Watch List, Saturday, 02/07/2009 by Keene H. Little Click here to email Keene

HAVING TROUBLE PRINTING?

New Watch List Entries

GDX - Market Vectors Gold Miners ETF

XLF - Financial Sector SPDR ETF

Dropped Watch List Entries

None

Current Watch List

GDX - Market Vectors Gold Miners ETF

I've moved this play from last week's New Plays section to the Watch List section because it was never triggered last week. So we're still watching for an entry (with an updated trigger price). I discussed my thoughts about why I wanted to short gold for what I believe will be a big move down. But first a comment from a reader on the chart I used last week for GDX (see chart below):

"Your GDX chart caught my eye. I have no position in gold or gold stocks as I see no good US $ trend. But, the chart, as I see it, in addition to the wedge, has a H&S bottom formation with the neckline as your upper wedge line with a potential upside target in the mid-forties."

Good eye on the inverse H&S pattern on GDX. But an inverse H&S is much more reliable at a bottom rather than in the middle of a rally (same with a H&S pattern being less reliable in the middle of a decline). But speaking of H&S patterns, there's a larger inverse H&S pattern in play since the September low (left shoulder). It's currently chopping around the neckline of that one and doesn't exactly look like it wants to break north (yet). But it's definitely worth keeping an eye on it since it wouldn't exactly help the bearish play.

Fund Info:

The Gold Miners ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index. The Index provides exposure to publicly traded companies worldwide involved primarily in the mining for gold or silver ore, representing a diversified blend of small-, mid- and large-capitalization stocks. The fund has been trading since June 2006.

Upside trigger: $37.40, stop at $41.50 ** note new higher trigger price**
or
Downside trigger: $31.30, stop at $35.00

BUY 2010 $30 LEAP Put, KFW-WD, $5.20 x 5.40

Chart of GDX

As depicted on the chart I'm looking for a little higher for GDX to tag the top of its rising wedge pattern and potentially the Fib projection at $37.47. This should coincide with gold pushing marginally higher to a target price near $944. With a drop in gold (assuming it will drop) and a drop in the stock market we should see good results for a put play on GDX. Gold Mining stocks have held up well since October 2008 but they still have underperformed Gold futures on a major trend basis over the past year.

Notice that I use the underlying to trigger entries and stop levels, not the price of the option itself. Depending on volume, rate of price change and other factors you may be able to get a price between the bid and ask.

XLF - Financial Sector SPDR ETF

Fund Info:

The investment includes companies from the following industries: banks, diversified financials, insurance and real estate. The fund will normally invest at least 95% of its total assets in common stocks that comprise the relevant Select Sector Index. This fund has adopted a policy that requires it to provide shareholders with at least 60 days notice prior to any significant material change in its policy or its underlying index. It is non-diversified.

Upside trigger: $11.50, stop price $10.00

BUY 2010 $12 LEAP Call, YUW-AL, $1.53 X $1.71

Downside trigger: $$7.70, stop price $6.50

BUY 2010 $9 LEAP Call, YUW-AI, $2.76 X $2.90

Chart of XLF

The daily chart shows two potential descending wedges and unless there's a significant break below $6.70 I'm looking for an upside resolution for this fund.