"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


Saturday, December 29, 2012

HUI Weekly Chart

The mining sector, as evidenced by the HUI has not been a happy place for bulls since late this summer. The selling has been a combination of both frustrated and disenchanted longs bailing out in addition to some opportunistic shorting.

While the broader stock market has fared well since the beginning of the year, it too began fading about the same time as did the overall mining sector. However, it still techically remains in an uptrend as long as it holds above the 1350-1340 level unlike the mining shares which have completely broken down falling through one support level after another.

The performance of the mining shares against the broader market can be seen by examining the following ratio chart comparing the HUI to the level of the S&P 500. Notice that even though the S&P was also working lower since late this past summer, it has outperformed the mining sector by a considerable amount. In hindsight, shorter-term oriented traders/investors would have been better advised to have bought into the stock rally and left their gold shares for another day. There is a reason that the motto: "You cannot fight the Fed" has some credence. Whether or not one agrees with this idiocy known as Quantitative Easing, the fact is that the market loves it, particularly the financial stocks.

About the best that can currently be said about the mining shares is that that are not further breaking down against the broader stock market. The low in the ratio seems to attract buying. Translation - at some point, perhaps we are there - in relation to the broader market, the gold shares are simply too cheap.

That being said, the problem with the mining sector, right now, is that big money is simply not interested in owning them. Value based buyers are but those are insufficient in size to drive them higher in price. Besides, value based buyers are never the ones who drive prices higher. That would be a contradiction in terms. Value based buyers PUT FLOORS UNDER MARKETS. Momentum based buyers drive them higher.

What is missing in the mining sector is the MOMENTUM BASED buyers. Right now, the momentum based buyers are busy chasing higher returns in other sectors of the market. To bring them into the miners one needs to see a TECHNICAL CHART SIGNAL and currently that is missing. For a bare minimum - the HUI needs to clear and CLOSE ABOVE 440. That will signal a very short term bottom is in. To do more than just meander sideways above support however, it will need to push past 455 which will spark some short covering and further fresh buying that will set up a TEST of 465. If and when this index clears that level, then, you will begin to see some more serious buying occur.

I am not in the business of making predictions for as a trader I do not have that luxury. I have to read what the current sentiment in the market is if I hope to profit and thereby trade accordingly. While 2013 might be a banner year for the mining sector (and I hope that it is), the current chart picture is not especially encouraging.

Remember, as a trader or even an investor, you are not going to profit UNLESS AND UNTIL many more traders/investors come around to your way of thinking. Without their money coming into a stock/commodity, it will go nowhere. Once it does, and the chart action confirms that your view/opinion of the market is becoming more widespread, then and only then can you be considered to have made a GOOD CHOICE. If you buy a stock that sits at the same level for months on end or even years on end you might eventually be proven to have made a correct choice but think about the lost opportunity cost of having tied up so much of your valuable investment capital that could otherwise be working for you elsewhere.

This is the reason that doing a regular analysis of your portfolio (WEEKLY) is so critical. If a technical chart is breaking down, get out of that stock unless you are content on sitting through corrections in price that may last for a long time. Do not forget, if you are constantly monitoring a portfolio or position on a regular basis, you can ALWAYS GET RIGHT BACK IN if the technical posture changes for the better.

I personally am not a big fan of Jesse Livermore because I believe he would have starved to death in today's markets. That the markets have changed tremendously since his day is an understatement of near cosmic proportions. Livermore, who by the way ended up taking his own life - an abject failure in my defintion of a successful man - should have learned to cut his losses instead of "sitting tight". How in the hell does anyone know in advance what sort of events can transpire that can completely wreck one's trading account? Yes, long term fundamentals will eventually win out but at what incredible cost to one's investment or trading account.

Also, Livermore never had to contend with trading against computer algorithms. Those mindless machines, which control most of the world's trading capital nowadays, could care less about the long term view. They are going to buy or sell depending on the current price signal, not on what any of us might think is going to happen 6 months out from now.

The good thing however is that the same technical price signals that trigger those nasty algorithms can be seen on the price charts and if we learn to properly interpret them, allow us to position ourselves to let the machines work in our favor.

In closing here, I want to emphasize the fact that I am talking as a trader and as someone dealing with paper markets. When it comes to PHYSICAL BUYERS OF METALS, if you do have a long term view of the consequences of nearly unlimited money printing by so many of the Western world power Central Banks, then you can also use the algorithm based selling of these paper markets to acquire the ACTUAL METAL during episodes of price weakness. Buy them when they are cheap; do not chase them when they are higher. Remember, this pertains only to the actual metal; not to positions being taken in the Comex futures market. If you choose to willy-nilly buy into the futures markets WITHOUT a technical price signal confirming that, just understand that you are an accident waiting to happen. Trade smartly and do not end up as road pizza on the floor of the pit.

Trader Dan Interviewed on King World News Markets and Metals Wrap

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