Tuesday, October 19, 2010

Using Calendar Spreads to Play a Short Term Top in Gold

From guest analyst J.W. Jones, an independent options trader using multiple forms of analysis to guide his option trading strategies. So far he's as on point as we've ever seen!

Recent price action in stocks and commodities reinforces the “don’t fight the Fed” mantra. What would our central bank be doing if it were not devaluing our currency, attempting to create inflation, and openly manipulating financial markets through a series of supposedly calculated open-market operations? I do not have any market prophecies; my crystal ball is on permanent vacation. The only certainty that presents itself is that the market pundits, the academics, and the analysts do not know exactly what is going to happen in the future.

We are in uncharted territory regarding government manipulation. We watch as our federal government actively and openly manipulates financial data in an attempt to boost asset prices with the hope that if Americans feel richer they will spend money more freely. What is going to be the catalyst to drive growth when the federal government and the Federal Reserve run out of manipulations?

By now the secret is out, the expected weakening of the U.S. dollar has propelled commodities and stocks higher in short order. The easy trade has likely passed and there are a few warning signs that are being largely ignored by the bullish masses. Business insiders are selling heavily while few are accumulating positions. The banks have not broken out and were under pressure for most of the trading day during Wednesday’s big advance. If the banks do not rally with the broad market, caution is warranted. We are approaching an uncertain period of time regarding earnings and the upcoming elections and we all know that financial markets hate uncertainty.

Additionally, the U.S. dollar is at key support and should that support level fail, stocks and commodities could continue their ascent in rapid fashion. If the level holds, the U.S. dollar could have a relief rally to work off the oversold condition, however a bounce will likely be short lived and the dollar will test and likely fail at that level. The chart below is the weekly price chart of the U.S. Dollar Index......Read the entire article.




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