Oh Bennie Boy, the Pipes, the Pipes are Calling

WOW! a bit of news out of Italy and it's ABANDON SHIP for stock market bulls. This coming a mere two days later after I posted my little piece about stock traders ignoring a downside technical reversal signal on the charts. Talk about a rapid shift in sentiment since then!

That news from Italy was enough to put Euroland back on the radar screen of traders after it had been completely erased since the Europeans began their bond buyiong program. The fear is that Italy will be gridlocked due to the election results that have been coming in and render it unable to comply with requirements for these continued bond purchases. The of course brings the stability of the Euro back into question.

That currency was spanked quite rudely today as the Italian news hit the markets. What aggravated the move lower in the Euro was a huge short squeeze in the Yen, that hit the Euro_Yen cross further exaggerating the Yen's move higher and putting additional downside on the Euro-Dollar cross.

The Euro and Yen have both been a sort of proxy for the risk trade with the Euro moving higher and the Yen moving lower as traders felt comfortable assuming risk once again. With risk aversion today's mood, those two currencies reversed their recent trends.

A lot therefore depends on what Chairman Bernanke is going to say when he gets before the Congress tomorrow. Will he whisper sweet nothings to the ears of equity bulls or will he strike a more cautious note? I for one will be greatly suprised if he says anything more about an early cessation to QE. He must certainly know that his words will be parsed with a fine-toothed comb.

The S&P 500 dropped so sharply on such large volume, that it sent the VIX, the Volatility Index surging over 35% today. Talk about rattling the complacency cage.

The S&P will need a lot of help from the Chairman tomorrow in his testimony to prevent a further move towards the Target level I have indicated on the chart. The Directional Movement has not only indicated a halt in the strong uptrend but has generated its first sell signal since December of last year. The loss of upside momentum that had been noted finally caught up to this index today. Quite frankly, there was a very large wave of selling - quite different than what we have been accustomed to when we have seen dip buyers eager to jump right back in. They appear to have been rattled for a change and look to be waiting for a bit deeper correction before plowing back in. By the way, that Directional Index sell signal back near Mid-December of last year was quickly negated by subsequent action. I honestly have no idea what the index is going to do tomorrow - everything depends on how the market interprets Beranke's comments.

Gold showed some signs of life today as it moved up in terms of the British Pound, the Euro and of course the Dollar. I will not be too impressed with gold until I see a handle of "16" in front of this metal that remains there. That will tell us that the spike down towards support near $1550 was a temporary bottom. It is not unexpected to see the metal bounce from its first test of that critical support level; however, to convince me that this is anything more than a type of Dead Cat bounce, I want to see that "16" handle PLUS a clear upside break in the HUI. Gold has found a base of support here about $1550 but specs are still favoring trading it from the short side so we want to see how it handles tests of upside resistance.

The HUI was rather lifeless today given the nice pop higher in gold settling well off its best level of the day. That index has been a drag on the gold price for some time now so if we see it begin to lead to the upside for any reason, a great weight will have been lifted off of the actual metal.

There are several downside gaps that need to be at the very least filled, before this index will give an all clear signal. Aggressive traders can buy shares but please be sure to use sound money management strategies. Don't forget the trend is down so one buying must know that you are going against the trend. Just be careful. You can end up a HERO or you can end up a great big fat ZERO. That is not my style of trading but I realize that we have many wild-eyed specs out there who love taking reckless chances with their trading accounts.

Stock Market Ignores Downside Reversal

Apparently the equity bulls are right back to work after "suffering" through a whopping two day correction in their permanently rising stock market. As you know by now, stocks took a beating on Wednesday when the FOMC minutes were hinting at some internal dissension among some of the various FOMC members in regards to the duration of the QE program. They then saw further selling on Thursday but come Friday, were right back up again completely erasing the losses of Thursday and cutting into the losses made on Wednesday.

It appears that traders have now come back to the view that the loudest voices in favor of cutting short the extent of QE were coming from the NON-VOTING members of the FOMC. The talk now has become that the VOTING MEMBERS are not going to cut anything short anytime soon.

I expect Bernanke to say as much in this coming week's appearance before the Congress on Tuesday and Wednesday.

If that is the case, and Ben issues soothing words to the crack addicts, then expect the equity bulls to go right back to doing their thing and driving stock prices relentlessly higher. If he even hints at some sort of agreement with the early cessation of QE, then Katie bar the door for stocks. We will certainly be watching very closely to see how the precious metals respond to this.

Notice the chart below - I have set up two indicators for you to observe. The first is the ADX or Directional Movement Indicator that it is more commonly known by. The black line is the ADX. IT rises in a trending market and falls when the market is not trending or in the process of consolidating (market tends to move sideways). Note that the BIG DOWNSIDE REVERSAL pattern in the S&P 500 that I noted earlier this past week caused that line to finally turn lower. That indicates a break in the uptrend. That being said, there is still no sell signal in this indicator. At this point it is indicating a pause, nothing more.

Normally, one of the most powerful technical indicators is one of these downside reversal patterns that come on huge volume. Typically they portend the end of an uptrend, especially one of such long duration and one which has experienced such few corrections over its course. To witness the eagerness of buying which we saw Friday is therefore no mean thing! You talk about "animal spirits" of investors. These guys are so juiced up that they could power light bulbs with their bare hands!

Note also the indicator below which I will leave nameless for the time being. It basically measures momentum. What I have been watching since the rally at the beginning of the year has commenced, has been the loss of upside momentum even as this market has made one new high after another. In other words, this market keeps grinding higher and higher and higher even as more and more momentum or upward energy is dissipating. I get the sense of a market that is at levels that are so ridiculous that more and more traders are getting increasingly nervous yet no one wants to aggressively sell the thing out of fear of the Fed's punch bowl.

We have seen what will happen to this "national security concern" if it believes that Uncle Ben is going to beginning preaching the virtues of monetary sobriety. Is there anyone out there who genuinely believes that the Fed is going to make sure that it crashes the stock market? Just who is in control here - the investing/trading class which just pitched a hissy fit over the FOMC minutes or the Fed which has now become captive to its own QE program.

Think about what we are witnessing here - The nation is addicted to cheap money as much as it is addicted to hedonism and vice and yet the Fed cannot pull the plug or more aptly, cut off the supply of the drug for fear of killing the patient. Our political leaders cannot cut a measely 2 pennies out of a dollar's worth of spending without telling us that Armageddon is about to occur; the madman running N. Korea is working on intermediate range nuclear missles and is even disturbing its only ally, China by so doing; Gasoline prices are topping $5.00 in some locales; Social security tax increases are hitting the entire working population and further scrimping already dwindling disposable income; health care costs are going UP not DOWN as we were assured that they would be once the grossly misnamed "Affordable Health Care" act was deceitfully rammed through Congress; we've got surveillance drones flying all over the damned country spying on us and yet everything is just peachy keen...

I have said it before and will say it again as much as it pains me to do so; America is going the way of ancient Rome as surely as the sun rises in the East. The Fed is doing the modern version of coin clipping. What is next, price controls under edict of death for merchants who hike them? No worries however - the stock market is rising so all is right with the world.

Trader Dan Interview at KIng World News Metals Wrap

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

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2013/2/23_KWN_Weekly_Metals_Wrap.html

Silver Specs Reduce Long-side Exposure

This is by request....

The big hedge funds are also exiting from the Silver market as they have been doing in gold but not near to the same extent. The reason is because of silver's industrial use. As a monetary metal it is experiencing selling tied to money flows leaving other sectors and flowing into equites; however, those same money flows, with many looking at the so-called "improving growth" scenario, are finding some of their way into the metal on the way down.

We do need to keep a close eye on the copper market however for if hedgies begin to get bearish on copper, it will be a tough order to keep them bullish on Silver. As of this Friday's COT report, hedge funds remain net long in Copper although they have trimmed that exposure by nearly 12,000 contracts through the reporting period.

Silver bulls do not want to see downside support near $26.25 - $26.00 give way for ANY REASON. It has been a solid base for more than a year and a half and has always attracted very substantial buying near those levels. Value based buyers see the metal as cheap down there. If, and we do not know at this point, if the metal were to test this level and rebound, it would indicate their activity and should bottom the metal. Still, from a momentum based view, it needs to clear $30 to get any excitement going on the part of the bulls.

One last thing - since I caught a lot of flack over my article on Backwardation by some of the uninformed out there who are always ready to swallow the latest nonsense, so long as it confirms their perma-bullish views, I wish to merely state that I hope you have learned something by the experience.

Markets will bottom when they are ready to bottom and not because someone "insists" that they must bottom in order to generate more traffic at a web site and thus reap more money from the Google Ads people. There are way too many in the gold community who seem to have some sort of perverse narcissistic addiction to constantly calling for bottoms (and tops I might also add) no matter what the price action is indicating. It is one thing to have a long term bullish view of gold; it is quite another to dredge up one story after another predicting with each one that a bottom is now imminent in the gold market.  

There is a time when markets go up and a time when they go down. It is really that simple. When the perceptions of market players change (and who among us knows precisely when that will occur?) then the price action will change.

Right now the perception among the majority is that gold's run is over. I am not saying that it is; I am merely telling you what the perception is. This is why gold is seeing so much heavy selling. This is what moves markets. When the conditions change so will the perception. Then those who were rushing to sell gold will be rushing to cover shorts and buy it all back or go long.

The key is in reading the price action on the chart for that is all technical analysis really is; a way to measure changes in perception towards markets.

To summarize - hedge funds are growing very bearish towards gold. They are doing so however now that gold has reached levels commensurate with former levels at which Asian Central Banks were very active as buyers. If the physical market buyers surface in size near current levels, there is fuel for an active short covering rally to squeeze some of them out. However, as long as the equity markets remain the place to be for hedge funds with money to invest, gold is going to struggle to find enough of these momentum based buyers to drive it sharply upwards. For that to occur, we need something in the status quo to change in order to shift perceptions back in favor of gold buying by speculators.

Perhaps Ben Bernanke's testimony in front of Congress next Tuesday and Wednesday will prove to be the Midas touch for gold. We will have to wait and see what he says then. My guess is that he is not going to upset the apple cart as he knows full well what is going to happen to the US equity markets if he even hints at ending this program of QE sooner than the end of this year.

Again, I am not saying that gold cannot rally; it is certainly oversold and due for a bounce; however, rallies are going to be sold until we get some sort of technical chart confirmation that indicates a change in the near term trend has occured. Currently that trend is lower.

Incidentally, in the late afternoon here on Friday, news hit the wire that Moody's had stripped the UK of its AAA rating. That was enough to send the British Pound sharply lower in very thin trade but it also saw gold goosed up into positive territory. We will want to see how the market reacts Sunday evening and early MOnday morning after a weekend to digest the news. Gold priced in terms of British Pounds moved up rather strongly on the news.

here is the British Pound priced gold chart with some notes.

Speculators Exit from Gold Market Continues

This week's Commitment of Traders report indicates a continuation of the trend that has been in place for some time now when it comes to gold, namely, the mass exodus of speculators from the gold market. Not only that, more and more hedge funds are playing gold from the short side of the market expecting lower prices in the future.

The following chart pretty much says it all. Take a look at the sharp drop in the number of outright long positions hedge funds are holding. Do you see the plummeting line. Is it any wonder that gold is plummeting lower? And what makes it even more noteworthy, is that this report DID NOT PICK UP the plunge through $1600 on Wednesday and the subsequent further pressure down towards $1555 the remainder of the week.

Note also the sharp spike higher in the number of outright shorts among hedge funds. This week alone this group was responsible (through Tuesday) for a total of nearly 28,000 contracts sold when you take into effect both their long positions being liquidated in addition to fresh new short positions. My oh my has sentiment towards gold changed!

By the way, the outright short position in gold being held by hedge funds is the largest that I have in my records going back to the beginning of 2006. I do have further dated records but have not bothered checking them. Let's suffice to say, that it is the most bearish hedge funds have been on gold in SEVEN YEARS! When one considers that the Fed has pumped or will pump nearly $3.5 TRILLION into the economy by the end of this year, increasing the money supply exponentially, this is nothing short of an economic miracle to see gold so comatose. You have to hand it to these masters of the Universe at the Fed - They have suspended the laws of economics with supply and demand no longer meaningful.

Not only have they managed to kill the canary in the coal mine but they have simultaneously made it appear as if the canary, and everything else in the mine, is just fine and dandy. Welcome to the Brave New World of the Modern Day Alchemists. Apparently prosperity in a bottle can indeed be created. Pity the ancient Romans; if they had only had their version of the Federal Reserve. We all might be speaking Latin nowadays and Caesar might still be ruling from the eternal city. 

Copper Woes

Copper began a strong rally into the end of last year, followed by a selloff with a resumption of the rally into a new high for this year in February. Since that time however it has been straight down for this important bellwether metal. Today's selloff in the red metal marks a brand new low for 2013 and the matching of a nearly 2 month low.

A couple of things are at work here. First, traders fear Chinese action to ramp down speculative fever in the housing sector over there. The concern is that any slowdown in Chinese building, no matter what the source, is not good news for Copper.

Secondly, there continues to be a general theme of selling commodities by hedge funds here in the US as evidenced not only by this chart, but by the CCI (Continuous Commodity Index) chart as well.

I believe we will want to keep a close eye on this market. With the US equity market once again moving higher today while copper moves lower, there is a divergence that needs to be monitored. I personally believe copper is a much better indicator of future expected economic activity than is the US stock market, which has become a bubble fueled by investors chasing "it is the only yield game in town". Ultra low interest rates, courtesy of the destroyers at the Fed, have sent high octane money flows into stocks. At some point that game is going to come to an ugly and ignominious end. I am just not sure when. Seeing these guys pouring back into equities in spite of the massive high volume reversal day posted this week is quite extraordinary.

The bullish fever refuses to die. What is particularly worrisome to me is seeing the huge outflows from money market mutual funds. Those funds, which are taking some rather reckless risks to try to obtain some sort of return in this insanely low interest rate environment (can you tell by now that I despise the Fed for what it has done to punish savers and retirees), are watching their investors leaving in droves to go and chase the stock market higher. This sort of herd mentality is precisely what the Fed has wanted but it is also precisely the same sort of foolishness that sets up those latecomers to the stock market for serious losses.

Forget all that claptrap being spewed out of the mouths of the various Federal reserve officials when it comes to their "mandate". The Fed has become nothing more than a serial bubble blower and a manager of the mess inherent in such things.

A Little bit of Fear?

Yesterday's downside reversal in the S&P 500, coming on the heels of the FOMC minutes, combined with a cornucopia of Central Bankers taking to the microphones today, seems to have FINALLY jolted the complacency of the Equity Perma Bulls. The Complacency Index, my name for the Volatility Index or VIX, has jumped quite sharply as signs are beginning to emerge that yesterday's FOMC minutes have rattled those who have somehow been hypnotized into believing that Central Banks have a magic can filled with magic beans that magically make all problems go away into never, never land, never to be seen again except in the dark recesses of our imaginations.

Here is a look at the chart that has gotten the technicians extremely concerned....

The extent of the stock market rally that we have witnessed since the beginning of this year alone is proof in my mind that investors can be herded into unthinking behavior faster than the word, "oligoply" can roll off the tongue.

Let's be honest here, the entirety of the stock market rally has been fueled by hot money courtesy of the Federal Reserve's Electronic Printing Press. It began with it back in 2008 with QE1 and has continued ever since then. Yes I know some point to corporate profits and signs of improving growth but does anyone out there genuinely believe that this economy can withstand higher interest rates? If the growth is so solid and the path to recovery is so entrenched then why is the Fed still continuing to conjure $85 BILLION each month that it might have it injected into the economy. Come on already....

The current fiasco involving the so-called "sequestration" in Washington DC has served to remind the saner among us that the US government is on a path that can only be termed "madness". The projected deficit for this fiscal year is over $ONE TRILLION. In a deficit of this magnitude, talk of even slowing the rate of spending increases (Washington DC speak for a cut) has brought out all manner of apocalyptic doom scenarios. What idiocy is it that grips the mind of these people? They are intent on bankrupting the nation. Historians paint a picture of the Roman emperor Nero supposedly fiddling while ROME BURNED. The current crop of leaders has certainly nothing on him. Matter of fact, they make Nero look downright statesman-like by comparison.

Here is the VIX CHART. Notice the sharp spike higher. Keep in mind that the only reason it had spiked higer in late DEcember of last year was over fears involving the now infamous "fiscal cliff".

Gold finally had some upside movement off its worst levels as it is seeing a bit of a reprieve from the nearly nonstop selling that has hit it since it took out support at $1640 last week. My buddy John Brimelow's excellent "Gold Jottings" reports very good premiums being paid for Gold by Indian buyers overnight. Demand was strong in Asia for the physical metal.

While the bounce is welcome, it does not look particularly impressive at this point. I suspect that there are more guys looking to sell rallies right now as they were caught long in gold and did not get out during the initial break towards psychological support near $1550. As I stated in yesterday's missive, gold needs to get back above $1640 to spook any of the shorts except for the most weak of hands. A move through $1620 will get some of them nervous enough to be ready to exit but the sentiment seems to be to wait around to see if the rallies have any staying power before exiting.

Something worth noting here, the Yen had a sharp rally, lots of short covering, as it and the US Dollar still remain safe haven currencies for some unfathomable reason. That implies a sharply weaker Euro and that is exactly what we saw today so far. The Euro got kicked in the groin by risk aversion trade tied to losses in the stock markets. Heck, the long bond finally showed some signs of buying although considering the extent of the jump in the VIX, for it to have trouble holding onto gains above a full point, tells me that there are still an awful lot of guys who want no part of bonds. Perhaps the thinking is if the Fed is going to throttle back on the bond buying program, there is no particularly compelling reason to lock in yields at such ridiculously low levels.

Let's just close today's thoughts with this... for the better part of nearly two months we have seen a near consensus among traders/investors that the Fed policy, in combination with the ECB, the BOE and the BOJ, had guaranteed smooth sailing in stocks. That led to one way trading in equities and in some of the currencies with the return of TRENDING MARKETS. That is the environment that traders, especially hedge funds LOVE. They find it extremely difficult to trade herky, jerky markets that whipsaw them up and down. The hedge funds were happy; the Central Banks were even happier as they had successfully herded the speculators into the markets they wishes them to ply their leveraged one way bets. All was well with the world, until....

 Yesterday's FOMC minutes have now injected uncertainty back into the minds of enough traders to return us to the wild up and down, nearly unpredictable movements of yesteryear. We'll have to watch these things very closely to see if this is the start of another new norm of more wild price swings or if we can return to the one way trades that marked the beginning of this year. Keep an eye on the Euro as it will give us some clues.... other than that, we are all trying to watch to discern what comes next. No one ever said this business was easy.

HUI to Gold Ratio

By request....