace, to often because "someone told them something". Not the best laid plan. Many amatures just wanted some market "action". The list goes on and on. I hope this doesn't hit home. If it does, it's simple to change and yes, you can still have the "action". The Futures Academy teaches a simple 5 step approach to trading. You must have a computer and Internet connection. We teach over the Internet, using a "live virtual classroom" where you and your mentor work privately together. No need to worry if you miss a classroom. We work around your schedule. No matter what your profession in life is, the odds are someone was looking over your shoulder when you first began. It's rare that one becomes a plumber, hair stylist or whatever without first becoming a "Journey Man". As a Journey Man you had a supervisor. That supervisor looked over what you were doing, to be sure you were doing it properly. That's how you learned in school. Your teacher did not pass out books at the beginning of a semester and say I'll see you at "final exams". Rather, they went through the books with you. The books had chapters. An order to each chapter. That's how The Futures Academy teaches trading. Each step builds on the next. You should take a look into it if you want to learn a disciplined trading skill. In any case, you now know something about Ira Epstein & Company. You'll find that some things don't change. We'll work hard for your business. Good luck and good trading to you. Ira Epstein
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