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Last Monday’s equity sell off that started in Asia jolted the markets so we held off making our suggested gold seasonal trade. Now we return to try again with an update for not only last week’s silver suggestion, but two actual gold ideas as well. Then we have two trend continuation suggestions to consider. First, our brief market review.
Market Review S&P 500 Index (SPX) 1026.13. The pull back from the breakout above 950 now appears to have been completed as the SPX declined to a low of 978.51 last Monday. It then turned higher once again and by the end of the week broke out to another high above 1018 made on August 7th. For those who prefer to wait for the reversal of the breakout correction then the SPX is now at that point. E-mini S&P 500 Future (ESU9) 1025.25. The September futures contract declined last Monday and then reversed up to make a new high by the end of the week gaining 19.50 points, or 1.9%. Volume expanded along with the open interest, which is a requirement for a sustainable uptrend. We will not know Friday’s Breakout volume until Monday morning, but we speculate it was at least 2.5 million contracts and open interest made another new high both of which are necessary if the uptrend is going to continue. S&P 500 Index Implied Volatility (IVXM). After turning higher with the correction last Monday the volatility measures reversed and closed lower once again. Our Implied Volatility Index Mean declined .20 points to 21.42 while the VIX ended the week .74 higher at 26.01, but back below the 20-day moving average at 25.39. The September VIX futures, premium over cash declined from 16.6% to 9.4%, while the October declined just .9 to end the week at 20%. The Implied Volatility Mean Index of the VIX options declined substantially from 112.95 to 78.67, or 34.28 points. The previous Friday’s high VIX implied volatility accurately foretold last Monday’s market decline US Dollar Index (DX) 78.04. The dollar index declined .69 for the week, after rising .78 to 79.51 on Monday with the equity market decline as the negative correlation with equities returned. Then, as equities turned higher, the dollar declined once again and since we are now expecting equities to continue rising, the dollar outlook is once again negative. iShares Barclays 20+ Year Treasury Bond (TLT) 93.77. Long-term bonds as defined by the TLT appear to be in a fairly well defined channel between 90 and 95. On Friday, the index declined 1.97 from Thursday’s high at 95.87. The channel between 90 and 95 is potentially the basis of a trading plan. NYSE McClellan Summation Index 1302.42.  Our breadth measure after slowing in the prior week reversed this week with a decline of 75.76 points. We expect it will now turn higher once again as equities have broken out to the upside once again. If our advance decline measure fails to follow the equity indexes higher it will create a divergence that should be carefully watched. Baltic Capesize Index (BCI) 4030. Our long route dry-bulk shipping index declined 678 points or 14.4% for the week. This index is now back to the level it made last May, but nowhere near the 2000 level of last January. August is a slow period in the shipping industry, but if the BCI continues to decline in September it would be a concern as it could be indicating China’s raw material restocking has been completed as previously reported. The combination of lower equity prices in China and a continuing decline for the BCI in September would sound the alarm bells.
Strategy With a cautious eye on Hong Kong’s Hang Seng and Shanghai’s Composite equity indexes and the BCI describe above, we are still using the minimum upside measuring objective of at least 1233.29, for the SPX as defined by the large Head & Shoulders bottom with a time objective lasting until October. The previously noted resistance at 1,000 has now been overcome so the next resistance can be expected at 1,100. We suggest increasing long positions and favor stocks and ETF’s that have broken out with the broad market, but remain wary of those with potential double top formations. We have most likely seen as much correction in the material and commodity stocks as we are going to get for now, so new positions in this sector should be considered along with others. We still expect to see higher market implied volatility going into the fall, so we suggest using strategies with long volatility or Vega. The 20% VIX futures premium over cash detailed in the VIX section above suggests maximum risk expectations in October. Seasonal Gold As we wrote last week, so far, this year gold has been following its usual seasonal pattern of weakness in June and July followed by relative strength in August. We expect it to extend into September and October, followed by a November correction before it reaches a high for the year in December. Since silver follows gold’s seasonal pattern we selected silver as a less expensive alternative for last week’s suggestion, but with the market decline last Monday, we backed away. Now we return with updated prices. iShares Silver Trust (SLV) 13.92. The iShares Silver Trust is a grantor trust holding silver bullion. The net asset value is quoted on the AMEX with the symbol SLV.NV; Friday’s NAV quote was 13.81. With a current Historical Volatility of 30 and with an Implied Volatility Index Mean of 38.84, the call implied volatility is 39.19 while the put implied volatility is 38.50.
The mid price for this spread on Friday was a debit (Dr) of .775 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be about .78 as shown above in the “E Price” column. Use the deltas for each leg to adjust for any change in price of the underlying ETF or use the net spread delta for spread orders. We suggest setting the SU (stop/unwind) at a close below the last pivot at 13.25 and if it should open below this level Monday we suggest deferring the trade once again.
Gold Miners Another part of the seasonal tendency is for the miners to outperform the bullion gold price in the second half of the year. Here are two ideas for the miners. Market Vectors Gold Miners ETF (GDX) 39.30. This ETF seeks to replicate the price and yield performance of the AMEX Gold Miners index. It normally invests at least 80% of its total assets in common stocks and ADRs of companies involved in the gold mining industry. With the current Historical Volatility at 36, the Implied Volatility Index Mean was 42.63. Consider this put sale idea.
The mid price for this put on Friday was a credit of .65 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be .57 as shown above in the “E Price” column. The “Greeks” are based upon Friday numbers, before the position is established – they will be reversed when the put is sold and delta and theta will then both be positive. Use the delta as shown above to adjust for any change in the stock price when placing the order. Use a close below the last pivot at 37 ½ as the SU (stop/unwind). Eldorado Gold Corp. (EGO) 11.02. Vancouver based Eldorado owns and operates the Kisladag gold mine in Turkey and the Tanjianshan gold mine in China, the Efemcukuru Gold Project in Turkey, the Vila Nova Iron Ore Project in Brazil, and the Perama Hill Gold Project in Greece. It is reported to be a low cost growth gold mining company. With a current Historical Volatility of 46 and an Implied Volatility Index Mean of 53.36, consider this combination of a short put and long call spread. Part one - the put sale.
The mid price for this put on Friday was a credit of 1.025 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be 1.01 as shown above in the “E Price” column. The “Greeks” are based upon Friday numbers, before the position is established – they will be reversed when the put is sold and delta and theta will then both be positive. Use the delta as shown above to adjust for any change in the stock price when placing the order. Part two - the long call spread.
The mid price for this spread on Friday was a debit (Dr) of 1.10 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be about the same as the time decay is offset by the spread and is shown above in the “E Price” column. Use the deltas for each leg to adjust for any change in price of the underlying or use the net spread delta for spread orders. Upon completion of both positions, the combined long delta will be 57.93 (32.37 +25.56) with a net cash cost of .09. However, there are margin requirements to consider for both. Use a close back under 10 as the SU (stop/unwind). Trend Continuation On the assumption that the uptrend continues as described in SPX and Strategy sections above, here are two suggestions to consider. iShares Russell 2000 Index (IWM) 58.15. When we compared the percentage increase of the SPX to the IWM from the March 6, 2009 low to last Friday’s close we calculate the SPX was up 49.4% while the IWM gain was 65.2%. Presuming this relationship continues we suggest a long position for the IWM. With a current Historical Volatility of 24 and an Implied Volatility Index Mean of 27.58, with the calls at 27.15 and the puts at 28.02 look at this long call spread idea.
The mid price for this spread on Friday was a debit (Dr) of 2.335 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be 2.31 as shown above in the “E Price” column. Use the deltas for each leg to adjust for any change in price of the underlying ETF or use the net spread delta for spread orders. Use a close under 53.79, the prior high before breaking out, as the SU (stop/unwind). Wyndham Worldwide Corporation (WYN) 16.31. This company is in the hotel and time-share business in the United States, Canada, Mexico, the Caribbean, and South Pacific. As of December 31, 2008, it reportedly owned approximately 7,000 franchised hotels. They reported earnings of .41 for the second quarter, the same as the first quarter but the stock continues higher and has broken out above 12 ¾, although the recent stock volume has been fairly light. The current Historical Volatility is 48 and the Implied Volatility Index Mean is 54.81 with the calls at 54.13 and the puts at 55.49. Currently in our model portfolio, we are short the Sep 15 put, suggested in Digest issue 31 on August 10, 2009. In addition, we now suggest adding a long call spread as follows.
The mid price for this spread on Friday was a debit (Dr) of .70 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be .69 as shown above in the “E Price” column. Use the deltas for each leg to adjust for any change in the price of the stock or use the net spread delta for spread orders. The options do not have as much volume as some other issues so you may have to be more flexible with the bid –ask spread in order to get the order filled. The position has a defined and limited risk with a good risk to reward ratio and enough time to meet the maximum upside objective of 2½ points. We suggest using a close below last Monday’s pivot at 14 ½ as the SU (stop/unwind).
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IVolatility.com Bookstore.  In addition to the vast number of articles and information on our web site, browse in our bookstore for more reference information and material.                                      In next week’s issue, we are going to look at some of the lower priced, but high option volume financial stocks and add to our trend continuation selections.

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