"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, June 11, 2013

Lack of Conviction - More Volatility Ahead

Investors/Traders are growing more confused and uncertain as to market direction and many are heading to the sidelines or scaling back the size of their positions in this very difficult trading environment. Witness the type of wild moves we are getting in the currency markets, especially the Japanese Yen, and you are seeing these CARRY TRADES involving the Yen being unwound.

When traders place these highly leveraged bets, they expect LOW VOLATILITY in the carry currency. When that does not occur, but rather the opposite takes place, it wreaks havoc on their positions and they have no choice but to liquidate or reduce market exposure at the very least. The results are unpredictable price movements across a host of markets and extremely wide trading ranges as so many of these hedge funds are all on the same side in the markets they are trading that there is hardly anyone to take the other side as they exit.

The Nikkei is now down 18% from its year-to-date high as the continued strength in the Yen is the carry trade being unwound. AS a matter of fact, the Yen had its single biggest daily gain against the US Dollar in over THREE YEARS! Tell me that the Central Banks have not fed and fostered and nourished this insanely leveraged speculative mania that we have been seeing in equities. It is ALL one massive bubble whose fortunes are tied exclusively to the continuation of enormous Central Bank bond buying policies.

The problem in Japan is that investors there are losing confidence in the ability of the Abe government and the Bank of Japan to actually accomplish what they have promised to do. In other words, the aura of invincibility of the Central Banks is beginning to wane.

Silver is getting whacked extremely hard as it has not been able to recapture most critical support at the $22 level. Failure to get back above there almost immediately is going to send it down to retest the $20 level. It was getting a bit of help from copper but now that copper is swooning after temporarily moving higher on supply disruption fears, that leg of support for the grey metal has been cut off.

Gold is flirting with support near the $1365 level with bears eyeing those stops that are building just below that level. If the physical markets blink and do not quickly step up their pace of gold buying, it too looks vulnerable to further downside. I fear that if bears are able to reach those stops and set them off, a cascade of selling will catch the lower-down stops and take this market all the way back to $1340.

I have said it many times of late and will say so again - Gold must have a catalyst of some sort to reverse the downtrend and give traders a reason to chase prices higher. They are looking to sell rallies, not buy dips. The only reason for any buying in this pit right now is due to strong physical off-take. If that fades...

The HUI continues to act as a drag on the metal. That overhead gap noted on the chart is like a THE WALL in GAME OF THRONES. It must be breached if the night walkers are going to invade the realm of men. Translation - until that gap is closed, the HUI is going nowhere. There simply is no reason for the bears to cover and thus no reason for the bulls to chase prices higher either.

A bit of parting advice for TRADERS out there... be very careful - watch your position size does not get too large for your account right now, especially if you are trading currencies, and forget all the glorious predictions and COT analysis and other claptrap. Right now, none of it means anything. All the matters is money flows and carry trades. If you happen to get caught on the wrong side of this, your career as a trader is going to be rather fleeting.

Investors with a longer time horizon obviously have a different perspective on things because we all know where this is going to go.



  1. This comment has been removed by the author.

  2. Good that you are warning. I have experienced times, when I would have made a lot of money by just going on holidays and paying for an expensive hotel in Florida.

    Afterwards it is always very clear, but when you are going through such a phase, you think the function of a trader is to always join the market.

    Sometimes it is better to be scary. There is a saying about pilots: "There are bold pilots and there are old pilots. But there a nearly no bold AND old ones." (Free translation into English.)

  3. Very odd as to how the dollar has shown weakness and other currencies have rallied, yet gold continues to grind down.

    Part of the "Bernanke Miracle", I suppose he's going to ramp up QE to save bonds from disaster, now that his "Jawboning" turned out to be a resounding success.

    Thanks to his "words", the CRB Index has completely crashed and inflation expectations are still near zero.

    Anybody how kept faith in the Fed and kept they money in the "system" fully invested in financials and consumer stocks made a lifetime worth of gains in just 4 1/2 years.

  4. Thanks as always Dan. I was reading Richard Russell's KWN piece. Sage as well. It amounted to: if you don't know what's going on, stay out. On the plus side, I can only hope that the chop and volatility is putting some fire under the big boys' feet.

  5. lovely analysis Dan...just what i needed..despite gold moving higher cos the general market turned today, i still feel like it will drop to make a tripple bottom (maybe even new low) before going up again...could even rise as soon as next FOMC meeting...either way, im looking to enter a little lower and ill switch from trader to investor cos i cant really take this volatility too much either...ill look to sell my leveradged gold shares postion (NUGT) when gold is substantially higher , like 1550 ish - if this takes a few months, so be it.

  6. Thanks Dan for another very useful post!

    Not much new since this weekend.
    The scenario I'm following still follows its course at present.
    - Volatility decreasing further.
    - red median of pitchfork acts as a magnet to gold prices.

    As a result, the Bollinger Band are squeezing around the median, and prices are contained within the two orange segments.
    Neither the bulls nor the bears seem able to win a decisive battle right now. MACD may give a small bull signal by not crossing, but that's just that.


    But, take a look at the Registered Stocks of the Comex. They are plumetting. Now, eligible stocks are feeling a bit better.
    If Dan can find a little time reminding the basics of eligible / registered, and more importantly :
    - are these figures relevant, can they be trusted?
    - if yes, can "they" move some of the eligible to the registered stock?
    Because at the pace these stocks are plumetting, there won't be much time left before Comex changes the rules on their contracts (I mean margins).


    Have a nice day all,

    1. Hubert;

      The drawdown in Comex stocks is always interesting but until I see it accompanied by a move higher in gold, it really does not mean that much right now. If gold is in tight supply, price would move higher on the board as eager buyers would swoop in with the intent to hold those longs into delivery after having bought it at a cheap price. So far that is not happening. Anything is possible in this day of market idiocy but for now I would watch the warehouse numbers but pay more attention to the price action on the chart.

  7. Consumer stock ETF's like XRT. and XLY are soaring again towards new highs.

    Poor GDX will need a 5 to 1 reverse split and NUGT will be an OTC bulletin board penny stock soon.

    As usual, the dip buying of Fed-approved sectors such as financials and tech is always rewarded.

    The esteemed Richard Russell must be scratching his head, totally bewildered.

  8. What continuosly baffles me is how the Hedgies continue to chew up each other, while the MSM continues to shout lies about meaningless stats, yet America declines to a state of disrepair. I put the blame squarely on Central Banks around the world trying to manufacture a renaissance. A yield curve which reflects absolutely nothing. Credit risk is meaningless right now. Maybe Japan combined with with this new Syrian Red Line will finally provide the spark which lights the fuse to the bomb in gold. Dave from Denver was as hyped as I have ever read him and he is not alone. It just amazes me how absolutely oblivious citizens are. Good luck all.


Note: Only a member of this blog may post a comment.