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.

Markets Finally Bang Out Rally But Volume Is Lacking

The market rallied as expected though volume was weak as only 160 million shares traded on the SPY which is average, but not enough to signal any type of fundamental rally. In addition, the SPDR gapped higher without first testing the lows which is a sign that sellers are not yet in the market. This week is shaping up to be as expected as we rallied for a 2nd day in a row going into options expiration. I am now out of FAS, I unloaded that at $24.46 which was just off of the highs of the day. I’m not concerned with whether or not it moves higher here because at this point I feel that any long position could be paralleled with picking up pennies in front of a steamroller.

I think the most this market has in it is $131.50 on the SPY which is possible that we tag by the end of this week or very early next week. I don’t expect a close above that level but certainly we could kiss it intraday. As far as downside targets, nothing has changed, $125.50 will be the next low before any type of long play will be worth taking.

I have laid off of the PM’s since the peak this spring though I still hear a lot of people asking about them and if they are a buy, hold, or sell. I suggested multiple times that they may get stuck in a trading range – silver particularly, and that has generally been my sentiment for the last month and a half which is why I haven’t taken the time to cover them.

So, here’s my opinion on gold:

I’m not a buyer until it (GLD) reaches $142, where it can be played for a swing trade. Ultimately, its going to $139.50 where it will make it’s next long term bottom in the secular bull market. For spot price, that would be just under $1440/oz. That’s the area where you want to be entering with large orders. Can it be shorted here? Maybe an aggressive trader can short a bounce off of $142, but personally I’ll pass on shorting precious metals in this environment. I talked about this a few weeks ago but the real bargains in this market are the gold stocks, many of which are trading at early 2010 levels while gold is just a percent or two off of it’s all time high.

To the pundits who think that the top is in for gold,

A) You are a poor analyst, or B) You are an unethical person and are attempting to move the price lower to find your next entry point. The top is not in, GLD is still trading 6% above a 31 month and counting trendline. Until it confirms a close below that, any type of topping pattern is off of the table. Again, ultimately, I think GLD pierces that trendline once again as it retraces back to $139.50.

Moving on to silver, I don’t like this inside bearish consolidation and cannot justify a long position here. I personally won’t be a buyer until it reaches the 200 MA which is at about $30 on SLV. The 50 MA is about as flat as a pancake and despite the nice reversal it had today, it’s still below the 20 MA.

The story here is fairly simple, the recent mega top has all of those added retail and overly leveraged buyers retreating into other assets. This is exactly what I talked about before the top was put in, I wanted to see the mainstream media get bored with silver and eventually, capitulation in the market before I became a buyer again. So far, everything is going just as I had hoped it would but I don’t see the capitulation yet, and I don’t like the look of the bearish consolidation on the chart which tells me that it’s headed to the 200 MA.