USDX Pushing Higher as Money Flows into Treasuries

The following chart I put together is interesting in the sense that it reveals exactly what is pushing the US Dollar Index Higher.

Normally, all things considered, the country which possesses the most solid fundamentals in terms of monetary policy, economic growth rate, fiscal policy and above all, YIELD or INTEREST PAID on its government debt, tends to have the strongest currency. At least that is the way it formerly was. These are broad principles and while there are always deviations, if two countries were pretty evenly matched in terms of the first three factors, the nation which had a higher yield on its government debt tended to attract more investment flows and thus had the stronger of the two currencies.

When we think about the US Dollar, we certainly do not think of a nation with sound monetary policy (reckless creation of nearly unlimited units of its currency called Dollars). Nor do we think of a nation with a strong economic growth rate (we were reminded of that today with the lowering of the original 1rst quarter GDP number). And lastly, fiscal policy here in the US is an unmitigated disaster given the enormous and never-ending budget deficits and huge amount of overall indebtedness (the US is now at levels on its GDP to Debt ratio of 100% or higher).

Why then the strength in the US Dollar? It is certainly not fundamentally based.

The truth is investors in Europe are terrified of what is taking place over there and have lost confidence in the bonds of many nations comprising the EuroZone. They are yanking their money and moving it into anything but the Euro which is giving the US Dollar the strength it is currently enjoying.

But how exactly is this being accomplished seeing that the US equity markets are sinking like a lead brick? Money flows from abroad are not moving into the realm of US stocks, that is for certain. The answer is that these investment/safe haven flows are moving into US Treasuries. In other words, there is unprecedented demand for US debt and this is producing the rally in the Dollar as all that foreign currency needs to be EXCHANGED (this is why the currency markets are known as FOREX - Foreign Exchange Markets) for DOllars to buy Treasuries with.

We can see this in graphic form by examining the following chart which basically charts the USDX and the Yield on the Ten Year Note and then charts the difference between the two to see whether or not the Dollar is rising as interest rates rise, falling as interest rates fall or RISING even as INTEREST RATES FALL. The latter is of course somewhat counterintuitive from a purely performance based perspective. After all, why in the world would investors deliberately put their capital into the currency of a nation where the yield they are receiving is actually going down?

Quite simply - we are living through times which are unique and unprecedented. There is almost a type of panic-buying of US Debt as a safe haven. Investors are willing to accept a paltry 1.58% on their money for the next TEN YEARS just to get it out of Euros and out of equities.

How this is demonstrated on the chart shows up as you look at the solid blue line. Note that there have been three occasions during which the Dollar has enjoyed great strength even as interest rates have fallen lower. The first was back in the middle of 2008. We all remember what happened then - the credit crisis erupted and there was a mad rush into the "safety" of the US Dollars, mainly in the form of Treasuries. That buying drove Treasury yields lower (remember- rising bond prices means lower yields).

We can see the same thing occurred in early 2010 when there was fear that QE 1 was ending and there was nothing to take its place on the drawing board. The rush back into Treasuries occured once again and up went the Dollar as interest rates were pushed lower by safe haven flows.
This third occasion can be seen to start in April of last year when it was assumed that QE2 was coming to an end in June. Ever since then, with a brief exception in October of last year, the Dollar has GENERALLY MOVED HIGHER even as INTEREST RATES HAVE MOVED LOWER.

This trend has accelerated in March of this year and continues at the present time as fears over the European Sovereign Debt affair have intensified. Notice how wide the differential has become. What this is charting is the FEAR of traders/investors over the preservation of their wealth. It is at an even higher spread than it was back at the peak of the credit crisis of 2008 even though the USDX is some 6 - 7 points lower than it was on both other occasions when this widening of the differential was taking place.

I would venture to say that if we constructed a chart of Yen, it would look quite similar over the last few months.

My thinking is that if the Fed does come in with another round of QE3, and it is of sufficient size to convince market participants that the threat of deflation has been suspended (at least for the time being), we will see the US Dollar move sharply lower narrowing this spread and will more than likely see longer term interest rates actually rise instead of falling as one might assume woudl occur, as deflation talk will give way to inflation talk and money will flow out of Treasuries pushing yields higher in the process.

Time will tell.

Monthly CCI Chart - May 2012

Monthly Gold Charts for May 2012

I do want to note that since we are facing a very similar set of deflationary factors at the current time as we did back in 2008 when the credit crisis first erupted, that time frame is an analogous year and for that reason provides at least some sort of frame of reference for a guide to price action.

Using MONTHLY CLOSING PRICES only, gold fell from a peak of $975 down to a low of $715 or a drop of 26.5% from it best monthly closing price BEFORE THE FED made clear that a round of Quantitative Easing would commence. You will recall that the purchases consisted mainly of Mortgage Backed Securities which were plummeting in value and wreaking havoc on bank balance sheets.

Fast forward to today - this time around it is Sovereign Debt out of Europe that is the culprit behind the destruction of the European Banks's Balance Sheets. Gold hit a monthly closing peak price of $1828.50. For the month of May it has closed at $1526.60 for a drop of 16.5%.

Worst case scenario would see a fall of another $183 from the current level or down towards $1344. Keep in mind however that back in 2008, the idea that the Fed would actively step in and actually buy up mortgage paper on the open market and serve as a buyer of last resort was a rather novel idea, even though it had been discussed in some circles as an academic type of matter. Now it is pretty much expected that not only will the Fed buy up such paper but also Treasuries themselves. I expect before this is all over, we might even see the Fed buying US stocks or at least stock indices.

Also, gold fell 26.5% from its peak back in 2008 while during the same time period the S&P 500 collapsed at whopping 47.7% from its May 2008 ClOSE to its February 2009 CLOSE. Does anyone really believe that the Fed is going to stand by and allow the US equity markets to lose nearly HALF THEIR VALUE before they act, especially during an election year??? I doubt it! Not when Bernanke and company are FAR MORE FEARFUL of ANY DEFLATIONARY event than they are of INFLATION.

Central Bankers are essentially confident that they can corral inflation if need be but they are terrified of having a deflationary mindset take hold. They will simply not allow the latter to happen, even if it means in engaging in another wholesale round of bond purchases and further money creation.

Again, we are all reduced to sitting around and waiting for signs of sufficient deterioration in the global equity markets and credit spreads to force the Fed to act. When they do finally sally forth, gold and silver will immediately bottom and begin to trend higher as trader sentiment then shifts away from deflation and back towards inflation.

We will also see interest rates reverse and begin rising, even if only for a while.

Gold Continues to Attract Buying at the Bottom of its Trading Range

Gold has once again attracted strong buying down near the bottom of its broad 8 month trading range and has now bounced higher for the day. Strength in the yellow metal has pulled silver up a tad which was sinking under the weight of a collapsing copper market.

While some are ready to pronounce gold DEAD as a safe haven asset, the chart picture denotes otherwise, especially given the broad weakness in the commodity sector as a whole and the rallying Dollar, which continues its technical march towards the 84 level on the USDX. Whenever I see gold moving higher alongside Treasuries and the Dollar, it tells me that all such talk about gold being useless as a store of wealth, is simply false. The chart will tell you more than all the pontifications of the short-sighted analysts and pundits.

To get any sort of excitement going beyond the continued value based buying of gold, it will need to push through the $1600 level and not falter.

The mining shares are defying the general trend of equity selling today which is aiding the cause of both metals. Note that for the last two weeks, it is the mining sector which has been the bright spot in the otherwise dim US stock market.

Rush into Treasuries Continues to Depress Rates

There is what feels like near-panic buying of US Treasuries at the moment, due to the implosion that we are witnessing in much of the European Sovereign Debt markets. Investors/traders are scared to death to own bonds from these problem nations and are rushing into both US Treasuries and German Bunds as safe havens.

The result has been to collapse US interest rates on the Ten Year firmly below not only the 1.8% level, but also below the intra-month spike lows near the 1.7% level. We have one more day left in the month of May but it certainly appears we are on track to set a new monthly closing low.

The flip side to this rush to Treasuries is that commodities are being thrown overboard, irrespective of any particular set of fundamentals, as hedge fund algorithms are whacking that sector, both liquidating long positions as well as instituting new bearish bets.

The question on the minds of many is when will the Fed step in to attempt to halt what looks like a growing tidal wave of deflationary pressures? My thinking is that they will not until they get the commodity sector, particularly the energy markets, more specfically the gasoline market, down to lower levels.

We are already at the 50% Fibonacci Retracement Level off the entire 2008 - 2011 rally. If the index cannot hold at this critical juncture, it will drop towards 465, which is the intersection of the bottom tine of the pitchfork and the 61.8% Retracement level. My view is that the Fed will act should commodity prices get to that level.

Keep in mind that while the Fed and the US monetary officials like these abnormally low interest rates ( it keeps loan rates cheaper and allows the US to continue borrowing and spending money at its drunken sailor pace), and while they are near gleeful at the prospect of falling food and energy prices, they do not want a deflationary mindset to take hold in the minds of investors or the public for that matter.

For investors, that will mean the equity markets willl collapse as they will dump stock holdings and for the public that means they will forego spending now on the notion that they can wait for prices to fall further. The last thing that the Fed wants is for consumers to rein in spending.

So, the question is, can the Fed get these stubbornly high gasoline prices to fall another 30 - 35 cents while holding off on any further stimulus or will the US equity market bears, force their hands?

Trader Dan on King World News Markets and Metals Wrap

Join Eric King and I as we discuss the gold and silver market action this past week, along with an analysis of the Commitment of Traders report, the outlook for the US Dollar and the mining shares in general, on the KWN Markets and Metals Wrap.

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Tough Luck to this Year's Crop of High School Graduates

As bad as things are in Europe, it is easy to forget how rotten the state of the US economy currently is. Take a look at the following story from the Washington Times to see how the recent crop of High School Graduates are going to fare in this current job market.

Number of high-school students with jobs hits 20-year low

By Ben Wolfgang

-

The Washington Times

Thursday, May 24, 2012

http://www.washingtontimes.com/news/2012/may/24/number-of-high-school-students-with-jobs-hits-20-y/


If that is not enough to make you cringe, read the following piece that has comprised a YOUTH MISERY INDEX. It is very revealing indeed.

At no point in recent history has life been harder for America’s young people. The Youth Misery Index adds together youth unemployment, average graduating student debt (in thousands), and national debt per capita (in thousands).
Youth unemployment is at 17.4 percent—one of the highest levels since World War II.

http://www.yaf.org/youthmisery/index.html

Trader Dan interviewed at King World News on Gold and Gold Stock Action

Please click on the following link to read my interview with Eric King on the KWN network about today's price action in both gold and the gold shares.

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Continuous Commodity Index - Fed Operation "Push Down Commodities" Successful

I have been convinced for some time now that the Fed is growing increasingly concerned about the impact from both the Eurozone and the slowdown in China on the US economy. The swooning equity markets in the US  ( the S&P 500 is almost negative on the year as of the low today) are heralding investor fears and uncertainty over when the next round of stimulus might be coming.

Yet the Fed continues to remain relatively silent when it comes to committing to any definitive date for another round of bond purchases even as the yield on the Ten Year Note is now close to 1.70%, having clearly broken below the critical 1.8% level last week.

I have maintained for some time that the Fed fully understands the impact that another round of QE will unleash on the commodity markets and is therefore attempting to see these markets driven lower before engaging more actively in QE talk. As stated many times here already, the danger they face in this gambit that they are playing is a collapsing stock market. One wonders just how much more downside they are going to try to squeeze out of the commodity markets before stepping in.

If you notice on the chart below, the CCI has one more line of support near the 500 level, which is the 38.2% retracement level of the entire rally from the 2008 low. If that does not halt the decline in the commodity world in general, then it is quite conceivable that the index could fall all the way to the 50% retracement level near 438. That level is also reinforced as technically significant as it is near the lower tine of the pitchfork drawn off the 2001 low and 2008 high, an area where we can expect to see some buying emerge.

While one can see that the long term macro trend on commodity prices remains higher, the intermediate trend is lower as is the minor trend which can be clearly seen on a daily chart.

For the silver guys out there, you will need to see this chart show some definite signs of bottoming before silver can be expected to start any sort of uptrending move.

Gold attempting to get to that "16" Handle

Gold put in a decent performance in today's session but was stymied at that psychological resistance level of $1600. It seems as if traders are basically standing around looking at each other to see who is going to commit first to buying it above this level.

Right now there is a general hesitation to get too aggressive as there is yet another, (sigh!) summit this week in Europe, this time in Brussels on Wednesday, where the market will have to digest whatever fodder these clowns want to utter. Look for more of the same talk that we got from this weekend's gathering in Chicago - namely - growth instead of austerity which translates to money printing.

At some point this will have the anticipated inflationary impact but not until we see something actually take place besides more talk. The moment, and I do mean the moment, we get confirmation that the ECB and the Fed are going to do the only thing that they can do, gold will move higher and start another leg in an uptrend. Until then we may have to be content with it marking some time here and allowing dip buyers to come in at appropriate moments barring some unexpected news.

I have not had to change the notations and resistance and support levels on the price chart as of yet but you can see where the resistance is located near the $1600 level. Above that, $1625 or so is next.

Downside support comes in at the $1575 - $1565 level.

Whistling Pass the Proverbial Graveyard

Remember when you were a little child and had to walk past a graveyard or cemetery on the way home? The process was rather unnerving particularly if it was in the evening. So along comes the advice of your seniors..."Just strike up a pleasant tune and whistle it out loud. It will perk you up and chase away any fears".

I got the distinct impression that this is what occurred in today's S&P 500 futures pit. Oh I know what the "perma bulls" will tell us. "Equity prices had gotten too cheap. The economy is not as bad as the stock markets are indicating" and so on and so on. But the "whistling tune" I loved the best today was this one:

"European leaders are going to go at their problems by employing a 'GROWTH' strategy and are moving away from 'AUSTERITY'.

NOTE: INSERT MELODY HERE TO AID WOULD-BE WHISTLERS AS THE AIR RUSHES PAST THEIR LIPS".

Why not just cut the crap and state the obvious - these short-sighted politicians and monetary officials will do anything to prevent themselves from getting booted out of office by a public ADDICTED TO GOVERNMENT SPENDING. Look at what happened to Sarkozy. He was replaced by a Socialist who LOVES DEBT AND MORE TAXES to apparently try to fund it all.

Hard choices?! Forgeddabout it! That's for the poor chump stupid enough to think that the public will give him a chance to do so.

Either way, the result of this "pursuit of growth" instead of austerity was the supposed reason that we had an enormous short squeeze in the US equity markets today. My guess is that the powers that be made sure that they had their "pals" bid the market high enough to trip the algos into buying and then sat back and laughed at what they had managed to pull off once again.

With the FACEBOOK IPO smell still souring the air, one has to wonder how much more contempt these elites have for the general public whom they just led to the slaughter touting that piece of junk stock. Didn't matter however - today was "All these European problems are so overblown Dude  - Day".

The timing of the big BULLISH OUTSIDE REVERSAL DAY just happened to coincide with a market approaching the critical 50% Fibonacci Retracement Level. That level also happens to not be very far away from the 200 day moving average. Surprise? I doubt that. Now we watch and wait to see how much, if any, staying power, today's contrived equity rally is going to have.

China flips the Finger to Wall Street

The following article appeared today on Reuters which is well worth your read. In a move that illustrates the growing clout of China, approval was granted by the US Government for it to bid DIRECTLY through the auction system of the US Treasury, completely bypassing the PRIMARY DEALER BANKS.

My guess is that the Chinese were sick and tired of being front-run by these unscrupulous banks and issued a stern but quiet demand to either allow them to go this route, OR ELSE!

This further underscores the fact of the growing economic clout of China and just how utterly dependent our nation has become on its funding of our outrageous and downright contemptible indebtedness.

Exclusive: U.S. lets China bypass Wall Street for Treasury orders

By Emily Flitter
http://www.reuters.com/article/2012/05/21/us-usa-treasuries-china-idUSBRE84K11720120521

NEW YORK | Mon May 21, 2012 3:35pm EDT

NEW YORK (Reuters) - China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government, according to documents viewed by Reuters.

Trader Dan on King World News Markets and Metals Wrap

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Gold continues its bounce

Gold continues to bounce higher in today's session as it moves further away from the bottom of the BROAD 8 MONTH TRADING RANGE shown on the chart below. The metal actually seems to be reverting to its safe haven function as it is holding its gain in spite of continued weakness in the broader US equity markets.

It does seem to have hit a band of resistance, as might be expected, near the psychological round number of $1600. For gold to get a handle of "16" in front of the price, we are going to need to see more hedge funds willing to go long this market even as their algorithms are increasingly playing a large number of the commodity markets in general from the short side. A clue that this might be happening is to watch for an increase in open interest which will mark an end to the wave of long liquidation that has dropped the price of gold so sharply over the past 2 weeks. We actually did see that increase in yesterday's open interest so I am especially interested in seeing Monday morning's data about today's session.

It should be noted that the rally has now taken the price back above the 10 day moving average. That is oftentimes a level that funds who are short will begin covering at. If the market has enough strength to make it to the 20 day moving average near $1617, you will see more of that short covering plus new buying from this camp. We will have to see whether or not that transpires early next week. I get the distinct impression from watching the price action in this market, as well as a host of other markets, that traders are extremely nervous, if not downright fearful about what might happen over the weekend in regards to the Euro zone and many did not want to risk being on the short side of the gold market heading into a weekend.

As stated in previous columns, the bounce from the bottom of this extended range is constructive as it further cements this level down near $1530 as extremely solid support. A sea change would therefore have to occur globally for those buyers whom have been active down there, to sit on their hands were prices to head back lower and revisit that level. I personally will feel a bit more comfortable that will not occur IF we can climb back over $1600 and keep that handle on the price. That will tell prospective buyers that the metal is not going to get any cheaper and if they were holding off waiting for better prices, they had better get in while the gettin's good. That means next week's price action will be very telling as to what we can expect for gold moving forward.

The reason I say this  is because the first time that gold dipped down towards $1530 back in September 2011, it did not GET BACK DOWN THERE AGAIN for another three months. Then it rebounded immediately in December 2011 and has only now come back down to that level again. This time it was a period of 5 months. If prospective buyers see this thing will not back down below the $1600 level, they will commit to larger purchases as the odds favor it being another rather long period before they can hope to buy it this cheaply once again.

It looks to me like we have resistance pegged in a band between $1615 - $1625 on the upside. That will have to be taken out for gold to move back to $1650. There is some light support on the downside near $1565; after that additional support can be seen near $1550.

The HUI has not been able to REMAIN ABOVE the 400 level. If it can pull that off before the end of trading today, it will be a sign that this sector might have finally been sold out. If it closes back below the 390 level, it is going to move lower and retest the bottom made this week near 372. It did form a POTENTIAL spike bottom this week but as stated, it needs to confirm this by closing a week above the 420 level. Aggressive traders/investors can try nibbling on the long side of QUALITY MINERS only, with good chart patterns, PROVIDED they employ sound money management techniques. That means if the price moves through this week's low, get out - no questions asked. You can always try again; i.e. unless you foolishly turn a small trading loss into a large trading loss and end up looking like road kill on the trading floor.

Do not try arguing with a market and attempting to tell it why it is not behaving properly (that means going in the direction you THINK it should be going). Guess what? the market doesn't give a rat's ass what you or I or anyone else for that matter, thinks it should be doing. It will do what it wants to do, when it wants to do and the sooner you recognize that and give it the respect it deserves, the sooner you will be on your way to becoming a successful trader or investor. Show me a stubborn fool who refuses to admit that he or she is wrong for the time being and I will show you yet one more casualty whose carcass lies dead in the trading arena. The inscription that you will see on their trading tombstone is as follows:

"Here lies Mr. or Ms. Wannabe TRADER - he was right to the bitter end".

Silver has managed to hold the $26 level once again, although this time around it did not get down as close to 26 even as it has done on two previous occasions, once in September of last year and then again in December of last year as well. I am still skeptical of this market however as it is too closely associated with the risk trades. If Copper could ever stop falling out of bed, I will feel more comfortable about silver. The best thing that can be said about it right now is that at least it stop going down for a change. If we get any sort of news over the weekend detailing a worsening of conditions in Europe, silver is going to turn right back around and go lower. You just have too many funds selling the metal who need something to shift the sentiment towards inflation to bring them back into this market in a very big way. That means we will need more statements from Federal Reserve officials leaning towards QE sooner rather than later.

One last thing - I do find it very noteworthy, that in spite of the fact that the US equity markets are sinking today and nervousness remains in the minds of many traders, the US Dollar cannot seem to find a bid. It reached as high as 81.93 before swooning once again. That tells me that 82 in the USDX is a FORMIDABLE RESISTANCE LEVEL that is going to take some sort of terrible economic news to get enough "safe haven" bids coming into the DOllar to absorb all of the offers from willing sellers at that level.

Bonds singing "Anticipation"!

While one day's worth of price action does not a trend make, it is interesting to me watching the combination of price action in both the gold market and in the Treasury market.

In the long bond, the market has broken into a new all time high. That is significant as it shows that traders there are anticipating an upcoming round of bond purchases attached to a new Federal Reserve round of Quantitative Easing. It seems as if the catalyst for today's surge higher was the Philadelphia Fed business index drop to an unexpected -5.8. Business conditions in that corner of the realm are worsening rather quickly.

Note also that the yield on the Ten Year Note has now fallen solidly BELOW that critical 1.80% level. This is what has traders moving towards action by the Fed. That line is technically signficant, as has been stated before, seeing that we have never had a WEEKLY CLOSE below this level and it is now Thursday!  If this yield were to further break below that spike low at 1.696% and the Fed were to NOT ACT, Bernanke would get his place in history all right, but it would not be in the light that he no doubt is hoping for!

All of this appears to be the driver in the nice pop higher in the gold market this morning, continuing the rally that began in Asian trading last evening. A push past $1580 would certainly startle the bears and induce further short covering that has the potential to take the price back to the key $1600 level.

Let's see where the dust settles at the end of the trading session today. For now, it appears that traders are regarding any dose of rotten economic news as increasing the odds of QE sooner rather than later.

If, and this is the big question, IF gold becomes CONVINCED that the Fed is going to act, it will immediately bottom. That is all one needs to know about the gold market. Nothing else will matter at that point.

We are back to picking the petals from Daisy flowers - She loves me; she loves me not. The Fed loves me; the Fed loves me not. Will it do the QE or will it not???

Gold Bouncing from Support in Asian Trade

After what seems like a nearly vertical fall in the gold price over the last 7 or 8 days, gold is finally getting a bit of a reprieve this evening as it enters Asian trade. The interesting thing about this most recent selloff is that reports of physical offtake have indicated good buying of the metal down here at these levels. This has been swamped by hedge fund liquidation and some fresh short selling as some in this category are moving onto the short side.

As you can see on the chart, gold fell nearly right to the very bottom of this 8 month long trading range before bouncing higher. It is not unexpected to see this sort of thing as those who instituted some fresh short positions a couple of weeks ago have made a very healthy profit and it never hurts being prudent and taking a bit of money off of the table after these kinds of gains.

We also probably have some bargain hunting and some bottom pickers coming in after a fall of this magnitude. Whether this is just what we traders call a "dead cat bounce" (if you drop a dead cat from a high enough altitude, even it will bounce when it hits the ground) before gold drops through the bottom of this range or whether this is indeed marks the end of this round of liquidation is unclear. I would not be rash enough to venture any guesses at this point as traders remain extremely nervous and very fearful of being caught flatfooted on the wrong side of these damned hedge funds.

I would not feel at all comfortable that the selling is finished until gold were to climb back above the $1600 level but barring any further negative developments out of Europe, it looks like it might want to consolidate a bit here. Again, that is unclear and will require a full trading session in New York tomorrow to get a better feel of things.

Regardless of the current technical washout, the interest rate environment continues to be one of low or negative "Real Yields" and is conducive to holding gold. I suspect a fairly large amount of the gold that is entering the system to be sold is coming from European banks selling off liquid assets in an attempt to raise cash in the attempt to help their pathetic balance sheets. After all, what can they sell that has much of any value at this point besides gold?

The Dollar is still having trouble with the 82 level on the USDX but the week is still not over. A weekly close ABOVE this level would be noteworthy.

Why the Delay from the Fed in Announcing Additional Stimulus Measures

With all the turmoil and commotion occurring in Europe, with slowing growth in China and with mixed signals coming out of the US, and now, especially with global stock markets reeling and talk of "US fiscal cliffs" abounding, one would expect the doves on the Fed to begin making noises and talking nicely to the investment community about future plans for additional QE measures. Some have even suggested that one of the things that the Fed also might do is to further push back their date for any rate hike until "late in 2014". For now however we are getting an eerie silence. Even today's minutes of the recent FOMC meeting are rather vague, pretty much just stating what everyone already knows - the Fed will act if they think conditions warrant them so doing. What gives?

Take a look at the following chart of unleaded gasoline which might possibly provide a clue. It seems to me that gasoline prices have become a sort of marker as this commodity is perhaps one that has the greatest impact on the general public at large since it is so obvious as price boards for it are stationed practically everywhere one looks.  Notice how gasoline prices have formed a double top on the chart above the $3.40 (these are wholesale prices with no federal or state taxes added) and have begun to come down having fallen some 55 cents or so over the last few weeks.

However, they still remain quite expensive by historical standards and are more than 16% expensive than last fall. My guess is that the policy makers understand full well that any certainty in regards to the advent of a new round of bond purchases by the Fed would turn this chart to the upside faster than one can say "Whoa Nellie".

It is very difficult to deny that while the Fed attempts to stimulate or to provide stimulus to the economy, if gasoline prices rise too highly as a result, it tends to short circuit the impact from such stimulus as higher gasoline/energy prices in general have a depressing or slowing impact on overall economic growth. I suspect that the Fed is hoping and waiting for speculative selling to push gasoline prices even lower yet so that the next round of stimulus will have gasoline prices back closer to levels seen late last year.

The problem for these Central Planners however remains the same, how do they herd speculative money OUT of the COMMODITY MARKETS and particular the ENERGY MARKETS and yet at the same time keep them from abandoning the EQUITY MARKETS? Remember, the more that people talk up the "SLOWING GLOBAL GROWTH" theme to push commodity markets lower the harder it is to justify stock prices at current levels. AFter all, what is good for the goose is also good for the gander and if the prices of basic commodities are plunging due to slowing growth concerns, then it is extremely difficult if not downright impossible to talk up the stock markets. Rising stocks need an economy that is growing and strongly rising stock prices need an economy that is growing strongly. You cannot have rising stock prices and falling commodity prices simultaneously as it is a logical aberration.

While the ESF and other entities would like to see this aberration - notwithstanding the impossibility of it occurring, if push comes to shove and they have to choose between falling equity prices or rising commodity prices, they will opt for the latter every time, particularly in an election year.

Risk Aversion Money Flows Drop the HUI

The mining sector was weak to start the session even as some larger entities were attempting to force the S&P futures above the 1350 level. The problem was that gold could not move into the plus column, the Dollar was not buying the concerted push nor were the bond and note markets which refused to go negative on the day even with stocks initially rallying.

Once the S&P dropped back below the unchanged level, that was it for the mining sector shares which are now getting what looks to me like the BEGINNING of a final washout in this sector.

Note that the critical 50% Fibonacci retracement level could not stem the bleeding as the index has not yet even registered a mere bounce higher. One can almost sense the disgust and dismay that pervades this sector at the time being. While the economic world is being rocked, the proverbial safe haven of gold is being shunned in favor of.... Yep - US Treasuries here and German Bunds over in Europe. Apparently promises to pay by overstrained governments are more valuable than the ancient metal of kings in this Brave New World.

I am sending up a monthly chart once again to provide a long term view of this sector with some key technical regions noted. If we base our analysis PURELY on Technical factors, there does not seem to be anything in the way of downside support until one nears the 340 level which is the 61.8% Fibonacci retracement level of the entire rally from the low hit in 2008. if that cannot stop this rout, then the upsloping trend line (in blue) drawn off the pitchfork is the next target - that is currently near the 300 level.

An extreme and unlikely target can be calculated by looking at the 2008 drop which took 70% off the value of the index in the matter of a few months time. If, and this is a WORST CASE SCENARIO, the monetary authorities sit on their hands and do absolutely nothing to reverse the course of the broader US (and global) equity markets, a similar erosion in value would drop the index to near the 185 level. Let's hope it does not come to that extreme. Again, I do not think this is at all likely - I only mention it as the bottom of last resort. For this to occur, the S&P 500 would have to literally implode and the notion that the Bernanke-led Fed would sit on its hands and do nothing while this occurs, sending the terrified citizenry flushing their stock holdings down the toilet is inconceivable to me.

The last chart is the US Dollar Index which is bumping up against a key overhead resistance level near 82. It has not been able to mount a WEEKLY CLOSE above this level since August of 2010.

HUI Fails to Confirm the Upside Reversal Day of Last Week

Today's selling downdraft in the broader US equity markets, when combined with more of the risk off trades, derailed the tentative Upside Reversal Day posted last week in the HUI. You might recall that I mentioned it might be prudent to get some additional upside price action before becoming too convinced that we had a sure bottom in the mining sector shares.

The reason for this is that far too many of both these upside reversal patterns and downside reversal patterns are being generated by the nature of computer algorithmic trading. In times past we would see these patterns form ONLY AFTER A PROLONGED UPTREND OR DOWNTREND when prices had reached extreme levels of valuation.

Commercial traders, whose business deals with the actual physical commodity and who understand "VALUE" better than most traders, would be moving in to cover existing shorts in large size/instituting fresh longs or liquidating long positions/instituting fresh shorts in large size when they spotted these extreme valuation levels. Their buying or selling would be of such magnitude that the market would then reverse course.

Today's BRAINLESS HEDGE FUNDS have no such understanding of VALUE nor do they even make any attempts to discover what value might be. How can they when you have a collection of mindless machines doing the thinking for this lazy group of traders? To decipher value one must have a thorough FUNDAMENTAL KNOWLEDGE of the market that they trade. Such knowledge takes many years to formulate particularly during which the traders gets to witness firsthand changes in supply/demand structures affecting the market(s) that they choose to trade.

What we get nowadays a result of these runamok algorithms, is every single machine on the planet buying or selling merely because the last trade price happened to either go up or down. There is no understanding of WHY there is buying or selling. All anyone knows is that a "bunch of other machines" are buying or selling so just go with them.

The result is what we saw last week in the HUI. Apparently there was enough profit taking in the ratio spread trade that it forced the shares higher. Once a technical level was taken out on the upside, additional algorithm trading then took over to take the HUI through the previous day's high closing a chart gap on the Daily in the process.

However, and this is the key - there was little to no SERIOUS Followthrough buying that occurred to thereby validate the signal. The result was that the buying present last week evaporated in the face of fresh selling.

The close today was not at all constructive with the index not only taking out the previous LOW of that reversal day but also CLOSING below that level. This gives the bears fresh fodder at this point so we will now have to wait to see subsequent price action to get a hint or sign that a serious bottom is at hand. If the market can quickly reverse to the upside and take out today's high, we might have had another one of these all-too-frequent head fakes.

Let's see what we get moving forward this week.

Gold Probing the $1550 Level

Gold has continued to see further selling in today's session with traders once again exiting "RISK" trades in favor of the "Growth Off" or RISK AVERSION trades. Long commodity positions, along with long equities, are getting liquidated with money flows heading towards US Treasuries in general. This can be seen in the CCI, the Continuous Commodity Index, which is moving lower while bonds move higher, taking interest rates down even further as the yield on the Ten Year is now down below the 1.80% level. Remember, there has not been a week yet during which this yield ENDED BELOW that critical level.

Gold's move down towards $1550 has in the past attracted very substantial Central Bank gold buying. Hopefully this will remain the case as the market is now pushing towards the lower band of an eight month long trading range. If speculative selling of the metal is not absorbed down here and the market were to break below $1520 and fall to recover quickly, it will more than likely drop below $1500.

My own thinking on this is that the markets are moving so quickly away from risk and out of basically everything except Treasuries or cash, that the Fed is going to have a major problem on their hands if they do not soon give some sort of signal that they are preparing to act to stem the deflationary decline. JP Morgan's $2 Billion credit derivatives-based loss has spooked the banking sector and that is the one sector that the monetary officials do not want to see going from bad to worse. Keep in mind that back in 2008, once Lehman went under with Bear Stearns following, it was the woes of the financial sector that pulled the rug out from under the entire US economy and the US equity markets. The Fed is well aware of this and I suspect will not want to wait too long before beginning to make some noise to keep the markets from becoming too roiled.

The bank shares might be the first thing to watch for some signs of further monetary accomodation as one can be assured that there are lots of phone calls and discussions underway even now. If they were to show some signs of bottoming, it might be a hint of things to come.

Meanwhile gold will need to get at least back above $1600 to give the bulls some breathing room. With the Commitment of Traders report showing the NET LONG position of the big hedge funds at a 42 month low, there remains plenty of room for them to come back into this market and juice it higher but they need some sort of signal to tell them to do so. Right now they are not getting it; if anything, some hedge funds are now moving to the short side of gold along as well as a host of various other commodity markets.


Incidentally, China is lowering their bank reserve ratio requirements, a sign that they are responding to slowing growth there as their export markets are impacted by the woes in the Eurozone and the anemic growth in the US. This is one of the signals that copper has been sending for a while now as it descends in price. Were copper to finally show some signs of a bottom, that would be constructive for silver which is testing chart support down near the $28 level once again.

Trader Dan on King World News Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap.

http://tinyurl.com/7jvm3mu

Silver Chart and Comments

Silver continues to be the poor poster child for the Deflation or Risk Aversion Trade. It's chart is abysmal at this point as it has steadily retreated since peaking near $50 in what seems a lifetime ago. About the only positive thing that can be said about it is that is had not been below the $26 level for some time now. That level still seems to be bringing in buyers.

Unless something changes rather drastically over the next week, it looks like it is going to once again test the resolve of those buyers that have been busy down there. If it holds, fine; if not, it would get rather ugly for silver.

One thing about it is that it has already seen a rather large exodus of speculative money from the long side of the market. It will take fresh short selling to break it down below $26 therefore. The key question is when will the market psychology shift away from deflation back to inflation? My view is that it will not UNLESS and UNTIL the monetary authorities give a credible hint that the QE punch bowl is going to be brought out soon.

Things are getting downright Dicey

Take a look at the following charts and you will perhaps see what is making me extremely nervous.

The first is the Continuous Commodity Index or CCI. It just today made a 19 month low and is back at levels last seen in October 2010. While the long term macro trend is decidedly higher, the intermediate term trend is extremely bearish. The market is basically signally deflation across a host of tangible assets.

Note that the index has crashed through the first level of Fibonacci support near the 550 level. It is now solidly beneath that level and looks like it is headed down to test the CRITICAL 50% or HALFWAY RETRACEMENT LEVEL near 506. If that cannot stop its descent, it is going to 450, the level last seen when QE I was winding down and there was not as of then, any clear conviction that QE II was in the works. It was only when market participants became convinced that QE II was a certainty, that this index bottomed out as the move into tangibles in association with the anticipation of a weaker US Dollar was then undertaken.

In the last two weeks alone we have seen crude oil prices drop $8.00 barrel. This week cotton prices dropped nearly $10.00. Perhaps even more stunning is the plunge in soybean prices, especially coming on the heels of a wildly bullish report out of the USDA yesterday. Those gains not only evaporated in today's session but the losses were so large that the market fell below its 50 day moving average for the first time since January of this year. Hedge funds seemed to be selling almost everything in sight, no matter what the particular fundamentals are for any individual market. They have been devastating sugar, which is now priced at levels last seen in that market all the way back into September 2010.

While this may be great news for the shopping consumer, I have to wonder if the Fed is getting increasingly nervous as this plunge across a host of risk or growth assets is taking place with the backdrop of plunging interest rates and a shaky stock market, which is only being propped up by official sector shenanigans originating out of the ESF.

Market reports are denoting large bullish option bets in the Ten Years Futures (rising note prices means lower interest rates) with the implied level of yield to hit 1.4% or lower this summer. In other words, DEFLATION SCARES ARE BACK AND IN A MAJOR WAY.

This is the nightmare that the monetary authorities dread and why I believe that the market is going to force their hand. No matter what they may fear about any political implications or backlash, they are going to have ZERO CHOICE and will be forced to act, that is unless they want to sit idly by while the equity markets implode on them.

As I scribble this commentary, I am noting that the ENGINEERED RALLY in the S&P 500 futures pit is fading as that index has now moved back into negative territory for the day. I get the distinct impression that while the Fed, Treasury and ESF are trying to prop this market up and get the computer algorithms to enter buy orders, traders are using the pops higher to unload. Keep in mind that this market has come a long way this year and is still loaded with a great deal of speculative longs. All of those longs are being guided by the technicals right now and if the monetary authorities cannot prop this thing up above the 1350 level by the time the closing bell rings, look out next week. Let's see what they can do with it. Welcome to the brave new world of managed markets.

JP Morgan losses send S&P 500 futures lower in Aftermarket

This afternoon, after the markets regular closing, news came out that JP Morgan has suffered a $2 BILLION HIT in their trading division, apparently tied to wrong way bets on credit default swaps (what else of course).

Just last evening I posted a chart detailing the significance of the 1350 level in the S&P 500 index. The Morgan news has sent the index reeling and back down BELOW this level in the reopening. Note that each time the index has fallen below this level, it has managed to recover before the bell rings that marks the end of the day's trading. If we go into Friday and this index closes below 1350 to end the week, particularly if it actually manages to close below both 1350 and the lower red line near 1339, we could see the US equity markets plunge rather sharply the following week. Look at how the rising 100 day moving average has basically been holding this market up the last few days.

Technically a poor close below that average will get the attention of technically oriented chartists.

Stay tuned on this one as this sort of thing has the potential to send equity traders heading to the hills until the dust settles out. Morgan may not be the only one with problems.

HUI holds Critical Support - Upside Reversal

In yesterday's post I mentioned that if the HUI was going to bottom, it was going to do so right now and right then. See the link here...

http://traderdannorcini.blogspot.com/2012/05/hui-chart-and-comments.html

If not, it was going to drop down towards the 340 region on a final washout.

In today's session, apparently the buyers showed up in a very large way at this key techical level. The index put in what is called in technical analysis terms, an outside day bullish reversal. This basically occurs AFTER A MARKET HAS BEEN IN A SUSTAINED DOWNTREND, goes on to make a new low for the move (which the HUI did today sincking all the way to 392), then reverses higher taking out the previous day's high.

Note the chart pattern.

What we need to see however to CONFIRM a bottom, is for additional upside followthrough to occur that takes the index AT LEAST through the blue line noted on the chart just above the 420 level.  I will feel much more confident however about the sector in general if it can CLOSE A WEEK ABOVE THE 440 LEVEL particularly if it can clear the initial Fibonacci retracement level near 434.

This reversal pattern used to be very reliable in the past but with the advent of the hedge fund algorithms and their inept, clumsy and downright incompetent trading patterns, rushing ALL IN or ALL OUT on any given day, I have seen too many of these patterns turn out to be one day fake outs. This is why I tend to be a bit more conservative or cautious and prefer to see some additional signs of solid buying before getting too optimistic. All too often we see sellers come right back in and use the rally to unload on the new longs that have just come back into the market after patiently waiting for an entry point only to get slapped in the face.

If the bottom is for real, it will manifest itself shortly. Let's see what we get the next couple of days.

One thing is certain at least for today - the shares were just too cheap for some to pass up. It also looks like there was some profit taking in those hedge fund ratio spread trades today.

What's with 1350 on the S&P 500

Note that for Friday of last week, Monday of this week and Tuesday, the S&P has crashed through the 1350 level only to keep rebounding back up through this level. I have watched it trade throughout the entire session and have noticed that it keeps getting sizeable bids coming in to take it back up but once that buying dissipates, the sellers come back in and use the rally to pound it lower. Then back up it goes. It appears that someone of large size is attempting to defend this level.

I remember writing back in February how stubborn this level was on the way UP and how it could not seem to clear it on a strong closing basis. Once it pushed through it of course triggered a large amount of short covering and went on to make new yearly highs.

What has transpired since then is that sovereign debt woes out of Europe, combined with deteriorating economic data out of the US and some slowing in growth out of China, has traders moving away from the so-called "Growth Assets" or Risk trades and into the Dollar and US Treasuries.

That flight of money out of equities has taken the S&P back down to 1350, which is now serving as a support level on the technical price chart. This level also happens to closely correspond with the 100 day moving average, which is still rising, unlike the 50 day which has now decidedly turned down. It also is quite close to the solid red horizontal support line noted.

My own opinion, and I cannot prove this, is that the ESF is in the market attempting to prevent this swoon in the market from becoming something more sinister. There looks to be some light support below this level near 1330 which if that gives way, should see the index drop below 1300 and down towards 1285 or so. Chartists will therefore see this 1350 level as quite a key to where things are going next.

If it goes, fasten your seat belts. Then again, it might be just the thing to send the Doves at the Fed scurrying to the microphones with hints of more QE, sooner rather than later.

Gold Down but Holds Support at $1600

In spite of the strong wave of selling that has swept across the entirety of the commodity complex in today's session, gold did rebound from its move below the psychological round number support level at $1600. If you note on the chart, the market continues to be essentially trapped within a very broad range that with a brief exception made in late December of last year, has held the metal for the last 7 months. That range is basically bounded on the top by $1800 and on the bottom by $1600.

Within that $200 range, there has been a tighter range for the last two months bounded on the top by $1680 with the floor of support down near $1600.

Gold is now testing the bottom of this range to see whether or not there is sufficient buying to keep it elevated and within its borders. Central Bank buying has been very active on any dips below the $1600 level in the recent past and I would expect this to continue. The key is whether or not speculative dishoarding of gold will be absorbed by these buyers. If the market pops from here and recaptures the floor in the region between $1620 - $1630, that will make evident that the buying is strong enough to offset the liquidation from the risk aversion trades.

If the market cannot get back above that level and falls through the floor at $1600, we should see very active large buying down towards $1550.

I would feel a bit more comfortable about the NEAR TERM prospects of the metal should it be able to reclaim the $1650 level.

HUI Chart and Comments

The HUI is reeling once again as it continues losing value against the price of an ounce of gold bullion. The index has fallen below chart support at the round number of 400 and is currently near the lows of the day as I write this.

As you can see from the following chart, it is approaching what I consider to be one of the most significant levels of chart support from a technical analysis perspective, and that is the critical 50% Fibonacci retracement level.

The mining shares as a whole, have now retraced exactly HALF of all their gains from the bottom that was produced back in late 2008 when we got the first round of QE that was used to buy up all those "wonderful" mortgage backed securities.

If the index is going to bottom, it will bottom here and now or else it is going to experience a washout that could possibly take it down towards the 340 level at which point the shares will either reverse or basically end up back where they started from in 2008.

Keep in mind that value-based buyers are now a definite minority when it comes to investing. Actually we have very little investors left in the markets as they are all becoming traders thanks to the hedge fund crowd which in effect, has become the market.

This the reason why we cannot as of yet see a bottom in the mining shares, no matter how inexpensive they become in comparison to bullion and in spite of some very good profits being reported by some specific firms.

The hedgies are using them as the short leg of that same ratio spread trade which has been their bread and butter in the gold sector for the last two years. When they finally are forced out, that will be a sight to see but for now, they continue to overwhelm the value-based buying that is occurring in this sector.

Notice the last chart showing the CLOSING MONTHLY PRICE  - back at levels last seen at the very inception of the gold bull market in 2001!

Gasoline Prices continues Getting Knocked Lower

Count me in as one of those who firmly believes that the Bernanke-led Fed has been doing everything in its power to rescue their boss's rear end from the fire of higher gasoline prices which is sinking his poll numbers along with the rest of the economy.

How so you might ask? Simple - they are absolutely close-mouthed on any hints of further monetary stimulus to electrify the paddles on the defibulator that is now needed to stave off the contagion effects from the woes besetting the Euro Zone. As the entire commodity sector gets hit by the risk off trades, we hear dead silence from our illustrious money masters.

They know full well what will happen the moment the speculative community becomes convinced that the next round of QE is on the way.

With this is mind, note the following press release from the EIA (Energy Information Agency) that came down the wires this morning.

*DJ EIA Estimates US Retail Gasoline Won't Top $3.90 For Any Month In 2012

*DJ EIA Previously Estimated US Retail Gasoline At $4.01 For May

*DJ EIA: US 2012 Gasoline Use Seen At 8.67M B/D, Lowest Since 2001

Just what the doctor ordered for Mr. Obama who will no doubt crow like a rooster about how his "policies" are working to lower gasoline prices for the "working men and women of this great nation". Actually I think I just inadvertently cut a campaign commercial.

The point to bring away from all this is quite simple - the economy stinks to high heaven, in spite of what the RA-RA squad keeps trying to convince the nation. If it were actually in decent condition, gasoline demand would be higher. (There will be those who attribute all of this to Americans driving more energy efficient cars). The truth is Americans are cutting back on driving because they cannot afford to fill their tanks especially those who are out of work or underemployed.

So, the money masters have figured out that they can get the hedge fund computers to take the price of gasoline lower, along with the rest of the commodity world, to where it reaches a level that once they do decide the pull the trigger on the QE front to slam the stock market higher ahead of the election later this year, that gasoline will then get levitated from a much lower level.

The problem they have is if they wait too long and do not act, those same speculators are liable to unload on the equity markets which will then set off another whole set of issues for these plate spinners to deal with.

Silver Chart and Comments

Silver is being pummelled today, along with just about every other single commodity on the planet, as the combination of the Socialist win in France along with the results of the Greek elections, has traders running away from growth assets and into the "safety" of US Treasuries ( I still have trouble saying those words in the same sentence).

Many are fearing that Greece will not be able to hobble together a governing coaltion in time ot meet the detail for their loan bailout package.

Either way, the usual "sell everything in sight" mentality has taken over the markets with the result that it has taken silver down below important chart support at the $30 level. As you can see on the following chart, it is trading below horizontal support as well as Fibonacci retracement support at the 61.8% retracement level.

The price remains mired in the downtrending channel shown and if recent history is any guide, it should stabilize either today or tomorrow before grinding sideways once again and deciding whether or not it wants to embark on another leg down (there is not much support on the chart now until it gets to near $28.50 - $28.25 or so. If it falls below the downsloping red line at the bottom of the channel, it will get there. If not, perhaps the bulls can take it back towards $30.50 which is the next upside resistance level that is going to have to be cleared to rattle the bears who remain in control of this market.