Oil Divergence From Copper Points To Coming Contraction

The most recent post was a video on how commodities were leading the market lower and how oil had remained buoyant considering the volatility in the overall equity market.

Charted below is a divergence between the price of copper and the price of oil. Oil may be getting close to an area that will put pressure on both the consumer and the producer should copper prices remain weak.

Oil began diverging from copper at the beginning of October when all markets made a YTD low. It took oil just 3 weeks to eclipse the September highs while copper lagged both commodities and equities. At the end of the month, oil made another thrust higher that lasted throughout November. That month, copper was down 2%.

For the month of December, oil is flat and copper is slightly lower though copper is in a much weaker technical position and like the economy, copper is directly vulnerable to headwinds such further elevation of oil prices.

Silver Long Triggered On Pierce Of Trendline

Take A Look At Copper

Looks like a breakdown of a 3 year trendline in JJC after a bear flag from the July highs. Copper is a leading indicator and if this chart confirms, it could signal further downside for the equity markets.

FS – Gold Could Correct To $1,500: Technical Analysis

http://www.financialsense.com/contributors/nu-yu/2011/08/25/gold-could-correct-to-1500-technical-analysis

Gold is in the second phase of a Bump-and-Run Reversal Top pattern, which typically occurs when excessive speculation drives prices up steeply, and is now at a critical juncture where substantially lower prices could be realized. Let me explain.

According to Thomas Bulkowski, the Bump-and-Run Reversal Top pattern (read here for details) consists of three main phases:
1.A lead-in phase in which a lead-in trend line connecting the lows has a slope angle of about 30 degrees. Prices move in an orderly manner and the range of price oscillation defines the lead-in height between the lead-in trend line and the warning line which is parallel to the lead-in trend line.
2.A bump phase where, after prices cross above the warning line, excessive speculation kicks in and the bump phase starts with fast rising prices following a sharp trend line slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height. Once the second parallel line gets crossed over, it serves as a sell line.
3.A run phase in which prices break support from the lead-in trend line in a downhill run.

As the chart above shows the price of gold has breached the sell line at $1,830 so we can expect to see a correction with downside price targets for support as follows:
1.$1,750 for support from the dotted pink line.
2.$1,650 for support from the warning line.
3.$1,500 for support from the lead-in trend line.

Original Source: http://fx5186.wordpress.com/speical-mid-week-update-8242011/

What took place in silver during the months of January through May should be a lesson that no asset, no matter how good the fundamentals are, can sustain parabolic moves. The article above is one of the few that I have seen recently that has been viewing the current run in gold from a more objective viewpoint. The article uses a geometric form of technical analysis which is an aspect that is often overlooked as the charts do follow certain forms of symmetry that can sometimes be amazing.

Financials Lead Low Volume Selloff

The market is selling on low volume which leads me to believe that there will not be another flush today. If the market holds up for the next two days expect shorts to cover before Jackson Hole and some relief going into Labor Day weekend.

Stocks Plummet Again On European Fears

The story of the week has been Europe though news was somewhat suppressed in the beginning of the week as the market floated higher on low volume with a tight trading range. I exited TBT on Thursday on the failed bull flag though there may be another bottoming tail in play on the daily chart as it closed higher than Thursday’s low today. TBT was only a small position and the stop out does not hurt much.

Over the last two to three days I have stuck to intraday trades of sector etf’s mainly because of how sloppy this market has been. The volatility is still elevated and equities are much too sensitive to news to be holding significant positions overnight. The switch over to the daytrading techniques has been successful, I pulled profits on ERY and TZA on Wednesday and Thursday The moves have been less profitable but the strategy has certainly been safer. I will resume swing trading if and when the market finally stabilizes. Quite frankly, the volatility has been aggravating and I was close to taking a nice vacation from this week due to the instability. Nonetheless, it is refreshing to not be heavily exposed during this beatdown and there are few interesting developments on the charts that I’d like to share.

The only bullish part about the chart of the SPY is that the bottoming tail is still well intact despite the obvious weakness in the market. The tails on the previous two candles signal that there are a lot of sellers who are still willing to enter short positions even at these levels.

For those of you who might not know, my strategy is to use the chart to understand the mentality behind the moves. So, if I had to explain the reasoning behind the activity over the past week, I would conclude that the low volume in the beginning of the week was the institutions allowing the market to float higher, and that the selling later in the week was them driving it lower before options expiration so that they could pocket the premiums. Otherwise the flush over the last two days is due to thousands of ants that are convinced that this is a good level to short the market at.

Not to downplay the weakness in the market but the SPY has not confirmed or even tagged the 110 low yet which means that we still have a bottom. So the point I am making is that despite the downside hype, we have not made a new low. In other words, the chart leaves out opinions and tells it like it is.

If the market does in fact plunge once more, the downside for the SPY should be in the $107.50 area and after that, the master level is around $101.75. Should $110 be tested again, it would be more vulnerable as the recent bounce would be considered consolidation from the move down. Another thing to remember is that Bernanke speaks at Jackson Hole this week and though no announcement regarding additional easing will be made without the FOMC, the market will still hang on his every word which can cause a reversal in favor of either side.

The most intriguing chart so far is copper. Copper has held up well over the last two days and actually posted a gain today despite the sharp decline in equities. There is a bit of a bull flag there on the daily chart and if copper gets a solid bid, it could signal interim bottom in the market. On the other hand, if it breaks down, it could become a failed bull flag which would indicate that there will be more immediate downside.

I would have liked to have seen this chart last week and picked up JJC for a pierce of that 3 year trendline. If this trendline holds, copper will get another bounce and there is a bottoming tail there on the weekly chart. This week’s candle was negative but the range stayed inside that of the previous week’s which is typical action after a bottoming tail takes place. Again, if copper gets a bid off of this trendline, it will likely breathe some life into the equity markets and could possibly signal a bounce.

The last chart that really catches my attention is silver. Silver has underperformed gold which certainly makes sense because silver is much less of a fear trade than gold since silver has industrial and technological applications. Because of this silver is negatively effected during a period of economic contraction as the demand for those goods falls as the economy shrinks. However, today’s action was a different story as gold did make a new high but looked weak intraday especially compared to silver which had a giant move higher. Again, it is surprising to see silver outperform gold in this environment and it leads me to believe that a big fish may have taken a large amount of shares and/or ounces off of the market.

In any case, today’s action does signal a breakout above $42 assuming it confirms today’s move on Monday, or perhaps sometime late next week after first consolidating. It will be interesting to see if the metals pull back or rally into the Jackson Hole conference. There doesn’t seem to be any way the conference can turn out without the metals surging. On one hand, Bernanke could sound hawkish, and then the risk of default due to not having any life support will scare the market and force everyone into gold. On the other hand, he hints at additional easing and the metals surge anyway. I think the only shot he’s got is to sound complacent, condescending, and indifferent, as if he is slightly confused as he looks down on the market and shakes his hand for reacting the way that it has. In my opinion, this is kind of how the most recent Fed minutes came off and it is part of the reason the market found its footing and moved off of the lows.

In any case, that’s my take on the upcoming Fed conference and my advice to traders is so completely stay out of everything this week unless it is a day trade. Cash is outperforming many asset classes including bonds (which have negative real rates) and equities so it doesn’t make much sense to heavily expose your porfolio until the dust settles. Abide by your stops, and if you enter a winning trade, take the easy money.

Equities Pause On Merkel/Sarkozy Comments

The market was weak after the comments from Merkel and Sarkozy that were less than accommodative though it seemed that many were expecting the two to not announce any type of new intervention. This may be why the selloff today was short lived and the market recovered for just a 11 point loss. The media may continue to hype the downside but keep in mind that this is an options expiration week and the market is currently showing some resilience after the late day rally so any pullback should be taken as bullish consolidation until 110 is lost on the SPY.

The tail on today’s candle suggests that there are still plenty of buyers out there though I do expect a bit of a pullback this week and perhaps some increased volatility. If you look at the 10 minute chart of the SPY and all of the major sector ETF’s (XLE, XLF, XLU), you can see some major yo-yo action over the last two days that is second only to the 700 point reversal from Tuesday of last week that marked the bottom to date.

If the right patterns presents itself, I’ll be looking for more long positions on a bullish pullback. The SPX should be headed in the range of 1240 to 1260 over the next week to two weeks. Utilities and financials are the sectors that I am watching for possible long swing trades since utilities are the strongest and may outperform based on strength, and financials are the most beaten up and may surge due to technical reasons.

Gold has been one of the barometers for strength or weakness in the market over the last two weeks and though it did have a nice up day, it is still trading within the range of the pivot high of $1817 that was made last Thursday. To put it plainly, if gold does not make a new high, then the markets will get a lift and will convert into a more complacent mood at least in the short term. Also, it’s worth mentioning that short term calls on GLL are looking succulent.

For those still wondering, TBT is still in play. Action over the last three days is nothing more than a bull flag which is something that I predicted would happen last week. The bottoming tail is still holding and any noise about treasuries surging after the Merkel/Sarkozy comments is nonsense. The chart clearly shows bullish consolidation after an oversold bottom and a sharp rally off of the lows. Targets for TBT are $28.50, $29, and $30.75 and stops should be advanced accordingly. Should the bull flag fail, TBT will become a stop-out and yields will fall further.

SPX Breaks Higher But Rally Is Showing Weakness

The SPY closed above Tuesday’s highs which were made during the rally after the Fed minutes. This is a key level for the market as it is now above that 700 point reversal and has a chance to rebound. However, today’s action was extremely weak considering the 6 point rally in the S&P as the market gapped higher on lower than average volume and failed to sustain the highs of the day. For this reason, I have sold F, HBC, and C as the market may yet again flush out weak hands and make yet another move lower.

The SPY is currently set up for an evening star reversal and I think that there is a high probability that we’ll see a gap down on Monday followed by slightly more downside on Tuesday. However, it is very important to keep in mind that I do not believe we’ll make a new low, though if we do, the market essentially goes back to sqaure one and may not bounce again until it reaches 1000 on the SPX. Remember what I mentioned in the most recent video analysis, the institutions will fake out amatuers with moves and by promoting media hype. I successfully called confirmation of Tuesday’s bottom when I saw the market plunge on Wednesday but not make a new low. If the SPY does not close positive on Monday, then today’s action is still not confirmed and the market will likely consolidate further before fully rebounding.

One big positive for the market is the weekly chart. There is a blatantly obvious bottoming tail on the weekly chart of the SPX and this week’s action should lead into a rebound. However, often times a bottoming tail is followed by another down day that does not make a new low. Case and point, the daily chart of TBT over the past week.

Ultimately, I think we’ll see some consolidation next week that most will mistake for another selloff and will miss out on being long for the rally that will follow. I think the best course of action is to wait in cash here and look for longs should the market pullback next week but fail to make new lows.

As stated earlier, I have liquidated my longs however I still maintain my position in TBT as it is one of the strongest chart patterns in the market. Again I hear news of treasuries “surging” yet an accomplished market technician will tell you that this is simply the beginning of an inside bar pullback on the daily chart of TBT. TBT is holding up well and after consolidating it should shoot higher to $29.

As a side note, above I mentioned how bottoming tails are typically followed by another down day that does not make a new low and cited TBT as an example. Note how on Monday the tail made on the chart was large as the ETF closed back near the highs. Then the following day it sold off again but stayed within the tail made on the previous day. For this reason I opened my TBT long since the news was pumping the upside in bonds and the downside in equities yet the charts were failing to make new lows or highs respectively.

Be smart, the market is still volatile. I am mostly in cash outside of TBT and though I do believe we’ll see some selling Monday, I probably won’t look for shorts in the market. Instead, I’ll most likely be looking for long opportunities on any consolidation next week.

Bottom Holds As Equities Surge

Despite yesterday’s downtalk, the market surged for a huge gain as gold and treasuries dived.

Gold And Silver Miners Look Weak In The Face Of Gold Making All Time Highs

Despite gold making yet another all time high again today the gold mining stocks have looked weak and are lagging spot price by a wide margin. Part of this is to be explained by the current risk-off nature of the market since investing in a company that owns gold is riskier than just buying the metal. At this point traders aren’t looking for profits as much as they are looking for protection so the lag between the two makes sense. However in the past a sink in the GDX has led previous corrections in gold and given that gold seems to be making a new all time high every time I glance at the chart, it also makes sense to conclude that there has been a sizeable influx of longs in a short period of time which could tell us that gold is getting extended.

I do see short setups in the sector but I won’t be taking any yet as we are a few hours away from the Fed minutes and a day away from a speech that will be made by the Fed chair. As such, shorting into the Fed announcement would be suicide since you can almost guarantee a rally in gold and silver regardless of what is said (lets face it, Bernanke is the ultimate stimulus for PM’s). However, gold is extended farther than it has ever been save the 1970′s going into the Fed announcement and given that everyone seems to be bullish on the metal, the FOMC may be the perfect contrarian indicator in this case.

Gold is up 15% in the last month which tells us that it is extended but that alone is not enough to initiate a short.

The weakness in the GDX tells us that traders are bullish only on the metal and despite all that has happened, they are not completely sold on gold in the long term and translate gold as an investment as a safe haven and not something that will garner profits. There is a bear flag on the daily chart of the GDX and its target is the pivot low of $53.37 that was set in May. Again, until the FOMC statement is made, I wouldn’t advise any type of trade given that the pattern can be easily negated during Bernanke’s speech, but what you need to know is that if it stays below the 200 MA on a closing basis, the pattern is intact.

Some may remember by article on silver’s long term trends from a few weeks ago where I used the charts of several silver miners that were showing head and shoulders tops to bring to light the possibility of a large correction. The head and shoulders pattern is still intact on SIL and price activity is hovering right on the neckline. Confirmation above the 50 and 200 MA would likely negate the pattern but confirmation below the neckline would initiate a target of at least $16.

Moving on to the weekly chart of SLV, the recent consolidation is still an inside bar bear flag. The lower trendline is where I expect silver to ultimately reach at some point in the future and I believe that a tag of that trendline could be the best buying opportunity we’ll have in silver since the 2010 Jackson Hole meeting. Just be sure to keep in mind that the circumstances in which the level is reached will play a huge factor as to whether or not it becomes the ultimate bottom.

The sum up what I’m seeing on the charts above, SIL served as a leading indicator for the drop in silver as it came 7% off of the highs in the weeks leading up to silver’s apex. Currently we’re seeing similar action from the GDX in relation to gold as the GDX is 9% off of its own peak and gold is continuing to make all time highs as more bulls enter the market. Therefore I’m seeing a few red flags pop up and would advise remaining careful until equities find their footing and gold stablizes.

Regarding the precious metals market as a whole, everything has played out as expected. Gold is making all time highs due to the fear of default and financial problems in Europe, poor economic data in the US, and the downgrade of our debt, which is exactly why we all have been bullish on the metals to begin with. The important thing to remember is that although things are playing out as expected and the fundamentals have never been better, the same thing could have been said for silver in April before the collapse, which if you had bought at the top, you would still be underwater and will still have to wait many months for those highs to be reclaimed.

Caution is the best strategy here. The stock market is getting pummeled and there is no reason to be a gunslinger. A pullback or dip is not a 2% drop in gold in one day after a 15% rally. A pullback is a 5-8% correction over a period of time (I.E.) weeks or months. After silver collapsed some of you may remember me saying ‘I don’t care how far silver comes down, what I care about is how long it consolidates for’. What this means is that time plays much more of a role in a market correction than price does so do not feel pressured to buy more shares of your favorite gold stock in fear of being left behind. That kind of mentality is based off of emotional trading and leaves logic behind.