Cluster of Resistance Follow Up

What a difference 10 days make!

On 05/06/2019 we wrote:

“The final down leg we were bracing for has not materialized and we are quickly approaching the $6000 level. There is a significant cluster of lows in the low $6000’s between June 2018 and November 2018. This support is likely to provide resistance to the current rally. If it holds, we are likely to retest the lows that were made in December 2018. On a decisive break the foundation of the bear story weakens significantly and mid to high $8000’s become the target for the 33% retracement of the 2018 selloff.

Bears may want initiate short positions at $6000 level with stops at $6400-$6500.

Bulls may want to buy and accumulate on pullbacks if we cross $6100 with stops on breakout failure back to $5700.”

The $6000 level broke easily over the weekend session on heavy volume. Interestingly enough, not only did it provide little resistance it has not been retraced too yet. There are several observations given recent price action:

1. The bears have lost. Dips are to be bought from now on until proven otherwise.

2. Rising volume in on this rally means that there is fresh capital being committed not just bears capitulating. This is supportive of the change in sentiment.

3. Our retracement target of $8700 has not been reached and remains the level to watch in the near term. The next target being 66% retracement to high $13,000’s.

4. This rally went parabolic which is not indicative of a fundamental move. While it started with buyers prompting the move, it appears more like a pain/liquidation event more recently. Options prices are supportive of this view. While we have been adamant that implied vol at 60% or below is uncharacteristic of this market and is bound to end we are now in the over 90% in the dated contracts and over 100% in the May contract which is close to panic levels. Call skew is still bid and put skew is suppressed so pain is still to the upside. We do not advise to initiate long option positions as it will be much more difficult to make money on long options. Most people who are buying options here do it because they have to. Vol can still move to 120% but that’s where a well-capitalized player may want to short at least butterflies if not straddles or meaty calls/puts.

5. Given the trajectory of the rally we would not be surprised if a correction is imminent. The levels to watch are $6000’s and even $4500. If we are not making a new low even getting to $4500 level keeps the strategy in the accumulation mode.

Our recommendations are the following:

a) Miners, holders: if a trip to $4500 interferes with your operations hedge at least some of your production or holdings. Given the level of implied volatility we would recommend selling futures or some inventory, buying puts selling calls, or selling calls to enhance returns. Buying puts outright may be treacherous given how expensive they have become.

b) Vol traders: if you have been short at historically low levels you have probably covered by now, if you are long, we would reduce or flatten the position and look for the opportunity to sell either vol or structure. Given the backwardated (nearby over dated) structure of the vol curve a short calendar call spread or a diagonal call spread may be a less painful way to try to collect some of the decay. This is not for the faint at heart and you are trying to time the exhaustion phase of this leg of the rally.

Good luck to all as this market is exciting again.

You can view some relevant vol charts at https://www.sk3w.co/options

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