MONDAY'S OUTLOOK

All three indexes are at or near a 50% retracement after Friday's rally. This could mean that they are about to make another move down...but it could also mean that the buyers are back and the indexes are about to break to new highs. There is no way to know what the market will do next. Normally I would bet that it would drop significantly, but I have to respect the strength of the bulls over the last few months. If you haven't yet bought any puts on the indexes (SPY, DIA, and QQQQ), this is a great place to enter a new trade. The reward to risk here is fantastic. If you have existing positions, it is best to just hold them. If the market breaks to a new high, we'll stop out and immediately buy calls. If the market breaks below last Thursday's low, we'll add to the put position. I wouldn't buy calls on the VIX here unless you are using the trade to hedge some other bullish positions. Silver looks like it could still go higher. You can trade silver using the SLV.

Gold and Silver Update

Jerry, Please consider posting this article as a follow up on last Sundays commentary.It has a direct bearing on what I was trying to explain about what is happening in the silver market. If you will reread my commentary and then read this article, I'm sure you will understand perfectly. This is really important to anyone interested in silver. I'm very confident that we are about to witness an extraordinary event in silver very soon. Thank you. Chaz

http://news.coinupdate.com/huge-comex-silver-supply-squeeze-developing-0695/

Huge COMEX Silver Supply Squeeze Developing

As the December 2010 COMEX silver contracts approached maturity, a higher than normal number of contracts were not closed out before the first day of notice for delivery. In theory, potentially all of these open contracts could have ended up being called for delivery. While a number of short sellers absorbed their losses by purchasing an offsetting long contract, the amount of silver that was needed for physical delivery did stress available COMEX inventories.

As a result, in November and December 2010 the price of silver jumped more than 30%.

This same pattern looks like it will repeat for the maturing March 2011 COMEX silver contracts. This time, however, the potential supply squeeze is much larger.

February 28 is the first day of notice for delivery of the March contracts. Normally, parties not wanting delivery would have closed out their contract long before then. At the COMEX close on February 22, there were still 50,848 open March 2011 silver contracts, representing a potential liability to deliver 254.24 million ounces of silver by the end of March. The COMEX registered silver inventories available to cover deliveries totaled only 41.91 million ounces. Even including customer inventories that are stored at the COMEX, which are only eligible to deliver against COMEX contracts if the owners so choose (and most do not), the total is only 102.35 million ounces.

During COMEX trading hours on February 22, there were 124,000 March 2011 silver contracts traded—almost 2-1/2 times the number of open contracts! This is almost unprecedented volatility!

Here’s what I suspect happened to cause such a huge trading volume that day. The price of silver had been rising significantly for the past several trading days, reaching successive 31-year high price records (ignoring inflation). The US markets were closed on February 21 for Presidents’ Day. In trading in Asian and European markets early on February 22, the price of silver passed $34.00. If this price were maintained, then a large number of short sellers would get margin calls when the COMEX market opened on February 22. That could have forced leveraged short sellers to put up additional cash, physical silver, or to buy long contracts to close out their short positions. Any of these actions would likely have the effect of pushing silver prices up even higher.

It appears that a massive effort was mounted to drive drown COMEX silver prices on February 22 in order to avoid or reduce the margin calls to leveraged short sellers. This strategy was successful to a degree in that the price of silver dropped to just below $33.00 at one point on the COMEX. The temporary drop encouraged some owners of long positions to liquidate and take profits, further helping to push the price down.

However, the price suppression effort was not successful at pushing down the silver price below the February 18 COMEX close. Once it became clear that the manipulation was losing steam, buyers jumped back into the market on February 23. During COMEX trading hours, the price of silver reached as high as $33.75. Trading was extremely volatile, with 1% swings up and down occurring within a matter of minutes.

Several hedge funds, seeing how easy it was to make a short-term profit in silver squeezing COMEX short sellers last November and December, are likely to repeat the tactic with the maturing March contracts—but on a greater scale.

If the price of silver from now through the end of March were to rise by 30% again, that would put the price around $43. But, if there is a larger supply squeeze underway, the price could go much higher.

Already we are seeing several physical silver wholesalers using a two-tier silver spot price system. If you want to sell to them, they are using spot prices derived from COMEX and other markets. On the other side, if you wish to purchase physical metals from them, they are quoting a selling spot price that is 5-10 cents higher than their buying spot price.

The mainstream media is reporting that stock market prices and most commodities (with the exception of gold) fell on February 22 as a result of concerns about unrest in countries in the Middle East and North Africa that could lead to reduced supplies of petroleum. The unrest is sparked in part by soaring food prices (which the US government pretends is not occurring) in addition to political factors. But this news does not give you a clear picture of what is really going on in the silver (and gold) markets.

Expect both gold and silver prices to become much more volatile in the coming weeks. Don’t be surprised if silver prices move across a $2-3 range within a 24-hour period. In the past week, our company has enjoyed a significant increase in demand for physical silver. Thus far we have been able to make immediate or short-term delivery of most forms of silver. That could change quickly. At last report, the Perth Mint was telling buyers that they would have to wait until at least April to receive delivery of newly manufactured silver ingots.

Even though silver prices are now near 31-year highs and gold is near its highest prices ever, I still consider both of them to be at bargain levels compared to what I expect to see by the end of March. Silver will outperform gold, but both will do well versus the US dollar and all currencies.

JB Slear

TOMORROW'S TRADE

The market could try to stage a rally tomorrow. Many stocks rallied a bit at the end of the day. If the markets trade up tomorrow, look to buy puts on the SPY, DIA, and QQQQ. Any rally would create a great opportunity to buy puts. Set a stop above last Friday's high. If the market moves to a new high, we would want to sell the puts and go back to buying calls. If the market does try to rally, watch the movement throughout the day if you can. Look to see if the rallies are met with more selling. This could be an indication that the institutional investors are trying to dump stocks on each rally. That would be very bearish and would add to the belief that the market could go lower. If the market can reverse the selling of the last few days (like it did a few weeks ago), we'll need to be prepared to flip flop back to bullish trades. Keep a watchlist of good bullish stocks in case this happens. If you aren't already in USO or the VIX, wait to see if they pull back a bit before getting in. The two day move up on the USO was massive. It is probably due for a bit of a pull back. Don't wait for it to pull back too much or you might miss another possible spike up.

Update...as I am about to go to bed, I noticed that the S&P 500 futures are down about 10 points. If this holds into the open tomorrow, the Dow could quickly be down 100 points. Oil is also over $100 at last check. If the market opens that low tomorrow, see if it bounces up a bit after the gap down. If it does, use the bounce to buy the puts. Don't chase a sell off here. It is okay to buy a few contracts if you feel the market will drop quickly, but be patient for a rally that will set up the next move down. These rallies can sometimes initially look impulsive to the upside, but they often rollover and lead to big moves down. These big downward trades are what we are trying to catch.

SUCCESS STORY

Jerry:

I purchased calls on USO this morning, per your blog. I sold out once I saw the pullback starting. My gain for a few hours of time was around 25 percent.

Last week I purchased calls on SU and my gain was around 20 percent.

Thanks again for all your help.

Lucy C

DOW TRANSPORTATION INDEX

The Dow Transportation Index (IYT) is often a leading indicator for the market. If that is the case right now, the market should continue to fall. The Dow Transports are getting hammered today. That makes sense since these stocks are all tied strongly to the price of oil.

TROUBLE IN THE MIDDLE EAST

When a a market enters a 5th wave in an Elliott Wave count, we start to look for a catalyst that will pull the market into its correction. The catalyst is usually unique and is unlikely to be closely related to the previous catalyst. The catalyst last April was the problems in Greece that spilled over into Portugal, Spain, and Italy. It looks like the catalyst this time around could be the new trouble in the Middle East. I'm not saying that the sell off today is the start of a larger correction. I saw what the market did three weeks ago when I felt the correction was underway. I am saying that this might be it. We need to be prepared and have a plan to trade any correction that comes our way. If you followed my advice over the last few weeks on trading the VIX, you hedged yourself nicely today when it spiked up over $4. This allowed you to offset some losses as you were stopped out of some of your bullish trades. We will watch the market movement closely tomorrow...much like we did on January 31st. If we wipe out this sell off within the next few days, my advice would be to buy calls on all your strong bullish stocks and ride the trend back up. If the rally stalls or if the breadth is small, it could mean that another move down is on the horizon. If we rally up a bit tomorrow, I will probably look to buy puts on the SPY, DIA, and QQQQ...with a stop above today's high. I'm also looking at calls on the TLT. The TLT is an ETF for the Treasury Bonds. Many traders are selling out of stocks and putting the money back into Treasury Bonds. I also like calls on USO. Although oil could pull back a bit after the big move up today, I think it should continue even higher. As long as there is uncertainty spreading throughout the Middle East, oil will likely continue to rise...especially if Saudi Arabia or Iran get involved. If you took a hit on some bullish trades today, you might just want to sit on the sidelines for the next 2-3 days and see which direction we are likely headed in next. I think that we are headed lower. Higher oil and gas prices will start to affect almost every area of the economy. You will start to see companies revise their forecasts and lower expectations for the upcoming quarters. This will inevitably lead to further downside pressure on the markets. I might be getting too far ahead of myself...let's first see how we trade tomorrow.

FREE WEBINAR

As a celebration for hitting 200 followers, I would like to do a free webinar for you guys. Before I set it up, I would first like to gauge the interest in having a free webinar class. I'd like to cover a topic or two that might enhance your trading. If you are interested, please email me at myoptionmagic@yahoo.com. Put the words FREE WEBINAR in the email title. Include your name and your email address so that I can send you an invitation to the webinar. Please note that this email address is not my regular class email address. I don't want to flood that regular email account with these emails. I haven't yet scheduled the free webinar. It will probably be scheduled out about 3-4 weeks. I need to hear from you as soon as possible. If there is limited interest in a free webinar, I won't be able to do it. Don't delay. Email me at myoptionmagic@yahoo.com with the information stated above.

Gold and Silver Update

Sorry for posting this a bit late. This post is from Chaz...a commodities trader that writes a monthly newsletter on the precious metals market. He has given me permission to post it on my blog. As a disclaimer...I (and Option Magic) are not responsible for the content or recommendations in this newsletter. Also...a lot of this information relates to trading the actual commodities. There may be some terms or strategies that you don't recognize. This update is meant to be an information guide for those of you that are trading gold and silver...or just the gold and silver ETF's like the GLD or the SLV. This commentary is opinion and analysis. You must still use good money management and trade management principles. You must also read the charts. No one...I'll repeat...no one knows the exact future of any event on Wall Street. You must still do your due diligence. Thank you Chaz.

Good afternoon traders. WOW! What a week! I'm sorry I didn't get this out to you last week before Thursdays open. I meant to send it Wednesday night but travel and time constraints made it impossible. Several months ago, I wrote that it was probable that we would soon see swings in the silver market in excess of one dollar or more. A one dollar move up is $5000.00 profit on a contract or an "in the money" option. This probability has now been realized. I remember when a ten cent move was exciting. If you got excited about Thursday and Fridays action, then prepare to become hysterical. Because i am now telling you that we will probably soon see swings approaching $5 a day and eventually surpassing that. Yes, I said $5. That is $25,000.00 on a contract or "in the money" option. While I admit that I woke up sick yesterday and have been running fever off and on the last two days, I assure you that I am not delirious. Thursdays action was an important market changing event only a small percentage of traders understand. Lets look at the last seven trading days and I'll try to explain what did happen and what is MOST LIKELY to happen. We have several new readers this week. To those of you who are new, welcome and thank you for considering my humble opinion. I'm not always right as we are about to see but my track record is nothing to be ashamed of. Most of you know that I am currently taking a three part stock option trading course. I took this course due to a growing interest in trading stock options but also to see if I could adapt a strategy or two to commodity option trading. I wasn't disappointed. OK. Get your March silver chart out and follow along. On Thursday, Feb. 10, during class, the instructor expressed his view that silver and gold were likely to correct in the next few days and that I would probably disagree with him. I think he quite surprised when I told him that I, in fact, did agree. I went on to say that I had just taken profits the day before. How can this be, you ask? Everyone knows I'm very bullish on silver, you say ? A good trader recognizes that markets are in constant movement and that a trader MUST learn to adapt to changing markets quickly. A good trader must also learn to think like the institutional traders do and to trade like them. That means having short term and long term trades. A good trader will often have short term calls and puts as well as long term calls and puts. But that is very advanced trading skills that few of you are ready for so I wont go into it here.... The March life of contract high was on Jan.3rd at $31.27. The close was $31.12. This was the beginning of what we call an ABC top formation which means a correction should be expected if it completes the formation. The B part formed on Jan.28 with a low of $26.30 and a close of $27.91. On Feb 9th, I decided to take some profits on a small part of my position. The high that day was $30.27. Knowing that expiration was close at hand, it seemed like the correct course to take.The next day, the 10th, brought a lower high $30.27. I was certain a correction was going to take place. I took more profits. On Thursday the17th, silver broke above the life of contract high set on Jan 3rd. This happened late in the day, a little after 2pm CST. If I had held on to my positions I would have profited by many thousands more dollars. But I made a call and I stand by it.It made the most sense at the time. Then ,the market made a profound change one week before expiration. This burnt a searing image in my mind because I now know for certain that the shorts have lost control of their 31 year long manipulation of the silver market. Monday is a holiday. Trading will be in overseas markets only. Tuesday morning will likely see a massive attempt by the shorts to cover the March calls they sold to us, the longs. There are more than 53000 "in the money" contracts that will expire this week. Only 8000 need to stand for delivery to break the COMEX. Even if only 2000 demand delivery, the shorts will be panicking. I think we may see some amazing events this week. I don't know when those $5 swings will occur but I think everyone holding May options are going to very,very happy. Consider the following. Margin on metals have been raised seven times( I THINK that's right) this year alone. Remember what happened in the platinum market about 10 years ago? The market was so out of control that they had to raise margins up to TWO TIMES the value of the contract. Will that happen in silver? Probably. Something else to consider. Watch the dollar index. It's currently at 77.67. There is virtually NO SUPPORT below 77. WHEN it breaks below 77, it will go into free fall and the metals will roar. Did you know that silver is the only commodity that hasn't broken above its 1980 high? I think we may see that very soon. ....I still have a few March positions, a lot of Mays and even some offers on July. That makes for complicated trading which I don't recommend until you've taken some good trading courses and have a few years of trading experience. Nothing much to say about gold except that I believe the price will have minimal movement next week compared to silver. That's all for now. Happy trades......Chaz ....Sunday, Feb.20, 2010. 6:55pm

SELL OFF COMING?

The market is extremely overbought again. This is usually an area where you have to be cautious. I've had some bullish recommendations over the last few weeks due to the continued strength of the market. I also bought some calls on the VIX as a hedge in case the market sells off. The market showed some weakness on Friday as many bullish stocks started to sell off a bit. This could continue on Tuesday. The trouble in the Middle East could cause oil and gold to spike. Many of the energy picks given out the last few weeks could have big moves up tomorrow. Many companies tied to gold and silver could also have big moves up. A market sell off is needed. It will either provide another opportunity to get into the Bull market or an opportunity to buy puts if the market trend is changing. Watch the price action on Tuesday. If the market sells off early, see if the buyers show up at the end of the day. If they do, there might be an opportunity to get back into some of the strong bullish trends. If the market can close back below its 10 day MA, there might be a bigger move down that we can take advantage of.

As a celebration for hitting 200 followers, I would like to do a free webinar for you guys. Before I set it up, I would first like to gauge the interest in having a free webinar class. I'd like to cover a topic or two that might enhance your trading. If you are interested, please email me at myoptionmagic@yahoo.com. Put the words FREE WEBINAR in the email title. Include your name and your email address so that I can send you an invitation to the webinar. Please note that this email address is not my regular class email address. I don't want to flood that regular email account with these emails. I haven't yet scheduled the free webinar. It will probably be scheduled out about 3-4 weeks. I need to hear from you as soon as possible. If there is limited interest in a free webinar, I won't be able to do it. Don't delay. Email me at myoptionmagic@yahoo.com with the information stated above.

UPDATE

The market pulled back a bit today, but I don't see anything yet that would lead me to believe that it is more than just profit taking. I know that the market is overbought, but it has been overbought for quite a while now. The VIX didn't move up very much which indicated that there wasn't much panic amongst the institutional investors. There are a few stocks that have been recent recommendations that did pull back a bit today. These pull backs could give you a second chance to get in. These stocks include WLT, CRM, PCLN, AAPL, RIO, and BHP. I will add VALE. Make sure you check for confirmation before you get into any of these trades. If they break below support lines or key moving averages tomorrow, don't get in. If you do get in, make sure you set up a plan for your trade using the guidelines outlined in the Trade Management class. Gold and Silver look like they are at a critical junction. If they move much higher tomorrow, I might have to turn a bit more bullish. If they start to sell off again, they might move much lower...in the near term anyway. In other words, I don't see a clear trade for Gold or Silver right now. That may change within the next few hours or days.

SUCCESS STORY

Jerry: I had a good week trading and have learned a lot from
from the last two lessons.  I spent some time on the 2nd
looking at the stock's daily charts on your watchlists.  I
was intrigued by UNP.  With the improving economy, I felt
the railroads might be doing well.  UNP stood out because it
was consistant and going up. At the close on Feb 3, it was
pushing on the 50 MA for the 3rd time in two weeks.  It had
not crossed the 50 MA since last Aug.  I felt it wanted to
go up to the 10 MA.  I placed an order to BTO on 2/4.  When
I came home from work on the 4th, I found I had a fill at
$4.80 on the Mar 90 call.  I am still in this position.  It
was valued at $9.15 on the close this past Fri. the 11th.
Without comissions, it is over a 190% gain over 6 trading
days.  YES!
Wayne K.

200 FOLLOWERS!!!

We just hit 200 followers! Another great milestone. Thanks everyone. I bought calls today on the VIX. If you look at a long term chart of the VIX, you will see that the $16 area has some strong historical support. Some of the biggest spikes have launched from this area. This doesn't necessarily mean that I think the market is going to crash. It could sell off if the problems in Egypt spill over to other Middle Eastern countries, but I'm using the VIX trade as more of a hedge for my other bullish trades. I also like put options on NEM and AEM...if they can get below their 10 day MA. The S&P futures are down about 6 points at the time of this posting. If that holds or worsens at the open, we could get another Friday like January 28th. That VIX trade might work out perfect.

PICKS

It's very late but I haven't posted anything for a while. Here are some great bullish patterns to trade. Make sure you set up a plan for your trade and never risk huge amounts on any pick...mine or anyone elses. RIO and BHP are breaking out of ascending triangle patterns. RIO could run up to around $82 if the market keeps moving upward. BHP could go up to around $104. PCLN looks like it could break out of a triangle pattern very soon. A close above $445 would confirm the breakout. If it does close above $445, this stock could run up to around $470 if the market keeps moving higher. I also like the bullish pattern on CRM if it can close back above its 50 day MA. The profit target on CRM would be around $150. The more that ISRG moves sideways, the more likely it will start to make another move up. I’d stop out if it moves below $320. Upside target around $360. I also like SCCO as a bullish play on copper…since FCX isn’t doing so well after their negative earnings report. You would want it to close back above its 50 day MA for confirmation. I need someone to send me a success story from one (or more) of these picks so that I can get some new stories posted. As for commentary on the market…we are back to the overbought conditions. I’ll keep my eye out for the start of a retracement, but I’ll continue to trade the bullish patterns when I see them. Because of the overbought condition of the market, you will want to keep a larger portion of your capital in cash. With the smaller amount that you are trading, you will want to get into several of these trades in order to spread out the risk. Just because I post a stock pick does not mean that the stock pick is guaranteed to work. Also…I don’t know which of these pick will work and which ones won’t work. This is why you would be better off with smaller trades on many rather than larger trades on one or two. Pay attention to the stocks that need confirmation…and wait for the confirmation.

ARE THE BULLS BACK?

At the time of this posting, the market is sitting just a fraction below its 52 week high. This rally back up is now testing the patience of the bears. If the market surges to a new high today, we must stop out and wait. If last week's highs hold at the close, you could add to your put positions if you have enough guts to do so (I haven't decided yet if I have enough guts). The VIX has also dropped back down today, but it is still off from last week's lows. Some of the bullish trades from last week are offering a hedge.