GOLD jumps, Mining stocks follow. Review of AXR.TO

Lets start off putting the gold jump into perspective.

From the lows to the highs $30 move in a very short period of time.   Gold and other Precious metals are interesting for a couple reasons, they are a fear hedge and inflation hedge.  The current situation in the middle east is continuing to degrade as citizens are revolting.  A lot of people are saying that food inflation is partly to blame, as prices of rice for example are near there recent highs looking to breakout further.
The dollar also jumped today, strange as gold usually moves inverse to the dollar.  It is my expectation that the dollar will still get a bid when the stock market finally wakes up to the reality, however, unlike 2008 PMs will also get a bid sooner.  Any major sell off in the PMs space will be an incredible buying opportunity.  I was reading an opinion on Zerohedge which had an interesting note:

"While many wake up in cold sweats with the memories of 2008’s commodity crash and the concurrent U.S. dollar rally fresh in their minds, these nightmares are misplaced.  The U.S. dollar has been hyper-inflated since 2008 and the only thing that has kept commodities under wraps has been the absence of a sudden and violent mobilization of those dollars into real goods."

This is game theory, what does the prisoners dilemma teach us?  Always cheat.  if not you are going to be caught on the wrong side of the game.  As the US dollar strengthens, why wait for the dollar to weaken again before purchasing real goods?  Inflation in Cotton for example.

Website Reference

The scary thing about this chart is I could show you similar charts for almost all commodities (minus Nat Gas as it is a special case, Shale!!!).  Corn, Rice, Wheat, etc.

In North America only 10-15% of disposable income is attributed to Food, however in emerging economies this figure is closer to 50-70%.  Hence food riots are occurring around the world.  Once this inflationary pressure reaches our shores it will be to late for most people to prepare for especially fixed income retirees and people will lower incomes.

Looking at that cotton chart should really make most of you reading this think a bit more about real inflation and just like the wealth trickle down effect governments always mention, inflation is exactly the same.  We haven't seen it yet.... but no doubt it is coming.

Anyways less doom and gloom and more Mining Stocks!!

Today we have seen a nice pop in the AXR.TO, current holding a position in this stock.  So my mindset previously was to setup a Cover Call on this at $8.00 for a premium of 0.75, however, Ask prices have only be at 0.55 and I am unwilling to sell an option for that price.  I may be reconsidering the cover call depending on next week as I do expect this stock to pull back however more upside is likely until 7.25 ish. My enter was at 6.60 and it seems like I could hold this stock for a bit longer.

An alternative is to dump the stock probably next week, in anticipation of a pull back.  The technicals are signally that a potential pull back is likely but with silver / gold prices finally on the move, I wouldn't want to pull the plug to early. 

Slow stoch is overbought, the 50 MA and bollinger band is at 7.20ish just above which should be relatively strong resistance, and the MACD is about to challenge the 0 Level.  However, the histogram which indicates short term momentum has had growing strength. 

My 1-2 month prediction for all stocks I have been following AXR.TO, SSB.TO, PTM.TO, EDR.TO, FVI.TO (also a nice pop today), FR.TO is the following.

There is a potential that they are currently in a wave 3 to the upside. Which means a low risk trade would be waiting for a small correction, an either attempting to pick the bottom if you wanted to be more aggressive or wait for the high which we are in the progress of making gets taken out.  Enter after this high with a stop loss directly under it.  The risk would be minimal and if I am correct you have just entered into a wave 3 of a wave 3, which typically would be an extremely strong move.  If I am wrong you get stopped out almost immediately.  This is going to be my plan going forward and I will post specific trades as this up move dies out and we see a small wave 2 correction within the greater wave 3 unfold.

S&P 500, gets above 1300.

Rumors of QE3 are kicking around.  It appears that the Debt ceiling will need to be raised by the end of March.  Will more of the same continue to keep markets up?  Time will tell, however, there is divergences now on the MACD and Slow Stoch where momentum is making lower lows, while price action is making higher highs.  So just be cautious and keep a tighter then normal stop loss to avoid being caught on another 2% drop.  On the Bull's side, the S&P 500 has closed about 1307, which is a new mid term high.  If the market consolidates above the 1300 mark, more upside could be in the works. 

Either way I am back trading mining companies as many have now retracted 50% of their strong move over the last 4-6 months.  My plan is to write covered call options for April contract.   It is my expectation that these companies will range for a couple of months, but any pop over the next couple of weeks could provide a high premium for my current ranging outlook.

Interesting to note Platinum is the strongest metal so far, so I have a small position in PTM.TO, which is currently trading at 2.30. 

View on GOLD, correction still in place, Wait and see mode

My current view on gold is above. It is my guess that when summer arrives gold will be breaking new highs. I expect that the 200 MA which coincides with the bottom of the trend channel, will be touch before we start seeing some continued upside.  
The MACD is an momentum oscillator, the way I read the MACD is that when the blue line is below the 0 level the main trend momentum is negative.  However, short term trend is governed by the histogram.  The Histogram is the distance between the blue line (MACD line) and the white line (9 day moving average).  Currently the histogram appears to be bottoming out, indicating that a bounce is more likely to occur.  A traditional "buy" signal from the MACD technical indicator is a cross over of the blue and white lines.  It appears downside momentum is decreasing, represented by the smaller negative ticks on the histogram.

The Slow Stoch appears as if momentum has shifted to the upside.  The stock was recent over sold so expect gold to catch a bid.  

I am considering a options trading strategy called a Cover call. 

From Wikipedia:
"A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities. If the trader buys the underlying instrument at the same time as he sells the call, the strategy is often called a "buy-write" strategy. In equilibrium, the strategy has the same payoffs as writing a put option."

From Investopedia:

"What Does Covered Call Mean?
An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.

This is also known as a "buy-write"."

Therefore if I have this expectation of how gold prices around to go, you could purchase Stock now, and write covered call options at or close to the peak of the current upside move.  Ideal case is that you sell a call option that is just in the money, with the expectation that the price is going to decline.  Since the option is already in the money, a large premium will be absorbed.


More likely, selling an options contract that is relatively distance and choose the beginning of
April as the time duration of the option.

Taking an options and derivatives course in University now so I am excited to get a more theoretical background in options trading.

Pay close attention to EGYPT, EUR/USD, AUD/JPY ,Gold/Silver, and NASDAQ

Well I will not do the story justice, however, the importance of what is happening in Egypt cannot be understated.  This full blown revolution has global implications and could be the downside catalyst this market has seemingly been begging for over the last few weeks.
Great live coverage is being played on Al Jazeera  .

Some links are here: BBC, CNN, Al-Jazeera, CBC
I have always been an advocate of reading the same article in at least 2 other main stream news companies that are on all sides of any conflict.  Form your own opinions of the true nature of any situation or conflict as unbiased as you can. 

Before talking about the Gold / Silver mining opportunities, a look at a major currency pair will help put global pressures into context.

What happens when the world starts to get the jitters?  USD gets a bid, which has been the expectation for a while.  This spells trouble for the EuroZone.  On the Egyptian turbulence, the EURUSD pair collapse and is currently trying to figure out "what is next?" It is my expectation that a deeper correction will occur, possibly the 1.35 area before major support comes into the market.  However, depending on world events markets in general are going to be volatile.

AUDJPY had the bottom fall out when markets opened at 6:00 pm Sunday EST.  Since then there has been a bounce, with the implied implication on further downside pressure on the pair.  The next logical support area I suspect is the 80.00 level, 1.72% from its current level.

Am I certain the silver market has bottomed?  Nope.... However, looking at some technicals, it does make sense to play this short term bounce / beginning of the next rally.  Looking at the massive rally from the end of August until the beginning of January we finally have had a much needed  pullback.  It still is my expectation that the bounce we are going to see is actually a continuation of the current correction and expect prices to range as long as world events remain relatively calm.  The price has retraced 32.8% from the highs which coincided with a strong reversal on sightly higher volume. 

The way I have advocated to play gold and silver are small cap mining companies that can easily have 5-10% pops when the conditions are right.  Well....  Regardless if silver lasts, if there is an up day in silver on monday, Silver mining companies are poised for a day of solid gains. 

Previous post I mentioned I have a position in AXR on the TSX, at 6.60, with its close at 6.67.

Another trade I am planning is on GPR, even though FVI I like as well.

The stock has had an amazing rally, and has recently come off its highs, a 50% retracement was completed 4 trading days ago.  This low also coincided with the Bollinger bands which have now started to curl back upwards.  As the Slow stoch shows there is plenty of room for this stock to rally without encountering overbought pressure.  The major resistance will come in at the 20 and 50 day MA, but if the price action can get above them, a retest of the 2.75-2.80 level is not out of the question.   I am thinking of a Buy-Stop at 2.17 which I expect will be a strong level of support in the future.

Lastly, Nasdaq down 2.48% on Friday.  This closed significantly lower than the 20 MA, which means the next logical support area will be 2655ish.  If this selling pressure continues (on very strong volume), expect more days like Friday over the next 2-3 weeks.

Note: VIX (Volatility / Fear index) popped 20% which confirms this strong move south in the Nasdaq and other markets around the world.