By Jim Comiskey

The markets have continued their volatile ways. It has been two months of sharp drops and big rebounds. Overall, the stock market and many commodity markets have trended much lower and it’s really hard to call a bottom in these markets.
Despite a weak U.S. economy, the U.S. dollar has been rallying since the middle of the summer. And as the dollar rallied, gold drifted lower. On July 15, 2008, gold traded near $1,000 an ounce. As of this writing (December 2), gold is trading closer to $800 an ounce. In times where gold would traditionally be used as a safe-haven, the U.S. dollar has emerged as a safe-haven among currencies.

Generally, the U.S. dollar is the main driver of the price of gold. If the dollar rises, gold typically falls, and vice versa. You can see in the charts below. The dollar’s rally has led to gold’s decline. I don’t see gold recovering until the dollar starts to turn lower.

If you’re looking to trade gold, I would recommend a January call spread. I recommend buying the 775 calls, which are currently trading for about $3,430, not including commissions. At the same time, I recommend selling the 790 calls to help finance the purchase of the 775 calls. The 790 calls will bring in about $2,800 in premium. In total, this position is a debit spread and your not cost is approximately $630, excluding commissions. The January call option expires on December 26, 2008.

Your target by December 26 would be for gold to get back above $790, which I think it can easily do. On expiration, you exercise your right to go long the futures at $775 an ounce and you get assigned a short position at $790. This gives you a $15 gain, or $1,500, before commissions. If your cost was $630, as mentioned in the preceding paragraph, your profit is about $870, and you get your original stake back.

S&P 500

In the S&P 500, we’ve never seen this kind of volatility ever. This is all from the sub-prime mess and the credit crunch. The financials have continued to get beat up, and as the banks go, so go the indexes. The volatility we’ve seen can’t even be compared to any point in the history of the U.S. stock market. There is nothing that compares.

If the banks begin to stabilize, I’d jump on the S&P in a heart beat. The stock market is very oversold, but until the banks calm down, I wouldn’t be too bullish. The Relative Strength Index (RSI) is also indicating oversold conditions. If the S&P 500 revisits the 783 bottom of late November, then I’d be a cautious buyer with a 10 to 15-point stop.

The survival instinct in these markets is fear. And if you do not have fear, you will not survive. Make sure that any money you put into these markets is strictly risk capital, because of the volatility. At the same token, this extreme volatility also presents unprecedented opportunity that we have not seen in years.

Jim Comiskey is a Senior Market Strategist with Lind Plus. He can be reached at (888) 800-5373 or via email at jcomiskey@lind-waldock.com.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

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