The DeCarley Perspective Trading Newsletter

 This newsletter was emailed to DeCarley Trading on July 13th, 2011

Thank you for choosing DeCarley Trading.  We are proud to offer the DeCarley Perspective as an informational guide to our clients and subscribers.  We hope that you walk away from the newsletter with a better understanding of market fundamentals, as well as technical and seasonal factors. 

**There is substantial risk of loss in trading futures and options.

**Past performance is not indicative of future results

On the radar:

·         Will the shimmer of gold fade away?

·         The crude reality of oil

Gold

We began feeling bearish on the metal yesterday afternoon as it was apparent than the European fiasco was being put on the back burner.  Nonetheless, the rally continued with newfound catalysts; investors seem to be finding a reason to buy gold regardless of what is going on in other markets.  A few weeks ago, a shaky Euro zone, tumbling stocks and weaker Euro were all reason to buy gold.  But more recently, higher asset prices (stocks) and a higher Euro (lower dollar) are being "blamed" for continued buying.  However, in our opinion the explanation is a little less complex....we think we are simply getting another herd mentality rally in gold.  This isn't the first time we have seen it, and it certainly won't be the last. 

It has taken gold traders a few months to get over licking their wounds from the last venture into the high 1500's but we have to say this is one of the most impressive rallies we have EVER seen in the precious metal.  Today's positive close was the seventh consecutive with all but two of the daily gains being double digits....but we wonder if gains will be sustainable given the current fundamental climate.  Sure there are some real concerns in regards to debt contagion, slow economic growth and possible inflation but the market appears to be pricing in a lot of "what ifs" rather than "what is" at the moment. 

For instance, money seems to be flowing into the yellow metal as insurance (and I use that word and theory lightly) against a U.S. debt default and the possibility of more quantitative easing (money printing) but the Fed.  Yet, in Mr. Bernanke's testimony today he merely suggested the checkbook is still open, not that he would be writing another check.  Simply put, the market is pricing in news that might not be a likely event. 

We view the value of gold as perception based, rather than reality based; nonetheless, just because we don't think a shiny yellow metal is worth $1,600 per ounce doesn't mean the market cant.  I believe gold is a lot like a diamond, it looks and feels great but the price tag is hard to justify.  Did you know diamonds are extremely abundant?  They are only expensive because the rock can only be mined in one part of the world and the same company happens to own nearly all of the land (monopoly).  Therefore, the value is based on preference rather than rarity or intrinsic usefulness.  If you are yearning to go long gold, we encourage you to wait for a pullback.  Relentless rallies in metals rarely end as well as many hope for. 

On a seasonal note, gold prices tend to see strength in late July.  Either we are getting it early, or there is more rally to come.  At current prices, we feel like the best trade is for the bear camp but might not be opposed to flipping to the bull camp on a decent sized correction.  Look for resistance in the August contract near 1595/1600 and then again near 1611ish.  Support on the way down will be 1538 and then 1490.  It's tough to pick a top in a runaway market so the "best" play might be to sell calls into strength or for those that aren't comfortable with option selling, scaling into short mini or micro futures at or near noted resistance levels might do the trick. 

Open position: Short August gold 1610 call @ 5.00 (depending on volatility, we might be willing to add on to this trade at better prices)

Crude Oil

Despite a sluggish global economy, the inelasticity of crude oil has managed to keep demand up and supplies continue to be vulnerable to event risk.  According to a report issued by the Department of Energy yesterday, world demand for 2011 is expected to be about 88.16 million barrels per day.  At the same time, the DOE believes world production will be 87.70.  They have also lowered surplus capacity to 2.95 million barrels per day from 3.9 in December.  With numbers like these, it is clear to see the IEA release of 2 million barrels of oil per day for 30 days in the month of July was more of a symbolic gesture than a dramatic change the market fundamentals. 

On June 19th we issued a DeCarley Perspective that speculated on a near-term low in crude oil and mentioned support at $91.75 and again near $89.  We know now that these levels not only held, but enabled a sharp rally.  In the newsletter, we also mentioned expectations of resistance near $99 per barrel, and that too proved to be accurate, but we were also looking at an ultimate target of $104 based on the August contract. 

We are wondering if our $104 expectations were a little optimistic, but we are going to cautiously continue to look for the $103/$104 area before running into resistance.  If you are a bear, these are the prices that might afford you the best odds of success.  Corrective trade could then bring prices into the mid to high $90's before moving back up...post corrective trade could see prices as high as the mid $105's (September contract). 

DeCarley Trading

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**There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.