Commodities Are Leading The Market Lower

Gold, silver, and copper are lagging the market and could signal a downturn after the light volume holiday period comes to a close. Additionally, the NDX is also lagging the market which is telling us that investors are putting their money into less risky assets like DOW stocks.

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Silver Bounce Nailed, Futures Higher Overnight

Silver gapped lower today but rallied higher throughout the day as predicted on Sunday night and additionally, the overnight prints are showing spot silver up as high as a percent and a quarter. Institutional short covering came late in the morning session and again just a half an hour before the closing bell as silver made an intraday low of $26.15, but closed $4.63 off of the lows for just a .30 decline. The pattern on the chart is a bottoming tail and more importantly, silver tagged support in the $26-$27 area, but rallied back for a close just off of the flatline.

This should signal some short term relief in the selling and any shorts may be squeezed out should silver make its way back above $31 tomorrow. The likely scenario is a gap higher off of the opening bell and I plan on exiting my SLV $30 call tomorrow should that happen.

Dollar Call Comes To Fruition, CME Gold And Silver Hikes

The equity market dropped sharply last week after the Fed’s “Operation Twist” was not enough to get investors excited about the long side. Bearish technical patterns in key asset classes signaled that a major move down was coming after the month of consolidation following the initial drop in August. The only chance the market had of holding on for a move higher was the fact that too many investors and traders had already fled the market and had begun to overload the sell side. At any rate, the market consolidated long enough for key stocks like AAPL and AMZN to make new all-time highs which may have been enough to get retail longs back into the market.

Regardless, the market has flushed and more downside should follow, most likely sooner rather than later, but I am not so sure that the market will completely crash in the near future as it appears that policy makers in Europe and the US are already preparing the market for a default in Greece. The fact that Ben Bernanke announced policies last week that he must have known would not be enough to prop up the market smells fishy in itself. Without getting too deep into detail, it looks as if the politicians and bankers are attempting to flush the market before Greece officially defaults on the basis that the default would eventually price itself in.

Moving on to the charts, I can finally claim victory in my call for dollar strengthening as price activity has now indisputably completed a reversal and breakout of the previous downtrend. I originally suggested that the dollar and gold would both strengthen versus the Euro back in February and I also successfully called for the bottom in the dollar in May, citing capitulation selling volume on the ETF UUP for multiple days towards the end of April and into early May.

The dollar index had a nice consolidation of the big upmove in early September right beneath the $78 area. There was major resistance at $77 and after consolidating sideways for a week or so, the dollar yet again broke higher after the FOMC policy decision. The USDX paused on Friday to digest the buying pressure, however the next major level is $78.87 and should the dollar consolidate again beneath this level, it may build the momentum to break through that level and confirm.

Coinciding with the dollar, the SPX paused on Friday after the sharp decline last week. The many patterns that I cited in the analysis videos – the bear flag, the M&A reversal/shoulder head shoulder pattern etc, have all begun to play out. The targets for these patterns are in the 1030 – 1050 vicinity on the SPX and 9700-9800 area on the DJIA. There is already support in those areas and the fact that these bearish patterns are targeting them reaffirms my belief that the market will ultimately trade there. My outlook for this market over the medium to long term is that there won’t necessarily be any 2008-esque collapses, but over time it will appear to have been a grind lower with highly volatile swings in both directions, though the possibility of an outright crash is certainly on the table.

Regarding the near term, I shorted ahead of the FOMC decision which turned profits and should the market consolidate for a few days, maybe less, I may take another short with a stop based on a close above Thursday’s high or a fill of the breakaway gap which was the close to open from Wednesday – Thursday. To reiterate again, the only hope the market has of rallying, is that too many retail investors have piled into short positions and the institutions decide to swing the market higher to shake out the weaker players. The problem with this is that this type of outcome is more typical when the market is close to options ex, and currently we are still several weeks away from next month’s expiry.

Over the last couple of weeks, I have cited copper as a potential leading indicator for a selloff in the equity market given that copper is an economic forecaster. That predictaion has also has come to fruition. Copper first broke down in the middle of last week and I posted the trigger of the bear flag which coincided with the break of a three-year trendline on the weekly chart.

There isn’t much to say about this chart from a technical perspective since it has crashed through every single major level of support on the chart since the initial breakdown. However there is a bit of minor support in the area of $3.17-$3.23, though that area was more or less tagged on Friday and any bounce will be due to pure overextension from the 20 MA, which it is currently 16% away from.

Crude oil was another chart I used as a leading indicator for a move lower in the equity market being that crude, like copper, also gauges economic strength. Again, there isn’t much to go over here, other than the chart pattern worked out yet again, there was a bear pennant on the daily chart much like the one that played out from late April – June and it enabled me to forecast a drop in oil prices that would translate into pressure on the stock market.

Gold and silver both dropped after the Fed announcement and entered an oversold condition in an extremely short period of time. The original explanation was that the European banks were taking profits on long gold positions in order to cover margin calls from the equity selloff. This explanation is arguably good enough to cover Thursday’ selling, but not nearly enough to explain the continuation into Friday. It is painfully obvious that Gold and silver collapsed because inside info was leaked prior to the CME’s margin hike on Friday.

Simply put, the fundamental case for selling on Thursday and Friday should have been dead from the beginning. The Fed was/is always in a box when it comes to a policy decision regarding the price performance of precious metals – if the Fed attempts to stimulate, then PM’s rise on inflation expectations and if the Fed does nothing, or not enough, then the metals rise due to uncertainty and sovereign credit risk. Between the dollar index hitting new highs, the stock market bloodbath, and treasury yields reaching record lows, gold and silver should have at the very least, held the flatline last week, and even that would have come as a shock. It’s not to say that the metals will always rally, but the knee-jerk reaction from the Fed should have at least given them an upside bias for the remainder o the week.

My guess is that the CME had scheduled a margin hike for Friday on the idea that the metals would inevitably rise after the FOMC for the reasons listed above. Someone inside the CME then leaked info to institutions but the problem was that the margin hike was never cancelled after the metals collapsed. Interestingly enough, the last time that the CME hiked margins, there was a selloff leading into the margin hike, and a bottom was put in after the announcement which of course makes perfect sense. The same exact thing happened last week and I expect gold and silver to bounce this week as the institutions cover their short positions.

Regarding the chart, notice how gold found nice support near the last area of consolidation around $1662. This is a good level for a bounce given how oversold gold is in the short term.

Another gold chart that often revert back to is the weekly, considering that the three-year trendline is one of the strongest trends ever. Some interesting data about this chart is the most recent peak, is really no more extended than other previous peaks in this cycle. This is significant because though the move looks dramatic in nominal terms, percentage wise the most recent peak was normal, meaning that gold really isn’t that extended in terms of this current bull cycle. The three most extended peaks from this trendline are February 2009, (Peak of $1007 – 23%) November 2009, (peak of $1227 – 19%) and of course August 2011 (peak of 1923 – 23%).

By using this trendline as a basis for gold’s health and as a gauge for its cycles, it would then make sense that over more time (perhaps the next year or so) gold may revert back to this trendline yet again as I called for over the summer. Clearly, that wasn’t the case this summer, but as with the call for a strengthening dollar, I have been early before.

Silver sold into the 200 MA on Thursday which should have been a solid level for at the very least a small bounce. That fact that it did not find any kind of support there confirms my belief that there was inside selling. In any case, I entered silver as a long on Friday after the pierce of $31 ($30 on SLV) which coincided with the 2009 trendline that I have talked about many times in the analysis videos. I originally called for silver to reach this particular trendline after the initial blowoff this Spring and through months of bearish consolidation, it has finally reached that level.

Regarding the trade, I think we’ll see a gap lower on Monday, (but not a new low) followed by a rally throughout the rest of the day and into Tuesday. That is essentially what happened the last time the CME hiked margins after gold and silver were down on high volume. Whoever shorted is likely holding into the weekend given the fact that the metals weren’t able to get much of a bid off of the lows on Friday and that pressure should translate into a gap lower on Monday. After that, I would be surprised to see the metals staying suppressed for long, it just doesn’t make any sense to risk profits when someone is that far in the money.

Also adding to the case for a bounce is that $31 is a major level and as mentioned before, it coincides with the 2009 trendline on the weekly chart. If anything, expect buyers to show up in this area on a gap down on Monday. Also notice how the chart continues to lead the news, the chart tells you what is going to happen, and then the news confirms it! Going into next week, I have no trades other than SLV $30 Q4 calls, but as mentioned before, if the market consolidates sideways, I may use that to look for shorting opportunities.

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.

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.

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.