I like to use fractals of past market or sector performance to predict future movement. That’s the way I trade, and it’s worked pretty well for me. Because of this I tend to read McClellan (I subscribe, and no I’m not getting a dime to endorse him, I’m just saying I like his fractal analysis) and also Market Anthropology.

Now, first of all, I bought TZA based largely on one of McClellan’s fractals using the LIBOR, and I discuss that in previous posts. Unfortunately I put a stop on the position. I don’t like trading with stops because here, for example, I got stopped out when I didn’t want to be. I made an 88% profit so am not complaining but with recent action I think it would have been around a 500% profit. No use crying over spilled milk. I placed a stop primarily because I am a professor and I teach one of my classes right at market open. This hour of blind time always makes me nervous.

Now, it seems we are in for a bounce, I think it might be a nice bounce for a few days, in which case I will certainly re-enter TZA. McClellan’s LIBOR fractal suggests a big drop through Oct, and this fits with general seasonal patterns.

I am growing even more confident in my Sept FXF puts and I’ll tell you why. Money is now starting to flow back into bonds. People were parking it in the franc during the US debt ceiling crisis. I think we’re going to start seeing an outflow from the franc. Hopefully this will happen quickly, because there is a seasonal factor working against my position: the franc tends to rise Sept-Dec along with gold. (The franc is almost a proxy for gold.)

Now, a big factor still to be reckoned with is the Fed meeting on the 9th. We pretty much already know what they will say; same as before. However the market is probably going to be very volatile between now and then.

I am still of the opinion that silver and gold are due for a big correction. I’ve been saying this for a long time and will not repeat myself. Often terminal velocity is reached by a macro or political event, and I think the combination of the Greek debt crisis, the US debt ceiling crisis, and the Fed meeting may provide the necessary jolt for terminal velocity (ie, correction). Also, as I said, money is flowing back into bonds. This is a macro event which may influence precious metal prices very strongly. Now, I’m talking specifically here about silver, and I say it’s due for a big correction partly because the fundamentals are not there; neither the industrial demand, nor this supposed shortage of silver. Every reliable source I have read (not a blog) has indicated there is a lackluster industrial demand and an oversupply of silver. Gold is probably a different matter. Though I see it due for a correction, I will probably buy on a good dip, partly because of the seasonal gold pattern; gold tends to rise from Sept through Jan because of the Indian and US and European holiday seasons. However, these things being said, I have to think about my ZSL calls, which expire in 16 days. If I don’t see profitability by the 10th, I will liquidate on the 11th and probably buy Dec puts. Another intangible is whether LaSalle St is interested in futures margins. They were when gold was this high before. But maybe what they were interested in was silver prices, not gold. I have no insight into the thinking of the boys on LaSalle St but we should keep them in mind.

Now, let’s assume there is a broad-market bounce within the next few days. I see this as likely partly because the RUT has pierced major support. However if you’ve looked at your charts you’re no doubt aware that we’ve made a head-and-shoulders pattern, which strongly suggests a big drop in the near future. Again, this is reinforced by McClellan’s fractals and by general seasonal patterns.

I am inclined to follow the seasonal trade and start going long in Oct. I will probably buy triple-weighted ETF options on an index, but I will also be looking for value opportunities on equities. The Company likes value. Almost always our plays, such as shorting the franc, are value plays (I don’t know if it’s cheap to short the franc now, but it was when we made the trade.) So looking ahead, I want if possible to accumulate BAC, C, F, and XOM. This will depend a lot on the value scenario in Oct however.