Gold technically weak - needs Asian buyers to become active

The following chart provides a picture of the technically weak posture brought on by today's hedge fund selling barage. Asian buying had been providing very good support on dips below $1800, particularly into the $1780 zone. That buying was overwhelmed today by the West jettisoning gold as the algorithms were all tripped into the sell mode on account of the rallying Dollar.

The result was to take gold through all of the support levels that had been holding it thus far. Both today's low and the 50 day moving average are the last line of technical chart support preventing a dip towards psychological support at the $1700 level. Below that, should it fail to hold, there is a former gap region near $1680 which should provide pretty solid support if this thing is going to stabilize. If not, it does have the potential to dip lower and move towards $1650.

On the upside, it needs to get back above $1800 to put a little doubt in the mind of the bears. A run through $1820 would see some sizeable short covering on their part.

It needs some help from the lagging HUI, which was slammed incredibly hard today.

S&P 500 Closing in on a Key Technical Support Level

With the US equity markets in seeming free fall today, there are some things worth pointing out here as well.

First of all, take a look at the horizontal red and blue lines shown on the weekly chart. Look first at the lower red line. Back in August of last year, rumors began to surface that the Fed was going to embark on another round of Quantitative Easing. The reason - the first round had apparently run out of impact. Yes, it had halted the collapse in both equity and commodity prices associated with the unwind of the carry trades on the heels of the credit crisis eruption, but when it came time for it to expire, the equity markets had nothing else to drive stock prices higher and began retreating.

Also, economic data had begun to once again deteriorate. The result was that the stock market dropped in April 2010 and then moved sideways almost as if hanging on by a mere thread as it attempted to force the hand of the Fed for the next dose of liquidity. The Fed did oblige and that took the index on a several month long rally that peaked shy of 1400 in early May of this year as the market anticipated the ending of the QE2 program at the end of June.

Since that time, look at what the S&P has done - it has completely erased the entirety of its gains associated with the actual implementation of QE2. Another way of stating this is that the effect of the gargantuan sum of $600 billion in Treasury purchases and $300 billion for Agency Debt has been utterly wiped out. We are now back to levels commensurate with rumors of the QE2 program began surfacing.

When one considers the fact that we just witnessed a month in which ZERO new jobs were created on a net basis, you can reflect on the enormity of the wasted effort.

Perhaps that was in the mind of the Fed yesterday when they announced a sterilized Treasury purchase program of $400 billion. Either way, the markets are not at all happy.

What is more ominous however is where this market appears headed. Tomorrow's close is going to be extremely significant from a technical perspective. Note that the S&P has not yet CLOSED below 1100 on a Weekly basis. It did violate that level in early August but recovered to end the week well above this key level.

If the bulls cannot quickly muster a new effort, and we get a weekly close below 1100, it would put the index on a course for a push into the level just below 1050. Below that there is nothing on the chart until you get closer to 1000.

What I am taking away from the price action thus far is that traders right now feel no reason whatsoever to step in front of this market to buy stocks. There may be some who are calling them "cheap", and that might be true, but some are looking for them to get even cheaper before they consider buying. With nothing seemingly happening on the European front, with Chinese growth numbers a bit lower and with the Fed having fired off its gun, what else is left for the market to rally on at this point is the current line of thinking.

Let's see what we get in tomorrow's action.

Commodity Sector Breaking Down but long term trend is still higher

Consider this as sort of an addendum to the article on the Australian Dollar earlier today.

Today's selling onslaught across the entirety of the commodity sector has wiped out the gains in this sector for the year. That is leading to further selling as hedge funds are grabbing what little might be left of their paper profits in there before those entirely disappear.

There are several factors which I think merit referencing on this weekly chart.

Firstly - the stampede to sell has taken the index below a major horizontal chart support level that came in near the 600 level. It has also brought into a focus a downtrending price channel that can now clearly be seen on the chart. Price is working slowly lower in this channel having failed to better the 660 level which is now a major point of chart resistance.

However, the longer term trend in the overall sector is still higher as can be seen from the uptrend line drawn connecting some of the reaction lows in the ongoing bull market that began back in late 2008 with the inception of the first QE program.

I am keenly interested in the point at which the lower red line of the price channel intersects with the rising blue uptrend line. That comes in near the 580 region.

In spite of the widespead selling across the commodity sector this morning, some of the major bank trading houses are still bullish on the sector overall but are cautioning their clients about the possibility of further near term declines. Some are advising clients that buying opportunities are going to present themselves but warn those potentially interested in the long side to expect more volatility. It could well be that we see some of these sidelined buyers moving back into the sector if the CCI nears this chart intersection level of 580.

This is another chart we will have to monitor for clues to future market price action as we enter the 4th quarter of this year.

Australian Dollar closing in on key technical support levels

The Aussie is under severe pressure this morning as traders sell the unit on fears of the global slowdown catching up to the Land Down Under. Australia's economy has been very resilient standing out as a bright spot with relatively low levels of unemployment and a vibrant housing market. That plus the fact that it sells a tremendous amount of its goods to China, has made the Australian Dollar a standout performer for the first half of this year. It has however recently fallen on harder times as traders have shunned "risk trades" in favor of the US Dollar and the US Treasury market and a broad sell off hits the overall commodity sector.

It would appear from the price action in the Aussie that traders are concerned that eventually Australia is going to be impacted by a slowdown in global growth and that any subsequent move on the interest rate front by the RBA will be in a downward direction.

Looking at it on the price chart, it has crashed through a chart support level just below the 99 level this week and has continued its plunge this morning which is bringing it into some key technical support levels. The Aussie tends to be a pretty good harbinger of overall investor sentiment towards growth in general so if it does violate the lowest of this support levels, it will not bode well for future global growth prospects.

If you notice, back in the latter part of 2008, the Aussie bottomed and began its ascent at the same time the US equity markets and the Continuous Commodity Index both bottomed out. So too did gold. We'll keep an eye on this for further clues as to the welfare of all the above.

Another key indicator of overall global health is copper. This has been a very rough month for copper bulls as the red metal has also broken down technically. It looks poised for further declines with some chart support first surfacing about another 13 cents or so below the current level. We will need to see this metal stop declining if we are going to get a shift in investor sentiment back towards risk trades.

Markets Digest FOMC Statement - develop a case of Nausea

The long anticipated prognostication finally arrived today as the markets, with bated breath, eagerly poured over the entrails of the FOMC press release to scour for clues to the future. The oracles of Delphi, descended from their lofty tower, uttered their prophecy, and then returned to their temples to observe their handiwork. Meanwhile, the stock markets having digested the contents, soon began to experience an uncomfortable sensation which worsened as the meal settled. Down collapsed the equity markets and then down went the commodity markets and up went the Dollar.

The Fed announced $400 billion worth of purchases of longer dated Treasury debt. One would think that hte markets would be pleased but alas, 'twas not meant to be. What stuck in their craw was the fact that these purchases were sterilized and not fresh purchases. In other words, there would be no increase in the Fed's balance sheet but rather a rolling from their current holdings of shorter-dated maturities into longer dated ones. Apparently the markets were not impressed and were looking for either:

1.) a larger sum than $400 billion
2.) non-sterilized purchases (another dose of QE)
or
3.) some combination of the above

This is a rather sad commentary on the current state of our nation where a sum as enormous as $400 billion dollars is met with a gigantic yawn followed by an upchuck.  One would think that after having learned that the exorbitant sum of $2.5 TRILLION DOLLARS in QE actually ended up giving us a month in which ZERO NEW JOBS were created, the proponents of more stimulus would have begun to look elsewhere for a cure to what ails the economy. Apparently not.

Either way, when the dust settled, it brought on the risk aversion trades. The thinking is that the sum of $400 billion is too small, especially seeing that it is not fresh purchases of US Treasury debt but rather sterilized purchases to do much in the way of harming the US Dollar. That combined with the fact that non one wants to buy the Euro, or the Swiss FRanc or the British Pound or the Japanese Yen saw the "safe haven" money rush into Treasuries and the Dollar. Imagine locking up your money at the rate of 1.9% or less for TEN LONG YEARS in the securities of a nation which cannot stop spending money or increasing the overall size of its debt load? And this is supposed to qualify as safe haven investing???

The rising Dollar then brought out the algorithm selling across the entire commodity sector as the hedgies did their thing once again and dumped everything tangible. With the Fed telling the world that it foresaw more weakness in the sluggish economy, crude oil and energy were dumped. So was copper. Basically the markets were looking at the absense of inflationary pressures once the Dollar starting rising.

Gold which had initially moved higher when the news first hit, then succumbed to the selling pressure across the commodity sector and moved below $1795 where it hit a few stops which took it into the region just above the $1780 level.

Asia has been buying heavily into this zone so we will see whether these buyers make an appearance again this evening.

I am a bit pressed for time so I have to cut this commentary short for now but perhaps can add to it later if time permits.

The mining shares, which had been performing remarkably well all day long, fell lower when the broader stock market imploded and were thus kept from taking out overhead resistance near the 640 level. I want to see the price action in this sector the next day and especially how it ends the week before drawing any further conclusions at this point but I do want to point out, that even with their weakness today, the sector outperformed the broader markets once again. It could well be that the miners might be evolving into the defensive sector trade which would give them a decent bid even on days of overall equity weakness.

At this point in the game, one has to wonder what tricks the Fed has left in their magic bag because it is evident that this one did not perform.

HUI - Mining Shares surging towards a retest of all time high

Very impressive strength in the mining sector was the feature of the day in the trading session.  The result was to set the index within striking distance of its recent all time high.

Newmont Mining shot to yet another all time high today.

Having a few days of price action under our belt allows us to get a better picture of where the buy orders and sell orders are coming in; in other words, defining where the "value" regions are located.

Note the chart and look at the horizontal red line drawn near the 580 level. We remarked that the index bounced off of this level on its retest last week, confirming a reversal of polarity principle where stubborn overhead selling resistance now becomes strong buying support.

IN yesterday's session the market pushed through the former gap and go region noted on the chart but was unable to hold its gains and settled below the bottom of the gap. While the action was not particularly bullish, it did hold the previous day's low, and refused to break down even while the metal price of gold was moving down to near the $1780 level. It was evident that there was dip buying taking place at the lower levels. This was all the more noteworthy because of the very broad weakness across the entirety of the equity world yesterday.

Today saw the miners explode back to the upside, through the gap and go region and to within a few points of the all time high in the index. The ferocity of today's move higher indicates distressed buying on the part of some of the shorts in these shares. They are being squeezed out by some fairly steady and determined buying. My guess is that there were some fresh shorts piled on below the 600 level that were too far underwater to hold any longer.

You can see on the chart that there are several candles with long upper shadows present up at these levels. There is also a minor double top just shy of the 640 level. The bulls now have it in their power to attack that region and see if they can dislodge some of the more stubborn bears in these shares. If they can do so, the buying by the shorts as they seek to cover will intensify and that should give us another sharp push higher.

The strongest hands in the short community are going to try to make a stand and prevent that from happening. Whether they can do so remains unclear at this time. If they fail to hold it at 640, they are in trouble.

Note something else of significance on the following ratio chart. This compares the price of the HUI mining shares index against the price of gold itself. The ratio is useful in the sense that it provides us a benchmark; something against which to measure the value of the shares in general. Here we have the situation where the HUI made it to within a few points of its all time high today yet the overall HUI/Gold ratio is sitting at a relatively low level compared to previous peaks in the valuation of the shares.

Today we closed at the .344 level. The peaks in this index were either above the .60 level or right at it. In other words, even with the HUI sitting at such a lofty level as where it closed at today, the overall sector remains UNDERVALUED against the gold price.

This is what happens when a long established trade outstays its welcome and descends into the arena of foolishness. The ratio spread trade employed by the hedge fund community, buying gold or the ETF and shorting the shares, depressed the share prices of so many miners that it has led to a case of excessive undervaluation which is now in the process of being corrected. I think one could easily make the case without even getting too far out on a limb, that this particular ratio could move to at least the .50 level before it gets anywhere near being in the "overvalued" camp. Believe it or not that would put the index closer to the 900 level if the gold price were to remain near the current level of $1800.

That is mind boggling now isn't it???

Gold chart and comments

Gold continues moving in a broad sideways pattern, unable to breach overhead resistance centered just below the $1840 but remaining above longer term support just above the $1760 level. The current short-term bias is negative until it can at least climb back above $1820.

Thus far forays down below the $1800 level have been met with quality buying in the physical market so this will need to continue to hold it from moving lower through $1760. Should these buyers step back a bit in the hopes of picking up the metal a bit cheaper, we could see it lag down towards the $1730 - $1720 region where one can expect to see very active buying occuring.
There is still some of this risk aversion selling occuring in gold (that is very easily seen in silver) but that is more a function of traders raising cash on their losing equity positions by selling their only winner, namely gold. In watching the price action today it seemed more a matter of a lack of eager buyers rather than any large scale fresh selling. That allowed price to drift lower until it triggered enough downside technically-related sell stops which then took it through $1780 before getting a bit of a light bounce up.

If you look at the copper chart, you can see that today it crashed through a former strong level of chart support. On the weekly chart, it has confirmed a double top pattern but that will not be totally confirmed unless it closes the week below the $3.85 level. Chinese buying had been keeping copper well bid below $4.00 but that buying disappeared today. The 100 day moving average, another key technical level, is now within easy striking distance for the bears. If they can take it down through that level, Dr. Copper will not be telegraphing good economic times ahead anytime soon.

There was also a hit to the unleaded gasoline market as well as crude oil. GAsoline is moving down towards a significant chart support level near the $2.60 region. Weakness in the grains is also evident. The result of all this is to bring the Continuous Commodity Index ( CCI ) back down towards the lower part of its now 5 month long sideways trading pattern.

This widespead selling across the commodity complex is a function of fears concerning the stability of the European Banking system which is reeling from its exposure to sovereign debt from that region. Investors are rightfully fearful of a contagion effect and a subsequent slowing of global economic growth. This is being reflected in severe weakness in the Euro, which as you can see from the price chart, is flirting very dangerously with falling below the 100 Week Moving average. It dipped briefly below this level last week but then recovered by the close of trading Friday and averted more serious damage. That respite was brief however as it has started off this week on a troubling foot. Unless it can rapidly recover above this level, it looks like a move towards 1.30 is in store. That would put even more upside in the US Dollar leading to further pressure across the broad commodity sector.

Take a look at the following chart and you can see where the safe haven money has been flowing over the last month. This is the gold/bond ratio. When the line is rising, gold is the safe haven of choice compared to bonds. When the line is falling, the bonds are the asset class of choice. Ever since the Central Bank organized hit on gold earlier this month, gold has been underperforming the US long bond. This is no doubt much delight to the Federal Reserve and to the Treasury Department, the former of which MUST HAVE LOW LONG TERM interest rates to prevent any further shocks to the already "on-life-support" economy; the latter of which cannot AFFORD to pay higher borrowing costs without worsening the already hopelessly incurable federal debt situation.

The HUI held fairly well today considering the weakness both in the equity markets and in the precious metals but it does need to clear 610 and hold that level if it is going to have a shot at the recent all time high once again. Downside support is initially near 600 followed by strong support near the 580 level.

Trader Dan on King World News Weekly Metals Wrap

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