"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


Friday, February 28, 2014

Short Covering continues to be the Feature in the Gold market

Gold seems to have run out of gas up near the $1340 level as it has been unable to extend its near month long gains here at the end of February. Upside momentum is waning and that requires close attention.

There are several things that I would like to bring up right now. The first is the nature of the buying that has been driving this market higher since the first of the year. Gold started 2014 near the $1,200 level and has since then put on $140, the largest portion of that this month when it moved $100 higher.

Based on the COT reports since the beginning of this new year, one can easily observe that the largest portion of the buying this year has come from whole scale short covering. Here are the numbers:

At the beginning of the year, the Hedge Fund OUTRIGHT short position consisted of 72,571 futures contracts and options. As of Tuesday this week, that position was 30,996. Doing the math, we can see a reduction of 41,575 short positions or short covering.

That same Hedge Fund category had a OUTRIGHT long position of 106,675 futures contracts and options. Tuesday this week shows a build in that same position to 144,907. The math - an increase of 38,232 positions on the long side.

In other words, short covering by the gigantic hedge fund community has outnumbered the amount of new buying by that same category in the amount of 3343 futures contracts and options since the start of 2014.

This is not a recipe for a sustainable bull market. One wants to see eager, strong, abundant fresh buying driving a market higher because it is a reflection of bullish sentiment, not a wave of aggressive short covering which once it fades, drops the upside momentum. Now, whether we can see something which will spur traders/investors to pile onto the long side with a greater fervor than the short which have been getting out remains to be seen, but until we do, caution is still warranted towards this market. The one thing about rallies led primarily by short covering is that they tend to fade quickly. We'll see what we get to begin the new month.

By the way, as a side note, for you folks over at a certain paid-subscription newsletter site that enjoy taking the articles posted here and republishing them nearly verbatim without giving credit to where you got them, I have not included a chart of the above so that you can at least add something of your own when you indulge your inclination to plagiarize.

Take a look at the chart below however and you can see the extent of the move this year but you can also see the obvious resistance zone that has formed up at $1,340.

The Directional Movement Indicator is showing the ADX line rounding over. It has stopped moving higher which in itself is a warning sign that there exists the potential for a halt in the uptrend. While bulls still remain in control of the market, upward progress is stalling indicated by the falling Positive Directional Movement indicator ( Blue Line ).

Dip buyers have thus far emerged in gold and kept it from breaking down sharply but if the physical market buyers begin to back away and wait for lower prices, I am skeptical that buying from Western-based investment sources will be sufficient take the price through this overhead resistance zone against which it is currently being held in check.

Copper Continues to Fall as Stocks Continue to Soar

Very strange doings occurring in Doctor Copper when one considers the nearly unstoppable surge higher across the US equity markets. One does not generally see copper parting ways with the broader stock market for long as this key bellwether commodity has an excellent track record at predicting ( or at least confirming ) economic strength, not only domestically these days, but globally, especially in regards to China's economy.

Take a look at the following copper chart and notice the sharp drop on the daily chart. Some of today's gap can be attributed to the fact that the March contract has given way to the May as the most active and that is now being plotted on the continuous contract chart; nonetheless, the technicals remain extremely poor for copper - remarkably so given the euphoria around US equities.

Two things stand out - first, copper is trading BELOW both its 50 day and its 200 day moving averages. That is bearish. Secondly - it is sitting right on top of a series of support zones. It tested the first of these today and managed to stay above that zone, but just barely.

Also notice that the Directional Movement Indicator shows the bears currently in control of this market. Negative Directional Movement Indicator ( Red Line ) remains ABOVE the Positive Directional Movement Indicator ( Blue Line ). Also, the ADX is beginning to undergo a slight upturn. It has not managed to climb above the 25 level, much less the 20 level, but it is rising as the market is moving lower indicating the POSSIBILITY of a trending move lower.

If copper were to break chart support indicated above in conjunction with a rising ADX line, it would tend to bode poorly for the overall commodity sector in general, especially those commodities which tend to be good proxies for overall economic activity such as cotton.

Cotton's chart looks decent for now but if it were to drop below 84 simultaneously with an additional move lower in copper, it would not bode well for commodities in general. Obviously there are going to be exceptions to this depending on the specific demand/supply scenario for each commodity market but I am speaking of the sector in general.

I find it particularly disconcerting to see copper moving lower, even as the US Dollar weakens. That has not been a frequent occurrence.

I will try to get some more up on gold later as time permits along with some analysis of the COT data. this has been a busy week in these markets with lots of strange, wild moves occurring and violent whipsaws at times ( the grains come to mind today). I for one am glad to see February come and go and look forward to March trading. While one has to respect the chart action if they are trading, I personally never feel comfortable putting large positions on in any market unless I can understand what is moving it. Some guys like to buy without asking questions based on the technical pattern ( I will too to a certain extent ) but only the brave ( or reckless ) will pile into a market without knowing what in the world is moving it. Reversals in such market come with little to no notice whatsoever and can punish you severely for being so brash and foolish.