Silver Drop Victory Lap — What’s Next?

Hey There Income Hunters,


I was very confident in the set-up for a downward move that I identified  on the monthly silver chart this past Monday


But I didn’t expect an 8% drop to happen so quickly.


For anyone who didn’t see the call, here it is …

Longtime readers of Power Income know how much I respect the Relative Strength Index (RSI) — a very helpful momentum indicator — when it diverges from the price trend.

A bearish RSI divergence is confirmed when the following steps are completed:


  1. You set a new high in price (27.39)

  2. It’s confirmed with a new high in RSI (75.28)

  3. The market price corrects and comes back and makes a higher high (27.98)

  4. RSI does not confirm the strength in the move (68.11)


It’s historically uncommon to get monthly RSI divergences…


However, when you do, it usually signals a decent move …


The question is, what now? Can we expect more downside?



Usually, when a trend reverses, it produces a three-day correction.


I’m now looking to buy silver and am grateful this market didn’t run away from us thanks to the WallStreetBets gang.


As far as the inflation trade goes, I think silver is a great core position to hold.


Here’s why …


Silver not only holds value as “real money,” — which is incredibly powerful on its own right as the world transitions to a new monetary system based largely on digital currency — it is also in HUGE demand for solar and electrical vehicles.


The Blue Wave will increase that demand with incentives in both areas.


Consider, for instance, that President Biden has issued an executive order to electrify the 645,000-vehicle federal fleet in his first days in office and is already spinning up a revised Cash for Clunkers program.


You can see the increase in demand just on the automotive side beginning this year …



How to Play It

The trade I like with SLV volatility a bit rich is to sell the 24 Puts at 2.60 …


I’d be happy to own Silver outright at $21.4. And if not, making over 12% wouldn’t be too shabby either …



Bring It Home

I think there was a good lesson to be learned this week.


It’s the same lesson the Hunt brothers learned in 1980 on “Silver Thursday,” the day the Silver market collapsed …


The exchanges can always raise margin requirements when volatility heats up … and when they do, you don’t want to be left holding the bag.


Let’s see what these wonderful markets have in store for us today…


Live and Trade with passion my Friends,

Griff

Silver Linings

Hey There Income Hunters,

Well, retail investors may not succeed in getting silver to 50 …

But in three days they did what it took the Hunt brothers (the infamous siblings who tried to corner the silver market) four weeks to do …

Drive the market 25% higher.

There is a lot more to the Hunt Brothers story … and for what this means for silver in the short-term.

On the Hunts for Silver
Brothers Bill, Nelson and Lamar Hunt, from Texas, spent the latter part of the 1970s accumulating silver in an attempt to corner the market. (It was actually a strategy to hedge against the decade’s insane inflation.)

In the brothers’ case, they were fully “leveraged” as they moved silver 713% in the first few weeks of January 1980.

Leverage, it should be noted, is trading on borrowed money — it makes the good times better and the bad times worse.

For the Hunts, it turned into a debt-fueled boom … and then bust on what became known as “Silver Thursday,” when prices collapsed.

Last week was another great example of how leverage works — and how it can turn the screws.

Several large hedge funds had maxed out their leverage …

The GameStop (Ticker: GME) squeeze forced the central counterparty clearing house (CCP) of the exchange to demand payment to satisfy the margin requirement … the dreaded “Margin Call.”

And the hedge funds lost BIG.

Back in 1980, the Hunt Brothers received a margin call for $100 million and they didn’t have it.

That created the fear Wall Street brokerage firms might collapse.

So, as usual, a bank lent the Hunts the money … to protect itself from failing.

You know, I often wonder what the banks will do when blockchain’s digital ledger technology simultaneously settles all transactions via digital dollars …

Hmmm, not sure if banks would have a role in that scenario … and that doesn’t hurt my feelings one bit.

I think we will find out soon enough …

What’s Next for Silver?
So, onto what I see for silver …

Longtime readers of Power Income know how much I respect the Relative Strength Index (RSI) — a very helpful momentum indicator — when it diverges from the price trend.

Well, we got a bearish divergence in silver on Monday.

A bearish RSI divergence is confirmed when the following happens:

  1. A new high price is set (27.39)

  2. It’s confirmed with a new high in RSI (75.28)

  3. The market price corrects, comes back and makes a higher high (27.98)

  4. RSI does not confirm the strength in the move (68.11)

That’s what we have below …

 

It’s uncommon to get monthly RSI divergence. When you do, it usually signals a decent move …

Bring it Home

My big-picture view has not and will not change …

The US is in the final stages of a long-term debt cycle …

The $28 trillion of debt compared to $21 trillion of income (GDP) gap can never be reversed … and the Fed has chosen to go down the path of inflating the debt away.

We will see inflation above 2.5% before the end of the year — and it could be higher.

However, my short-term view is a bit different …

I don’t believe we’ll see the economic recovery the markets have priced in.

So, in the short term I do believe we could see deflationary forces at work. This will only force the Fed and the administration to be more aggressive with stimulus.

That, in turn, will reinforce the inflation I expect in the second half of the year.

So, here is a picture of my conflicting short-term/long-term views …

A little bit of deflation, meaning lower consumer prices (CPI) and soft economic numbers … 

This will fuel greater stimulus, then when the economy starts to re-open…

BAM!

Inflation will be unleashed!

Look, it’s hard to make money trading without having conviction.

I have traded through many economic cycles, but to trade through a transition to a new monetary system is thrilling …

The new system that I foresee will center around a basket of multiple central bank digital currencies and maybe even some gold and silver.

I’ll have much more on that in future posts …

You Income Hunters have been providing great feedback and asking great questions. Keep’em coming and as always …

Live and Trade With Passion My Friends,

Griff 

The Rise of Retail

Hey There Income Hunters,


The GameStop episode is a groundbreaking event.


It’s magnitude really can’t be overstated.


The result is a major step forward towards levelling the playing field in the capital markets arena. 


The little guy may actually make up some ground.


And before I get into what this means for the market, let’s get one thing straight …


The only illegal practice going on here is “Naked Short Selling” by the institutional investors (i.e. hedge funds), which is short selling shares that have not been affirmatively determined to exist …


According to financial data firm S3, GME short interest is currently 113% of the floating supply. See the chart below.


So, the illegal practice continues!


A Long Time Coming

The GameStop episode is the culmination of 20-years of technological, communication and connectivity advancements that finally make the markets fair-game for all …


However, for a total breakthrough to be complete, regulators must acknowledge the illegal activity engaged in by the hedge funds as well as their prime brokers, who are the largest banks …


So know this: our  capital markets system is broken. (Check out my column about the biggest bank heist in history for a review of our financial system and the embedded inequality …)


But the Rise of Retail will help force change!


And I have hope the current administration will put through the reforms necessary to redistribute wealth to honest traders like you …


While at the same time facilitating an increase in total wealth through infrastructure programs that create real jobs as opposed to funneling more cash through the banks.


It sounds like retail is a fan of one of my favorite Blue Wave Specials …


iShares Silver Trust (Ticker: SLV)


Let’s take a look at how to play for a breakout.


Time to Focus on a Possible Breakout in SLV…


You can see from the longer-term chart on SLV that we closed on Friday right at the downtrend line …


A gap open above the downtrend should be bought with a stop on a close back below… 

SLV could trend higher towards the $34 level quickly …


A fast play 

If you are looking for a quick $5 move higher on the breakout, buying an outright call will give you the best bang for your buck …


$310 would be your maximum loss per contract.


The profit is shown in the risk profile below… With an outright call option position, your max profit is theoretically unlimited, since a stock’s price can rise infinitely …

Let’s take a look at the risk profile …



Bring it Home

When we see a market like silver on the move, an outright call instead of a call spread is worth consideration. We use call spreads when you may need more time for the trade to develop.


When you’re playing for a breakout and anticipate a quick move… the outright offers greater upside and you can deploy trailing stops to stay in the trade longer …


An SLV 27 call trailing stop is an order type that would trail the market price of the call by let’s say 10% …


If the 27 call market price drops by more than 10% the position would automatically be closed-out. However, if the market never drops by 10% and increases to $40 you are still in the trade.


That, Income Hunters, is how you give yourself a chance to hit a “Home Run” …

On a trade that offers real potential… Use trailing stops to “stay in the Game” while managing downside risk.


Good Luck and as always …


Live and Trade with Passion My Friends,


Griff

Is This A “Healthy” Correction

Hey There Income Hunters,


I always felt the worst thing for the markets was uncertainty … 


Uncertainty causes fear of not being able to efficiently manage financial risk … 


It ignites a “risk off” mentality that can fuel liquidation of positions …


I think the hard-to-borrow activity we saw this week with GME, etc. will ultimately be a good thing and could possibly reduce the gap of inequality … which would be a victory for the warriors who fought for change!


Now, let’s see how YOU can capitalize on the lower prices of companies we know will benefit in the months ahead from the Blue Wave stimulus …


Let’s first take a look at the technical damage done to the SPDR S&P 500 ETF (Ticker: SPY) this week …



Next week will be very important.


We need some reassurances from the Fed (and, more importantly, the Administration), meaning Janet Yellen on stimulus …


Or we need good economic news — and my concern is we may get the opposite there.


Non-farm payrolls for January come out next Friday and they look like they are getting ready to head south again …


Check out this two-year graph of monthly non-farm payrolls.



I think this is the most important economic number…


Remember the Fed’s mandate … their job … is to create jobs, and we are a long way from getting back to pre-covid levels as you can see above.


On the bright side, this may be exactly what the Fed and administration need to get them moving on what’s important instead of the same old politics …


So, what’s the play? I am still focused on ENERGY.


Crude has been very stable the past couple of days and I think that’s a good sign for further increases in the price of oil, which is extremely beneficial for energy infrastructure companies like Energy Transfer LP (Ticker: ET) …


Plus, we will get a double win of more demand and less supply toward mid-year.


Here’s the Trade

I like ET. (And I don’t mean the movie.)


A lot. 


It’s trading near $6 …


It’s volume has been picking up in options …


And it’s a 5-star rating at Morningstar with a $20-dollar fair value price… 


Hell, if I can pick it up at $6, I’d be happy with half that!


I like these fast charts because they give you a lot of valuable information with a two-year forecast on earnings as well …


2021 will be a great year for ET… check out the $1.13 earning per share (EPS) forecast for this year in the red circle. That number is not even pricing in Goldman’s forecast of a $65 dollar oil price by year’s end.


Now, according to Morningstar, there is a 50% probability ET will lose $700 million in revenues on the likely Dakota Access Pipeline closure …


However, they have over $50 billion in revenues and Morningstar’s $20 fair value price has the $700 million loss built in …


So I like playing this one with an outright call purchase …


I’d like to see ET drift a little bit lower so I can buy the $6 strike call under $1… 


Then if ET goes to $10, I’ll double my money.


I think we may get many great opportunities in this correction to get set up for the Blue Wave rally in Q2 …


Have a great weekend everyone and as always,


Live and Trade with Passion,


Griff

Correction over jump on Exxon

Exxon (Ticker: XOM) has made an incredible turnaround 


The oil and gas company is up 50% since its October low …


Plus, Morningstar gives XOM a 5-star rating … and puts the current price ($46.06) at a 39% discount from fair value ($74).


So, after a nice pull back from overbought territory (see graph below) …


It’s time to put a tiger in your tank.

What you have to love about Exxon is they refused to cut their dividend during 2019/2020 when oil prices tanked …


Now, check out expectations for the next two years …



It mostly due to their cutting costs and holding back a bit of capital investment …



Here Is the Trade I did:

I purchased a 47.5/52.5 Call Spread for $150, which is my maximum loss with $500 as my maximum profit …


You get a nice 3.3 to 1 reward to risk and I chose a July-19 expiration to be in play for an infrastructure spending package in Q2 …



Bring it Home

It is really important to stay with the longer-term game plan and look for opportunities to take advantage of corrections as your entry point for trades …


I love the energy sector and have been waiting for Exxon to pull back a bit …


I have my eye on a couple of other energy names and will highlight them in future posts.

Have a great day and as always …


Live and Trade With Passion My Friends,

Griff


DISCLAIMER: FOR EDUCATIONAL AND INFORMATION PURPOSES ONLY; NOT INVESTMENT ADVICE. The materials presented from Option Pit LLC are for your informational and educational purposes only. Neither Option Pit LLC nor its employees offer investment, legal or tax advice of any kind, and the analysis displayed with various tools does not constitute investment, legal or tax advice and should not be interpreted as such. Using the data and analysis contained in the materials for reasons other than the informational and educational purposes intended is at the user’s own risk.
DISCLAIMER: OPTION PIT LLC IS NOT AN INVESTMENT ADVISOR OR REGISTERED BROKER. Option Pit LLC is not responsible for any losses that may occur from transactions effected based upon information or analysis contained in the presented materials. Specific trading ideas or strategies discussed in the presentations or materials are entirely illustrative and do not constitute the solicitation of a transaction (or transactions) or a recommendation to execute a particular transaction or implement a particular trading strategy.
DISCLAIMER: TRADE AT YOUR OWN RISK; TRADING INVOLVES RISK OF LOSS; SEEK PROFESSIONAL ADVICE. To the extent that you make use of the concepts with the presentation material, you are solely responsible for the applicable trading or investment decision. Trading activity, including options transactions, can involve the risk of loss, so use caution when entering any option transaction. You trade at your own risk, and it is recommended you consult with a financial advisor for investment, legal or tax advice relating to options transactions.

The Worm Has Turned… What’s next?

Hey There Income Hunters,


Well, the patience paid off … 


And, boy, was it worth it … a recent put spread play produced a 60% profit — in just six days — for a 3,500% annualized return!



This is how the divergence between price and relative strength of price played out:

  1. On Jan-08, SPY set a high of 380.59 and set a high RSI at 69.88 

  2. It then reversed and traded down to a low of 373.70

  3. It held and reversed back up and set a new high of 375.25 … however, this time the RSI only increased to 67.53 and the market traded off a bit from there.

This divergence between price and relative strength of price revealed less strength on the rally to new highs …

I executed the 385/375 put spread and five days later the market broke down …

I booked my profits on SPY and have similar exposure elsewhere. Let’s check it out … 

IWM = WIN

I also recently purchased the iShares Russell 2000 ETF (IWM) 113/103 put spread on and will let that run.


I would really like to take the IWM trade to Feb-19 expiry. Here’s why …


The chart below shows recent activity in IWM with the strike I purchased (213) and the strike I sold (203).


To maximize the trade, I would like IWM to close below 203 on Feb-19 …


In that case, I would sell IWM at 213 via the long put, since a put is a right to sell the stock, and also buy IWM at 203 via my short put, since a short is a right to purchase the stock …



I expect IWM to trade down to the 193-198 area on this move …


I think this is a mild correction since the Fed will most likely come in and support the market by doing more quantitative easing (QE).


I also think this move down could push the Biden administration to increase its stimulus package, which will be good for the market.


And I firmly believe we’ll see upwards of $5 trillion in stimulus spending in 2021.



Bring It Home


So, once the broad indices get oversold on the relative strength index (RSI), I will look for an opportunity to get long …


Volatility is going to stay high for a while and I will be teeing up plenty of other trades over the next week.


So stay tuned, and as always …


Live and Trade With Passion My Friends,

Griff


DISCLAIMER: FOR EDUCATIONAL AND INFORMATION PURPOSES ONLY; NOT INVESTMENT ADVICE. The materials presented from Option Pit LLC are for your informational and educational purposes only. Neither Option Pit LLC nor its employees offer investment, legal or tax advice of any kind, and the analysis displayed with various tools does not constitute investment, legal or tax advice and should not be interpreted as such. Using the data and analysis contained in the materials for reasons other than the informational and educational purposes intended is at the user’s own risk. 
DISCLAIMER: OPTION PIT LLC IS NOT AN INVESTMENT ADVISOR OR REGISTERED BROKER. Option Pit LLC is not responsible for any losses that may occur from transactions effected based upon information or analysis contained in the presented materials. Specific trading ideas or strategies discussed in the presentations or materials are entirely illustrative and do not constitute the solicitation of a transaction (or transactions) or a recommendation to execute a particular transaction or implement a particular trading strategy.

DISCLAIMER: TRADE AT YOUR OWN RISK; TRADING INVOLVES RISK OF LOSS; SEEK PROFESSIONAL ADVICE. To the extent that you make use of the concepts with the presentation material, you are solely responsible for the applicable trading or investment decision. Trading activity, including options transactions, can involve the risk of loss, so use caution when entering any option transaction. You trade at your own risk, and it is recommended you consult with a financial advisor for investment, legal or tax advice relating to options transactions.

Tide Turning on Small Caps?

Ah, the art of contrarian investing …

It’s an investment strategy that rewards patience, confidence and rationality with high returns.

Well, the market has certainly been testing my patience lately, as valuations seem to have lost all meaning. (Hello, GME!)

However, it can never shake my confidence … and I have some good firepower behind me right now.

Here we go …

The iShares Trust Russell 2000 ETF (Ticker: IWM) has met its upside target from its breakout in November. 

Here’s how I measure the target …

  • First, I connect the major highs.

  • Then, when the market breaks above that trendline, I measure the distance from the first correction below the trendline and add it to the breakout above it.

See it in action here:

I’m ALSO leaning on a negative divergence (shown the chart above), meaning price has increased while the Relative Strength Index (RSI) has decreased since Jan. 12. 

The RSI, you’ll recall, is the index of the relative strength of uptrends versus downtrends.

My big picture idea is still the same. …

The Fed will keep printing and come up with new tricks to stimulate the markets, and hopefully the economy, until they spark inflation …

This Russell 2000 trade and the SPY put spread I bought last week are short-term trades …

I see a window over the next month where the market can correct around 5-10% …

As a contrarian trader, when the put/call ratio is at an extreme, that’s a pretty solid signal for to go against the crowd…

The Put/Call Ratio Is Tilted

The put/call ratio is a useful indicator of the imbalance of positions in the options market … 

A ratio of 1 means there is an equal number of open positions in puts and calls and the options market is in balance … 

Right now, the ratio is 70% puts versus calls, which is a 16-year low … 

Making the Trade

I think we will see a small correction within a couple of weeks and that is what I am playing for …

Check out the trade I did today …

I purchased an IWM 213/203 Put Spread expiring Feb-19 …

I paid $316 for a maximum profit of $684, which would be a 216% return …

Bring It Home

Income Hunters are at their best when they focus, aim and shoot.

When you take the right shots, it’s easy to manage the trade …

Having a good location minimizes my risk. If IWM closes on a new high, I close the trade with minimal loss.

However, if I am right I double my money at a minimum.

Have a good Wednesday and as always …

Live and Trade with Passion my Friends,

Griff

From The Big Short to the Incredible GameStop Long

HHey There Income Hunters,

Playing in heavily shorted stocks can generate some monster rewards.

Of late, there has been no clearer evidence of that than the ongoing GameStop Moonshot.

One of Wall Street’s most hated stocks has soared to record highs.

Charts don’t lie …

Bloomberg reported that one investor has turned a little more than $53,000 into $11 million.

When it comes to the hard-to-borrow names (stocks with a limited supply for short-selling), options can give you a heads up on the “squeeze play.”

That’s when the costs for borrowing stock rises forcing the shorts to cover.

Big call buying can reveal insider info that borrow costs are about to rise … 

Check out the increase in calls ahead of GameStop’s big move …

The Genius Is Back
Michael Burry, the famous hedge fund manager and inspiration for the movie The Big Short, is now making a fortune being long GameStop …

In August 2019 he purchased 3 million shares of GameStop, and as of Q3 2020 he was still long 1.7 million shares …

At the high Monday, GME was up an incredible 5,868% since Aug. 2019.

Burry may have been in there letting some more shares go yesterday.

I mean, look at this incredible move!

      

Somebody get Christian Bale on the line for the sequel!

What Drives the Squeeze Play?

Let’s take a look at squeeze play that has sent GameStop to the stratosphere.

A squeeze play, remember, gets its name from the shorts getting squeezed on the cost to borrow the stock. If painful enough, it can cause the short to cover, sending prices even higher.

GameStop shares had fallen 72% in 2019 after a series of disappointing earnings reports and worries over its future in the digital-download landscape.

Enter Michael Burry, who stepped in at the most pessimistic point with the stock down around $2.

Burry believed that both the Sony and Microsoft next-generation consoles were likely to have “physical” optical disk drives, which would be supplied by GameStop.

He also played down concerns over competition from new videogame streaming competitors like Alphabet’s Stadia.

“The streaming narrative dovetailing with the cycle is creating a perfect storm where things look terrible. [But] it looks worse than it really is,” Burry said in an interview with Barron’s at the time.

Bingo!

THAT is the foundation for a squeeze play.

Many willing sellers based on the consensus narrative and a few geniuses envisioning a monster-shot home run.

Keep an Eye on Floating Stock

More shorts than floating stock set the squeeze play in motion.

Floating stock is the number of shares available for trading of a particular stock …

It’s calculated by subtracting closely-held shares and restricted stock from a firm’s total outstanding shares.

Game Stop’s short interest, meaning demand to borrow the stock, recently reached an incredible 71.2 million shares, which was 144.34% of floating supply. See below…



That set the stage for the squeeze play. Once the short interest (SI 71.2M) rises above the float (49M) there is no longer enough stock to cover the shorts and the shorts are squeezed, meaning they must buy back their shares …

Who’s Next?

Below is a list of names with high hard-to-borrow interest versus the float …

One company on the list that I think is very interesting is Bed, Bath and Beyond.

The company has been buying a tremendous amount of its own shares, plus the short interest is almost 70% of the float …

The $25-$30 level would be an excellent location to open a long position.

You have two potential positive forces at work… Short covering, plus the company stock purchases…



Bring it Home

Follow the Stock Borrow Market. It can give you great insight to flows in and out of the underlying price. You can request a hard-to-borrow report from your broker… 

Every so often you can find the rocket fuel that will provide supersized gains.

Live and Trade With Passion My Friends,


Griff




PS – Here’s a shot of Christian Bale playing Michael Burry in The Big Short, which is a top-10 movie for me.

It’s entertaining and provides a realistic education on what drove the bursting of the housing bubble …

I like it almost as much as the Bed, Bath and Beyond play I mentioned above …