"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
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The mining sector was weak to start the session even as some larger entities were attempting to force the S&P futures above the 1350 level. The problem was that gold could not move into the plus column, the Dollar was not buying the concerted push nor were the bond and note markets which refused to go negative on the day even with stocks initially rallying.
Once the S&P dropped back below the unchanged level, that was it for the mining sector shares which are now getting what looks to me like the BEGINNING of a final washout in this sector.
Note that the critical 50% Fibonacci retracement level could not stem the bleeding as the index has not yet even registered a mere bounce higher. One can almost sense the disgust and dismay that pervades this sector at the time being. While the economic world is being rocked, the proverbial safe haven of gold is being shunned in favor of.... Yep - US Treasuries here and German Bunds over in Europe. Apparently promises to pay by overstrained governments are more valuable than the ancient metal of kings in this Brave New World.
I am sending up a monthly chart once again to provide a long term view of this sector with some key technical regions noted. If we base our analysis PURELY on Technical factors, there does not seem to be anything in the way of downside support until one nears the 340 level which is the 61.8% Fibonacci retracement level of the entire rally from the low hit in 2008. if that cannot stop this rout, then the upsloping trend line (in blue) drawn off the pitchfork is the next target - that is currently near the 300 level.
An extreme and unlikely target can be calculated by looking at the 2008 drop which took 70% off the value of the index in the matter of a few months time. If, and this is a WORST CASE SCENARIO, the monetary authorities sit on their hands and do absolutely nothing to reverse the course of the broader US (and global) equity markets, a similar erosion in value would drop the index to near the 185 level. Let's hope it does not come to that extreme. Again, I do not think this is at all likely - I only mention it as the bottom of last resort. For this to occur, the S&P 500 would have to literally implode and the notion that the Bernanke-led Fed would sit on its hands and do nothing while this occurs, sending the terrified citizenry flushing their stock holdings down the toilet is inconceivable to me.
The last chart is the US Dollar Index which is bumping up against a key overhead resistance level near 82. It has not been able to mount a WEEKLY CLOSE above this level since August of 2010.
Today's selling downdraft in the broader US equity markets, when combined with more of the risk off trades, derailed the tentative Upside Reversal Day posted last week in the HUI. You might recall that I mentioned it might be prudent to get some additional upside price action before becoming too convinced that we had a sure bottom in the mining sector shares.
The reason for this is that far too many of both these upside reversal patterns and downside reversal patterns are being generated by the nature of computer algorithmic trading. In times past we would see these patterns form ONLY AFTER A PROLONGED UPTREND OR DOWNTREND when prices had reached extreme levels of valuation.
Commercial traders, whose business deals with the actual physical commodity and who understand "VALUE" better than most traders, would be moving in to cover existing shorts in large size/instituting fresh longs or liquidating long positions/instituting fresh shorts in large size when they spotted these extreme valuation levels. Their buying or selling would be of such magnitude that the market would then reverse course.
Today's BRAINLESS HEDGE FUNDS have no such understanding of VALUE nor do they even make any attempts to discover what value might be. How can they when you have a collection of mindless machines doing the thinking for this lazy group of traders? To decipher value one must have a thorough FUNDAMENTAL KNOWLEDGE of the market that they trade. Such knowledge takes many years to formulate particularly during which the traders gets to witness firsthand changes in supply/demand structures affecting the market(s) that they choose to trade.
What we get nowadays a result of these runamok algorithms, is every single machine on the planet buying or selling merely because the last trade price happened to either go up or down. There is no understanding of WHY there is buying or selling. All anyone knows is that a "bunch of other machines" are buying or selling so just go with them.
The result is what we saw last week in the HUI. Apparently there was enough profit taking in the ratio spread trade that it forced the shares higher. Once a technical level was taken out on the upside, additional algorithm trading then took over to take the HUI through the previous day's high closing a chart gap on the Daily in the process.
However, and this is the key - there was little to no SERIOUS Followthrough buying that occurred to thereby validate the signal. The result was that the buying present last week evaporated in the face of fresh selling.
The close today was not at all constructive with the index not only taking out the previous LOW of that reversal day but also CLOSING below that level. This gives the bears fresh fodder at this point so we will now have to wait to see subsequent price action to get a hint or sign that a serious bottom is at hand. If the market can quickly reverse to the upside and take out today's high, we might have had another one of these all-too-frequent head fakes.
Let's see what we get moving forward this week.
Gold has continued to see further selling in today's session with traders once again exiting "RISK" trades in favor of the "Growth Off" or RISK AVERSION trades. Long commodity positions, along with long equities, are getting liquidated with money flows heading towards US Treasuries in general. This can be seen in the CCI, the Continuous Commodity Index, which is moving lower while bonds move higher, taking interest rates down even further as the yield on the Ten Year is now down below the 1.80% level. Remember, there has not been a week yet during which this yield ENDED BELOW that critical level.
Gold's move down towards $1550 has in the past attracted very substantial Central Bank gold buying. Hopefully this will remain the case as the market is now pushing towards the lower band of an eight month long trading range. If speculative selling of the metal is not absorbed down here and the market were to break below $1520 and fall to recover quickly, it will more than likely drop below $1500.
My own thinking on this is that the markets are moving so quickly away from risk and out of basically everything except Treasuries or cash, that the Fed is going to have a major problem on their hands if they do not soon give some sort of signal that they are preparing to act to stem the deflationary decline. JP Morgan's $2 Billion credit derivatives-based loss has spooked the banking sector and that is the one sector that the monetary officials do not want to see going from bad to worse. Keep in mind that back in 2008, once Lehman went under with Bear Stearns following, it was the woes of the financial sector that pulled the rug out from under the entire US economy and the US equity markets. The Fed is well aware of this and I suspect will not want to wait too long before beginning to make some noise to keep the markets from becoming too roiled.
The bank shares might be the first thing to watch for some signs of further monetary accomodation as one can be assured that there are lots of phone calls and discussions underway even now. If they were to show some signs of bottoming, it might be a hint of things to come.
Meanwhile gold will need to get at least back above $1600 to give the bulls some breathing room. With the Commitment of Traders report showing the NET LONG position of the big hedge funds at a 42 month low, there remains plenty of room for them to come back into this market and juice it higher but they need some sort of signal to tell them to do so. Right now they are not getting it; if anything, some hedge funds are now moving to the short side of gold along as well as a host of various other commodity markets.
Incidentally, China is lowering their bank reserve ratio requirements, a sign that they are responding to slowing growth there as their export markets are impacted by the woes in the Eurozone and the anemic growth in the US. This is one of the signals that copper has been sending for a while now as it descends in price. Were copper to finally show some signs of a bottom, that would be constructive for silver which is testing chart support down near the $28 level once again.
Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap.
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.
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.
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.
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.
