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.