"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


Friday, November 7, 2014

Copper COT Anomaly

Tracking the copper market over this past year has been a rather fascinating study for me as it has produced some very unusual readings that do not occur very often.

I made mention of one such development earlier this year when noting the "Dueling Speculators" scenario in which the hedge funds were on one side of the market while the other large specs such as floor traders, non-registered CTA's and other private traders of size, were arrayed on the opposite.

Now we have yet another rather fascinating occurrence to note. This time it involves the fact that out of the 5 categories of traders that are reported and broken down, all but one are on the net short side of the market. The category carrying the entire weight of the net long position in the market is the Swap Dealers.

The Commercials - Producer/User/Merchant/Processor are net short along with the hedge funds, other large reportables and the general public. I am not sure why this is the case here with copper but it has been the norm for this year to see the Swap Dealers opposite the Commercial category. Both tend to generally be more closely aligned as to the same side of the market, although I wish to emphasize that it is not always the case nor does it need to be.

But it does strike me as rather odd to see the current configuration.

Here is the actual price chart.

As you can see, the market has essentially been slowly grinding lower since January 2012. There is a channel defined but the upward movement has been growing more shallow this year and has not been able to make it to the upper channel line. That is a sign of persistent weakness.

Thus far those on the short side of the market have been on the correct side although the market has not made it easy at times. It has been under $3.00 only briefly before popping higher but over the last month it has made several trips below $3.00 more frequently than at any time in many years. This is a testimony in my view to the overall sluggish nature of the global economy.

Will this market go in the direction in which the 4 categories are positioned and finally mount a weekly CLOSE below $3.00? I do not know but if it does, it will bode poorly for growth prospects.

While such an occurrence might unnerve some, it should be pointed out that it was not until the middle of 2005, that copper prices began any sort of deviation from its historical norm when it comes to price. Just look at the chart going all the way back to 1992 and you will see what I mean.

Copper at $2.00 is not exactly cheap when compared to the 13 years prior to the breakout in 2005. Maybe copper is reverting back more towards its historical average when it comes to price. If that is the case, $3.00 copper might still be considered rather expensive.

All this of course is dependent heavily on what happens in China but I can tell you this, if growth were to slow at a faster rate in China, and again, no one knows for sure what will happen there, but if it does, copper prices would have some substantial room yet on the downside. That rectangular support zone noted on the chart might just not hold after all!

We are all certainly going to see one way or the other. As a matter of fact, I suspect our monetary masters are also keeping a close eye on this chart, along with that of the crude oil markets I might add.

GLD to Gold - We have a Problem!

Once again we have another one of those proverbial flies in the ointment when it comes to one of these frequent rallies we have seen in gold during the ongoing bear market of the last two+ years. We get a great rally and a lot of powerful chart action over at the Comex only to wait upon the reported holdings update from GLD and then find disappointment.

Instead of a nice climb in the holdings, what did we get instead? _ a fall of some 5.7 tons! Quite honestly, that came as a very big surprise to me. Given the action in the mining shares, I had expected to see some increase in the holdings. 'Twas not to be apparently.

This confirms my concerns about the rally - namely that while it was indeed powerful, it was due primarily to short covering and not so much due to an abundance of new buying. It is obvious that some used the rally in gold to close out some longs in the GLD.

Here is the chart. Gold holdings are now DOWN 71.07 tons from the first of the year ( and going in the wrong direction) while reaching back to levels last seen in late September 2008.

I am going to keep a very close eye on this next week and can only hope that we get some regular numbers reported daily from the ETF. Those of you who tend to follow that thing as I do know that we can sometimes go days without any fresh numbers coming our way.

Some Thoughts on Corn and the Commitment of Traders

Those of you who trade the grains as I do are well aware of the importance of this Monday's upcoming USDA grains report. We will get a fresh look at the yield numbers and the overall size of the crop based on the latest from USDA as well as what the expected changes in the final carryover will be for the 2014-2015 marketing year.

It is no secret that we are expecting record corn and bean crops. The only question is what size? Traders such as myself are going to be especially interested in the carryover numbers expected.

Heading into this report however, we have had a huge rally in the bean complex as well as generally higher prices in corn, after it made a low near $3.20 at the beginning of October. It has since rallied some $0.60 higher in the face of a record crop which has most traders confounded and left scratching their heads looking for a reason to justify a move of this extent.

It did back down a bit this week as expectations began to circulate that we would get some higher numbers based on what the private firms were saying as well as some anecdotal type reports from long-time crop watchers/observers.

I want to make an especial note that these USDA reports more often than not produce some violent moves. Many traders tend to move to the sidelines ahead of them therefore to avoid getting caught in the usual crossfire that erupts when the numbers hit the wires.

I have noticed something however that I feel is worth mentioning. In going over the Commitment of Traders reports, I was struck by the size of the NET LONG positioning of the LARGE SPECS heading into this report. To put it bluntly, they are banking on a very bullish report.

Take a look at the following COT chart and note the blue line. That is the combined NET position of the LARGE SPEC category. As of Tuesday this week, it is the largest it has been since May of this year. As a matter of fact, it is at levels commensurate with late May when they began to exit and move out from their heavy long side exposure in earnest, eventually reaching a net short position in the process.  ( NOTE the price chart where this is detailed).

Here is what should make any trader a bit nervous about this...

If this report is not strongly bullish, given the fact that corn has rallied to the extent it has over the last 5 weeks, one has to be concerned that there is now a hefty contingent of these large specs sitting on the net long side of the market waiting for this report to essentially confirm their bullish bias. While the report may yet to prove bullish, it is going to take a much lower than expected yield, a lower ending carryover, or a lower planted/harvested acreage number than what the market has built in heading into this report to provide the additional fuel required to push this market much higher in my view.

As I see this thing, the corn has essentially been pulled higher by the antics of the meal market, which as I have been commenting rather frequently of late, has been dragging the entire grain floor higher alongside of it. The strong fund buying in the meal then spilled into the beans, which then spilled into the corn.

But here is the interesting thing - the number of OUTRIGHT LARGE SPEC LONGS has not seen near the volatility as has the number of OUTRIGHT SHORTS. Look at how relatively stable the long positions have been versus the sharp moves up and down in the number of outright short positions.

To put it bluntly, the vast majority of this move in corn, both down from its peak in May and now HIGHER, from its valley in October, has been caused by sharp fluctuations in the number of short positions held by these large speculators which dominate our markets.

It has been my experience that a market which moves higher due more to the fact of an overwhelmingly larger amount of short covering, than BRAND NEW LONG POSITIONS being added, lacks the necessary ingredients to support a bullish trend remaining intact.  In other words, that move is suspect.

Those of you who have been reading here for any length of time at the site, know quite well that I have often commented on the inability of gold to sustain rallies due to the fact that the largest component of the move higher  during the current bear market has been based on short covering and not NEW LONG positions.

I suspect the same thing with corn. When the shorts are finished being run out, who is left to buy up at these levels? Answer - not many, especially when they realize that a record crop is coming. For now, the bulls, aided by nervous shorts, have been able to push this market well off the low made in early October as the final size of the crop was becoming known. Harvest delays, meal rallies, etc, have been the fundamental justification to support that rally.

Will the report we get this coming Monday turn out to be the swan song for the large specs or will they be proven to have been correct? We shall certainly see.

Big Reversal Day for Gold - But will it Last?

That's the question on a lot of minds as a result of the huge upside day in the gold market today.

Gold essentially managed to erase nearly all of the losses on what was began as a big technical downside failure but ended up leaving both sides a bit unsure as to what to expect next.

From my perspective, you had a combination of two things at work here. The first is the payrolls number which came in a bit on the low side of what the market was looking for. In and of itself, the number was not that bad but the market seemed to be looking for a reason to rally and that was as good as any.

But what compounded the move higher was the reports of Russian tanks moving in Ukraine. That was just too much for the already nervous shorts and out they came in droves.

I mentioned the other day about the psychology at work in what the gold perma bulls constantly harangue us about whenever gold experiences a sharp selloff, namely, their poorly dubbed, "Flash Crash".

"GET ME OUT AND GET ME OUT NOW" at any price is the psychology at work on the longs when selloffs are the case. Once the computer selling kicks in, that attitude then takes over. Today it was the bears screaming the same thing, "GET ME OUT AND GET ME OUT NOW" as prices MELTED HIGHER.

Of course, just as all it takes to get a move lower is a few big sell orders, all it takes to get things rolling on the upside like today is a few big buy orders. Computers on the way down and computers on the way up. It is that simple.

Take a look at the daily chart first. That is most impressive!

The price posted a huge outside reversal up day today. Coming after an extended decline like gold has experienced, it is therefore significant from a technical analysis perspective. It indicates that the market is SOLD OUT for now.

Those who have been short should have covered most of their shorts during today's session so as not to lose the tremendous profits that they have accrued over the last couple of weeks. That is where a great deal of the buying originated from today.

Here are some things that I am watching however which, while I respect the day's action, I am noting as obstacles the bulls have yet to overcome.

First is the ten year moving average ( in BLUE). Note it is still declining and note that the rally has not made it back to even this initial of key technical levels. In spite of the tremendous rally today, that 10 day is still lurking overhead. I should also note that it is ABOVE the key downside breakout level of $1180.

The test for the bulls comes early next week to see whether or not they can prove that the breakdown below $1180 was a bear trap or whether this is just another one of those violent short covering rallies that come so often in gold during its bear market and which only serve as higher selling levels from which new bears can enter the market or existing stronger hands can add to their short positions.

The verdict remains out on this in my view but I am keeping an open mind. Previous experience with gold is that it tends to put in these violent upside rallies only to then disappoint with little in the way of additional upside follow through. Will this time be different? I honestly do not know so therefore I am observing.

One thing that the gold bulls have working in their favor at this time however is the confirmation in the gold mining shares as evidenced by the strong chart action in the HUI.

Here is its chart...

Notice that it filled that overhead gap serving as resistance. That is impressive and needs to be respected. Was it an exhaustion gap signifying the end of the move and a final bottom in what has been an inexorably brutal bear market in the gold shares or is this merely the beginning of a new sideways pattern forming above the low of the week near the 146 level? Subsequent price action next week will go a long way towards clearing that up for us.

However, if you take an intermediate term view of the gold chart, that casts a bit different light on the metal which urges some caution about getting too bulled up.

Here is the weekly chart of gold. Some of you will recall this from some previous posts I made when the metal broke down below chart support at the triple bottom near $1180.

Notice that you have what chartists will refer to as a "hammer" pattern, which derives its name from price action "hammering out a bottom". However, this is the key - the CLOSE remains below the former triple bottom of $1180. I would very much prefer to have seen the market recover that broken triple bottom before turning more strongly bullish. Right now I am ambivalent.

Why? Because i am unsure whether this is merely a return to that level to test to see whether or not the same eager sellers are present or is this a move indicating a stronger move higher that can possible recapture a "12" handle?

Again I do not know as we will have to wait to see what we get next week before saying with much certainty. Right now any guesses are just that, GUESSES, and successful traders do not become successful by trading guesses.

If the bulls can take the price ABOVE $1180 and keep it there to end next week, then we have something. If not, I suspect we will see a new range trade develop at a lower level with the bottom near $1130 ( this week's low) and the top wherever the pattern develops.

I will get some more up later on when I have a chance to go over the COT stuff. Suffice it to say it is an easy matter to expect significant short covering will not show up on this week's report. That all happened today!

In the meantime I am worn out from trying to keep my sanity trading beans and cattle, which have both been all over the place as the computers have shoved them around relentlessly this week, especially the meal.

Monday we get a major USDA grains report and perhaps we will see some semblance of normalcy come back to the grains and get rid of some of the volatility that is jerking traders all over the place. But then again, given the brave new world of electronic screen trade and computers incessantly firing off buy or sell orders in huge quantities, I tend to doubt it.

LBMA Announces ICE gets the Gold Fix

In what will obviously make the Intercontinental Commodity Exchange crow to annoy the CME Group, the London Bullion Market Association announced that it has picked ICE to manage the Gold Fix.

The new electronic fix will commence in early 2015 with 11 firms intending to participate.

This will be interesting to watch as it ushers in a new age for the gold fix and brings it into the 21th century. One can only hope that is functions smoothly and efficiently and above all, with increased transparency.

At this hour, gold is showing excellent chart performance as shorts are getting pushed out. Here is a quick chart. We now have some solid technical support levels that have formed as well as resistance levels that will make analyzing this market a bit easier.

As you can see, it has pushed past the first zone of resistance noted on the chart. The market looks to be experiencing what I and some other long time traders refer to as a "melt up". It continues to work its way higher as one can see groups of shorts covering as the market refuses to give up much ground on the upside. That causes some who come in to sell into the rally to jump back out which then tends to feed the further upside progress.

I am still most interested in how this thing will close today. Mining stocks are having a nice rally as well with their upside performance bettering that of the actual metal. That is a good sign if one is bullish. Also, that HUI/Gold ratio is correctly somewhat today after striking all time record lows this week.

By the way, there are some reports circulating out of Ukraine that Russian tanks are moving. That is keeping some safe haven buying which can be seen in the upmove in the bonds and the unwillingness of the Yen to move lower.

Payrolls Friday - Lots of Volatility

Payrolls number disappoints Wall Street could be the headline for today's trading session. The always volatile number came in at +214K against expectations of a +233K. The rate of unemployment fell to 5.8% versus market expectations of 5.9%.

The numbers for September were adjusted upwards to +256K from +248K. Also, the August numbers were kicked up as well going from +180K to +203K.

As always, the data unleashed a round of furious price action across the currency markets, and by default, the gold market. Most are seeing the numbers as having a bit of something for all sides.

Those reacting to the headline number registered their disappointment by selling the Dollar, especially in favor of the Euro.

However, those who were looking at the monthly average since the beginning of the year, were doing the opposite. Analysts pointed out that the average number of jobs created this year has been +220K/month, something not seen since nearly a decade ago.

A key data point inside the report was the fact that average hourly wages rose 3 cents to $24.57. A lot of traders, including yours truly here, are closely watching that important number. Remember, it is my view that the reason inflationary pressures have yet to show up in the economy is because wages have been flat/stagnant. If, and this is a HUGE "IF", we were to see a trend in rising hourly wages develop, that might be the catalyst that could shift the current deflationary psyche to one more of an inflationary bias. It is certainly not here now but we are all watching.

The data did little to convince market players that the Fed is going to move on the interest rate sooner rather than later. Most still expect something to happen on the front mid year next year. Shortly after the data was released however, one of the Fed governor's, Mr. Mester was quoted as saying that the report was: " a pretty solid jobs report across the Board". He also noted that the "unemployment rate is a pretty good indicator of improvement in the Labor Markets".

The Fed has been very vocal about stating its close scrutiny of the labor markets ahead of today's reports in their various statements coming out of the FOMC meetings.

I am interested in seeing how the dust settles today before making too much of the early price action. As I said, there is a little of something for everyone in this report.

The Dollar moved slightly lower as an initial reaction to the report but in the tmie it has taken me to type these comments, it has since stabilized and remains slightly higher. Gold is taking its cues directly from movements in the Forex markets.

No telling where all this will end today so buckle your seat belts and stay tuned.