Ten Year Treasury Note back below 2.5%

My thesis is that the recent sharp spike higher in interest rates on the longer end of the yield curve sent shock waves and convulsions into the hallways of the Federal Reserve's headquarters. This is why I maintain that Chairman Bernanke's abrupt reversal and subsequent contradiction of his June comments concerning tapering of the bond buying program was so forthcoming.

The Fed watched in horror as the bond vigilantes did their thing and took interest rates higher. Concerns began arising that the higher yields were already pushing prospective home buyers out of qualifying for certain properties and were reducing downward the size and price of the homes that they were able to quality for.

Enter the Chairman and VOILA!.... presto, change-o, down comes the yield on the Ten Year to back below the 2.5% level. It is going to be entertaining to say the least to see how this all important indicator behaves as we move deeper into the latter part of this year.

My guess is that if it gets too disobedient and begins to climb too sharply once again, we will see more backtracking from the respective Fed governors about the pace of the tapering....

Gold Showing some Resiliency

Wednesday's rejection of gold from the $1300 level emboldened sellers who drove the market down towards the chart support zone of $1270-$1260. Buyers surfaced first in Asia that evening followed by more in both the European and New York sessions on Thursday. Today, Friday, more buying was seen which enabled the market to move back up towards the top of this constricting range in which gold is currently working.

The top of the range is $1300. Gold is just a few dollars away from testing that once again and may very well do it on Sunday evening/Monday. We will have to see.

I am of the opinion that it will take a convincing push PAST $1300 which remains above that level to bring in some fresh speculative inflows into the metal, flows which have heretofore been lacking.

Based on this week's COT report, the predominant factor in the recent advance has been short covering on the part of the giant hedge funds. What that same report reveals however is that there is hardly any NEW BUYING from fresh longs occurring in that camp. Gold must have that in order to generate more upside potential.

On the KWN Markets and Metals Wrap this week, I discussed what I believe is the re-emergence of hedging activity by the miners. Their activity is showing up in the Producer category. I think it important to note that for nearly a decade now, we have not had to deal with any significant amount of hedging coming from the mining community. That appears to be now changing as per one of my previous posts.

From an investor/trader perspective, this is significant in the sense that it brings a fresh new source of selling into the paper gold futures market which we have been able to dismiss for nearly 10 years.

The focus has been primarily on the bullion banks as the ones supplying the bulk of the sell paper throughout the past decade. I believe that they will still be a force to deal with SHOULD GOLD BEGIN TO RALLY but selling from the miners will also have to be absorbed by the hedge funds or any other speculators who will be playing gold from the long side when the technicals shift in that direction for good.

Back to the short covering featured this past week - all major reversals do start with short covering but they must see the infusion of new longs to sustain any upward price movement. Short covering is more closely akin to a bottle rocket - fast, noisy, lots of excitement, but when it fizzles out, back down to earth it comes. What is required to keep anything aloft for long is FORCE. In the futures market that force is supplied by FRESH BUYING.

That remains to be seen as to whether we are going to get it. If we do, we can more definitively say that a lasting bottom is in. I remain hesitant to go that far until the market proves that it can at least put and maintain a "13" handle in front of the gold price.

One thing that is also constructive is that the beleaguered mining sector, as evidenced by the HUI, is also showing some moxie. The index failed to close through the gap this week after pushing into it whereupon it promptly retreated and moved lower. Today, it showed some amazing strength and worked higher this time closing into the gap once again. The key for the index remains working past the gap and that means pushing through 245 and doing it with some gusto.

If that occurs, particularly if it can manage to do this two successive days, then you will see more short covering occur in the respective shares that comprise the index and some new money also flowing in. There are a number of people who believe the gold shares are seriously undervalued but are quite hesitant, understandably so, to commit capital in size into the sector for fear of getting burned. A technical signal is therefore needed to convince them to come back into the water in a larger way.

Will we get that next week? Stay tuned.... There is a big election this coming weekend in Japan that might have an impact on the Yen and therefore the price of gold depending on its outcome. That could be the dominant factor in early Asian trade Sunday evening over here. Quite frankly, Japan is a mess with a national debt that exceeds twice the size of the entire domestic economy over a TWO YEAR PERIOD! At some point the sheer size of the debt begins to crush everything in its path. Forget about Godzilla! Their debt is the only Godzilla they should be fearing!

Then again, one wonders if that is exactly where we are ultimately heading ourselves over here in the US....

$1300 Rejects Gold

Gold was stopped cold in its tracks today at the psychological round number resistance level of $1300. It had initially reacted to Ben Bernanke's comments, (which most market analysts and players viewed as dovish) by moving smartly higher. During the Q&A session which followed, gold was slammed lower by a wave of very strong selling.

In watching the price action it occurred to me that just as we suspected in our notes from yesterday, nothing new or fresh proceeded from the Chairman. In other words, there was NO FODDER for the bull. Gold had already run higher last Wednesday when Bernanke first reversed himself from his comments in June. At this point in the game however, that is now old news. What gold needed to propel through $1300 was something far more definitive than what Mr. Bernanke gave the markets today.

Think about it this way - the QE will continue as long as the economy needs it. Okay - what is new about that? We have seen this QE going on for some time now and to the minds of most market participants, there is still no real inflation threat looming on the horizon. What is there to make them waver the least in their convictions that inflation is benign? Answer - there isn't anything... YET.

Now, if crude oil and unleaded gasoline do not soon set back then that might change. But with a large grain harvest expected, food prices look to be moving lower. As stated previously in another piece I wrote - energy prices may be high and moving higher but food prices are going the other way. Just look at a chart of new crop corn or wheat, or sugar, or cattle, etc.

Both of these need to be moving up simultaneously to impact the consumer (and business to a certain extent although that segment is more impacted by higher fuel and energy costs) and to generate the all-important headlines needed to derail an entrenched, "there is no inflation" psyche.

Technically, two things happened today: Gold failed to extend past an obvious chart resistance level while simultaneously, the HUI FAILED TO CLOSE THAT IMPORTANT CHART GAP I noted in yesterday's missive.

Both occurrences are viewed as technical failures and will bring in additional selling by the shorter-term oriented trader. What will be key for gold is whether or not it can generate enough buying to keep it above the "former resistance zone now turned support" that can be seen on the chart. Let's call that the zone between $1270 - $1260. If it can hold here, it will bounce back and set up yet another try to best $1300. If not, down towards $1240 it will go.

I should also note that volume in today's rejection at the $1300 level is very strong. I view that as a bearish sign that a lot of bulls threw in the towel and gave up on a breakout above $1300. Also, guys who have been playing gold from the short side were emboldened to come back in.

I am unclear just yet as to how much of this jump in volume is associated with rollovers as those are occurring in increasing frequency as we move deeper into July. Most traders will be moving out of the soon-to-be-in-delivery August contract and heading into the more active December. That might have distorted the volume somewhat and thus take what I say here about it with a grain of salt but nonetheless, volume was strong regardless.

Silver? What more can you say about it other than the fact that it too failed to push past tough overhead resistance at $20. The level is now reinforced with significance on the technical price chart. For this metal to start any fireworks whatsoever, that barrier MUST BE BREACHED. If not, it ain't going nowhere. Poor English grammar but solid trading analysis.

Silver bulls simply must prove their mettle or the bears will grab control of that market and take it down for another test of $18.

One more thing I want to note was that the yield on the Ten Year note closed the day just below the 2.5% mark ( 2.491 to be exact). Interest rates have set back ever since Bernanke made those comments last Wednesday. Here we are now a week later and they have yet to exceed their recent peak. That being said, it might not be too much longer before they try sneaking up again. Everything will depend now on the content of each piece of economic data that gets released.

Strong Day in the HUI

The mining shares finally showed some signs of life in today's session (for a change) but still have some work to do in order to turn the chart pattern more friendly.

Notice that the index managed to CLOSE INTO THE GAP region noted on the chart; it has not, however, managed to close ABOVE that gap. If this index fades and cannot maintain its footing up here, technicians are going to view that as a bearish signal and will be emboldened to come back into the market selling. At least the bulls showed some mettle today which was rather pleasant given the weakness in the broader equity markets.

I do think that the odds are favoring a bottom in this sector based on what I can see thus far. That does not mean these shares are ready to rocket higher as some suggest. What it more likely denotes is some consolidation or sideways movement until the bulls can convincingly seize the initiative.

The metal itself is having trouble clearing $1300, round number resistance that needs to give way before I personally will feel better about gold's prospects for the short term as well as that of the miners.

As mentioned here previously however, I expect more mining companies to be coming on with hedging programs so gold will meet selling resistance on the way higher from the companies that dig it out of the ground. There is no way they should make the mistake of not locking in some profits on future production. Even worse than that would be to end up producing at a loss!

Tomorrow we are going to have to sit around and parse the words that come out of Ben Bernanke's mouth once again, unfortunately. Whether he walks back some of his comments from last Wednesday remains to be seen. Personally, I still believe that his sole purpose in uttering those words was to knock down rising interest rates and send the bond vigilantes scurrying for cover.

The Fed, nor the US government for that matter, DOES NOT WANT higher interest rates. If however, Bernanke sends the US Dollar sharply lower, look for noise to start emerging out of the Eurozone. They do not want a higher Euro over there for the most part. The Swiss do not want a strong Franc either.

Truth be told, I look for him to say what both sides want to hear meaning that we will probably have the same old, same ol'. In other words, "we need accommodative monetary policy to continue but will look at the economic data to determine when and how much to begin scaling back or tapering those bond purchase. Some news flash!

Silver is still struggling to convincingly clear and LEAVE BEHIND the $20 level. Until it does, I am not interested in it.

Some Chart Analysis on Gold

In light of the recent apparent reversal by Fed Chairman Ben Bernanke when it comes to the timeline for any TAPERING of the Fed's Bond Buying program, affectionately known as "QE" for short (I like to think it stands for QUICK and EASY profits for Wall Street), I felt it might be a good idea to take a look at where gold stands on the technical price charts.

Let's start off with the Daily Chart only as I am pressed for time but wanted to get something posted for the readers. Note also I am using an old but very reliable technical indicator known as the Directional Movement Index. I like this index because it is basically a trending indicator. It is thus very useful for determining whether a market is in a TRENDING pattern or whether it is in a sideways or NON-TRENDING pattern.

A quick primer on this indicator is therefore in order before proceeding - it consists of THREE lines; two of them are DIRECTIONAL INDICATORS ( +DMI and -DMI ); the third is the TRENDING INDICATOR ( ADX ).

You can see those noted on the chart. The +DMI or positive directional movement indicator is the blue line; the -DMI or negative directional movement indicator is the red line and the ADX is the dark purple line.

When prices are moving higher, the +DMI will move higher and the -DMI will move lower with the result that +DMI will BE ABOVE -DMI.

When prices are moving lower, the -DMI will move higher while the +DMI will move lower with the result that -DMI will be ABOVE +DMI.

If the blue line is rising therefore and remains above the red line, the price is rising.

If the red line is moving higher and remains above the blue line, the price is falling.

That takes some getting used to among those new to using this indicator but once that is understood, the direction of price is very easily seen by a quick glance at the respective lines.

The third indicator, the ADX (purple line) will rise whenever a market is in a trend and fall when the trend is ending. When the market is moving sideways or is trendless, the ADX will move lower until a new trend emerges (either up or down; it doesn't matter) when the ADX will begin to rise once more.

When a market is in a strong uptrend, you will have the +DMI moving higher with the -DMI moving lower  with the +DMI remaining ABOVE the -DMI. You will also have the ADX rising.

When the market is in a strong downtrend, you will have the -DMI rising with the +DMI falling with the -DMI remaining above the +DMI. You will also have the ADX rising.

That being said, look at the chart and see if you determine whether or not gold is in a trend and if so, what that trend has been, up or down? If you chose DOWN, you win the stuffed animal prize.

Can you see how the red line crossed above the blue line back in November of last year? That was your sell signal in gold. It was also an early warning of the impending break of downside horizontal chart support at the critical $1680 level.

Note at that time the ADX was down below 15 indicating the lack of a trending move as it had already turned lower upon the inability of gold to clear $1760. The downside crossover of the blue line  ( +DMI ) below the red line ( - DMI ) was a warning to bulls to book profits or at least protect profits, not necessarily go short.

From the point of the upside crossing of the red line above the blue line in November, this market was to be traded from the short side notwithstanding all that claptrap about gold backwardation, etc.

Now look at the ADX during the time inside the rectangle. You can see that gold was making up its mind whether to continue moving sideways or break lower. The ADX was not moving higher but was stuck in a sideways to lower pattern between 20 and 15 indicating the lack of trend. Once the price broke down below horizontal chart support at the $1640 level, the ADX began to turn up and cleared the 20 level indicating that a downtrend was forming. Note all the while this is occurring, the red line remains above the blue line. Negative directional movement is dominating the chart. This means one DOES NOT BUY no matter what the various headlines some in the gold community were posting on their websites.

From that point on, the ADX continues rise with a few brief periods of mild dips in it before it goes on to rise to new highs. It is now turning down from a very lofty level up near 45 which indicates there is currently a PAUSE in the downtrend, a downtrend which I might add has been very strong and very long in the tooth.

However, while the red line is moving lower and the blue line is moving higher, the fact remains that the two directional lines have NOT CROSSED. What this means is that from a pure chart perspective, the current move higher in gold is nothing more than a rally in an ongoing bear market.

For this market to change complexion, I will need to see an UPSIDE CROSSOVER of the +DMI or blue line ABOVE the -DMI or red line. Keep in mind that because the downtrend in gold has been of such great extent and duration, the ADX will continue to move lower for a while even if price continues to ascend further. A way of interpreting this in English is to say that it will take quite a move higher in the price of gold to REVERSE the downtrend AND SIGNAL the start of a NEW UPTREND.

Remember, a market can end a trend without necessarily beginning a new trend in the opposite direction right away. By the way, have you noticed that DESCENDING 50 DAY MOVING AVERAGE? It is still some $80 or so ABOVE the current price so until or unless that average is cleared, bottom calling is ill-advised. Only short term, TRADEABLE BOTTOMS, are justified but those mean exactly what I stated, "SHORT TERM". I am attempting to illustrate here what the inputs are that are required before I personally will feel comfortable saying we have a MORE LASTING BOTTOM in gold. Perhaps we already do - then again, perhaps we do not. At this point this chart does not confirm a lasting bottom only a pause in an ongoing downtrend in the metal.

Lastly, the variables that one chooses to set up the indicator determine how quickly it will turn and give off trading signals. When it comes to gold, I prefer to use a bit longer than normal timing factor so as to weed out some noise and prevent false signals. This is however the daily chart. This same indicator can be used on all time frames down to 5 minutes if you want although I think the usefulness is pretty much over once you move down any shorter than a two hour chart to be honest.

I wish you readers to know that the reason I am writing this article is to help you to learn to think and trade or invest for yourselves and not be moved by every headline or the latest gold community buzz word or theory. Most of the people who write those websites ( not all of them)  make their livings by selling ads on them based on the number of hits. They have a vested interest therefore in generating as much website traffic as possible as it increases their monthly checks. Those of us who actually make our living IN THE MARKET, have no such luxury but must be prudent. One can find experienced traders and one can find reckless traders but one will search in vain for EXPERIENCED AND RECKLESS traders. There are no such creatures as any of the reckless ones have long ago become road pizzas on the trading floor of the exchanges having failed to survive as Traders long enough to actually have gained enough experience to know what the hell they are prattling about.

One more reminder, this is not a Holy Grail of an indicator. It is just one of many that I use in my tool box. Some are more responsive; others less so. But what I try to do is to use is several trusted indicators to develop a consensus and then tie those in to various support and resistance levels including Fibonacci retracement levels to determine how to approach a particular market. Along those lines you might want to check in with my friend, Trader Garrett, whose website is listed in the favorites section over on the right hand side of this blog. He is also a veteran trader and both of us share the same philosophy when it comes to putting our hard-earned capital at risk in a market. Neither of us are given to sensationalism. Hard nosed realism is the key to survival if you are going to trade in these markets.

Keep in mind an old axiom of mine that sums up how I feel about the need for humility. Opinions are like armpits. Everyone has two of them and they all stink. The only opinion that ultimately matters is price action and whether or not you are on the right side or the wrong side.

Trader Dan Interviewed at KWN Markets and Metals Wrap

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

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/7/13_KWN_Weekly_Metals_Wrap.html

Unleaded Gasoline on the Move

I have been watching developments in the crude oil and unleaded gasoline markets with a great deal of interest. This week's numbers from the EIA and other private sources shocked the market due to the extent of the drop in crude at Cushing and sent both markets on a tear higher. Crude is now trading close to $106/bbl  as I write this and unleaded gasoline has pushed above the $3.10 mark (remember - that is a wholesale price not the pump price).

Frankly I do not see the US economy as strong enough to support either crude or unleaded gasoline at current prices but right now hedge funds are driving these markets higher and the momentum is strong to the upside. There certainly is no shortage of WTI from what I can see but a goodly portion of it appears to be leaving the US via exports to the EU and elsewhere.

One has to wonder however at one point the spike in gasoline prices at the pump is going to hit Mr. and Mrs. Consumer right between the eyes. You can make a case for rising energy prices being inflationary but you can also make a case for them being deflationary.

In the former case, energy costs are a major input in manufacturing of all kinds not to mention shipping/transportation costs of goods that need to move to market. Think also airlines, railroads, etc. Unless companies are willing to eat the higher costs, they have to raise prices to shore up profit margins.

In the latter case, consumers are not exactly awash with surplus income right now thanks mainly to the moribund labor markets and flat wages. If a larger chunk of their disposable income goes toward transportation expenses ( it is also summer vacation time), that results in them having less to spend at the local Wal-Mart.

I do think that if crude somehow manages to push past $110 (basis WTI) and especially if it climbs through $115, we are going to see some market impacts elsewhere. Let's keep a close eye on this.

By the way, those of you working the grains markets might have noticed the sharp selloff in the beans today. Yesterday's forecast changed and that, in combination with the bearish USDA reports yesterday, finally caught up with the corn and the beans. That might be the silver lining for consumers to help enable them to cope better with rising gasoline prices. If food prices begin to drop, it will take some of the pressure off their checkbooks.

Lots of variables to consider - one thing however is extremely important - gold, and especially silver, need an inflationary psyche to thrive. Right now we have energy up and food moving down. One is tending to cancel the other out. What we have to watch is to see whether or not the two groups will move in sync at some point.

Physical market tightness helps keep a floor of support under gold but it takes a genuine shift in sentiment towards one of inflation to make the yellow metal run. Until the gold shares can put in a better performance than they heretofore have managed to accomplish, I look for rallies in gold to be sold. Bulls are going to have to PROVE that they are determined to drive prices higher before the strong-handed shorts are going to panic.

Rick Santelli echoing my Sentiments

If you would like to watch Rick Santelli at his best, check out this segment of his show on CNBC where he describes exactly how he feels about this idiocy with the "Taper Caper".

I can tell you as a long time professional trader, that he is exactly dead on target. Once upon a time, those of us who make our living in the market and not off the market, attempted to master the fundamentals of those markets in which we traded. We prided ourselves on our understanding of the factors determining supply and demand, seasonal trends and tendencies, value pricing, etc. I can say that more often than not, it seems as if none of that matters at all. All that does matter is whether or not Uncle Ben will keep the money spigots wide open or close them off.

Trading used to be a business which required hard work, long hours of meticulous research and devotion to ones craft if one was to be successful. Not any more! Now all that is required is ferreting out the inner workings of Mr. Bernanke's mind and determining whether or not he is in a generous mood when it comes to supplying punch to the multitude of bowls laid out in front of him on Wall Street.

I can only say that if this is what the greatest nation on the face of the earth's financial market system has been reduced to, kiss us goodbye, because we are going the way of ancient Rome faster than I had even contemplated.

Enjoy Rick's rant! It is a classic....

http://video.cnbc.com/gallery/?video=3000182232&play=1