Draghi Comments; Markets Party

ECB President Mario Draghi announced that the ECB, in an unanimous decision, voted to leave interest rates unchanged. Many market observers were expecting a rate cute. The announcement was viewed as an expression of ECB confidence in the EuroZone economy and thus had a devastating effect on the US Dollar with traders rushing to ply the risk trades particularly in the commodity sector, which if you recall the chart I published yesterday, had recently been on the receiving side of a good butt whipping by the hedgies.

It is astonishing how rapidly sentiment, and thus money flows, can change in these modern markets. It is like watching an entire business cycle occur within a 24 hour period!

Take one look at the following two charts and then you will understand why nearly anything remotely resembling a commodity is higher.

Here is the first chart - the Continuous Commodity Index or CCI: Note that the price has run exactly to the 200 day moving average. The big test now comes tomorrow or early next week to see if today's Draghi-induced rally has any legs. If it does, and the index can trade back above that level, expect to see further strength in gold and in silver as fund flows will be coming back into the overall commodity sector.

By the way, all of the base metals, with palladium and platinum, were especially strong today. That bodes well for silver if it keeps up.

The next chart is the US Dollar Index. It was hammered lower today and I do mean "hammered". I find it especially interesting to see that it too failed at the 200 day moving average. Were it not for sharp losses in the Japanese Yen, the Dollar collapse would have been even more severe.

Taken together, these two charts pretty much tell us all that we need to know about today's price action in the precious metals. With the Dollar dropping sharply, the risk trades were on in full bore and that means big money flows into both equities and into commodities. That in turn pushed up silver and gold.

I do find it noteworthy that the long bond, while it was weaker today, was down less than a full point. A move of the magnitude that we witnessed in the Dollar and the surge in the S&P 500 should have been good for more than 20 ticks or so. That is a flag that stands out to me. With all the hoopla regarding the onset of the risk trades, the bonds should have been knocked on their can with money flowing out of that sector in chase of higher yields elsewhere. I was looking for at least a full point or lower move in that market; we didn't get it. Hmmm.... let's see what we get in that market tomorrow. If it fails to move lower, I have to wonder if we are going to see a continuation of today's commodity and stock buying binge.

In the aftermarket in the S&P, it looks as if the bull train is leaving the equity station and there is a panic to get on board but the bonds are still not imploding lower - yet....

The HUI did put in a good day bouncing further from that 420 support floor. It still is not out of the woods as the bears remain in control of the larger trend until we get a close through the 450 level. One thing is certain however, value based buying has continued to manifest itself every single time this index moves to that 420 level. Apparently investors see value in the mining shares that comprise this index on moves toward recent lows. That is a good sign for the beleagured bulls. The longer this index remains above 420, the better the chance that it will spark a wave of short covering which is what is needed to kick off any sort of uptrending move.

Take a look at the gold chart and note that it accomplished STEP ONE - it made it through the 200 day moving average and did not fall back through it. That is a good first step. The big key however is last week's high just shy of the $1700 level. If the bulls can muster enough conviction to take it through that level it will have enough upside momentum to take it through $1700. What it does next then will show us whether we have the beginning of a good uptrend move or just another bounce higher against which bears will be able to successful sell.

If you look at the graph of the RSI, Relative Strength Index ( an old but solid technical indicator) you can see that it has not been able to get back above the 60 level since early October of this past year. That is a classic case of a market in a bearish posture. What we want to see is this indicator take out the 60 level and get to at least 70 before we can call this latest move the real thing. It should closely coincide with an upside breach of $1696 - $1699. Let's see.

I have to make one more comment before closing - while one cannot fight the trend as a trader if they wish to be successful, for the life of me, I cannot fathom how the S&P 500 can continue heading in a vertical upward direction putting it within 120 points or so of its all time high. One would think that they is hardly a care in the world about the economy or the horrific condition of the US Federal government. Proof positive that what the Fed wants they are generally going to get!