HUI attempting to make up lost ground against the S&P 500

If one goes back to the beginning of July of this year, you can see that for the next two months, the mining shares were outperforming the broader equity markets as a whole.

Once September rolled around, the shares gave back their gains against the broader market and severely underperformed. With today's strong surge higher, we might be seeing the reversal of this recent lagging in terms of performance.

Much depends on the willingness of traders to see gold and silver as "SAFE HAVENS" and not as part of the broader risk trade. The reason the mining shares are doing so well in today's session, especially with the broad based selling across the general equity world, is that traders/investors have re-awakened to both gold and silver as safe havens in the midst of some very palpable fears about the shaky European debt crisis. As money flows have returned to those precious metals, flows are also coming into the mining shares which will of course benefit if the metals continue to move higher.

One day a trend does not make but this is such a drastic departure from recent behavior that it must be noted and also closely watched to see if this is the start of something significant.

As a side note - if the chart pattern is moving higher, the HUI is outperforming the broader US equity markets. The opposite is true if the pattern is moving lower. Note the sharp surge higher in this ratio and the breach of the downtrend.

Gold Breaks out

Gold bulls finally managed to beat back the line of defense erected by the perma shorts at the Comex in today's session as safe haven buying came into gold from all quarters early in the session and continued to build as it wore on. The technical breakout above resistance also brought in both short covering and new momentum based buying.

Volume on the upside move has been very good which is generally regarded as confirmation to the validity of the breakout.

The next technical target lies near the $1720 level.

Downside support now moves up towards $1680 with much better support near $1650.

Helping confirm the move is the surge in both the mining shares as evidenced by the HUI and the upside breakout above $32.50 in Silver.

Note on the silver chart that the market is  currently up against the 50% retracement level of the most recent leg down. Clearing this should allow it push first towards $34 and then up against the $35.15 - $35.25 level.

Downside support levels are first near $31 and then back down towards $30.

Silver and Copper are parting ways today

Both of these metals have been moving in lockstep recently as risk trades were either jammed on or taken off. Silver has been trading like an industrial metal during such times. Today it is moving like a safe haven metal. Very interesting developments to say the least.

In the process it is now trading solidly above critical resistance near the $32.50 level. If it can hold these gains, it will be on target for a shot towards $34.

Is Gold resuming its Safe Haven Status?

In a departure from recent price action in which it has been acting more like a "risk" asset rather than a safe haven asset, gold is moving higher alongside of both the US Dollar and the US Treasury market. It appears that traders are becoming increasingly "jittery" over developments in Europe concering the bank recapitalization plan and the Stability Mechanism. Safe havens flows are definitely returning to gold based on what we are witnessing today.

Thus far the volume has been very strong on the breakout above key resistance at the $1680 level with the market challenging overhead psychological resistance at the $1700 level. If gold can put on a handle of "17", it will get the attention of money that has been sitting on the sidelines as well as putting some further pressure on shorts.

I will get a chart up a bit later towards the end of the session today as I want to see how it does for another couple of hours.

Let's Play "Guess a Chart"

Take a look at the following TWO charts and see if you can notice how similar the two of them are.

You can tell that both charts, while not identical, are eerily similar in the manner in which they depict the overall price action.

The top chart is the S&P 500. The lower chart is Crude Oil.

They both tend to move up at the same time, mover lower at the same time and grind sideways at the same time.

What these charts tell us is that there is no longer any SERIOUS INVESTMENT "STRATEGY" in today's financial markets. All that they are doing is reflecting either the willingness of the HEDGE FUNDS to take on RISK TRADES or to FLEE from RISK.

On any given day, if the risk trades are on, these nitwit hedge fund managers buy everything in site except for US TREASURIES or the US DOLLAR. If the following day brings in risk aversion trades, they throw away everything purchased the previous day and do the exact opposite.

Truth be told this sort of thing has nothing to do with INVESTING. It has everything to do with MONEY FLOWS generated by computer algorithms. This sad state of affairs is what Central Bank interventions and constant interference into the financial markets has reduced our markets to.

Traders have to put aside their personal disgust at this madness and trade accordingly if they wish to profit. Still, in this trader's opinion, this is one more symptom of the decline of the West. No longer is the stock of various companies bought because of long term prospects for solid profits based on solid research and good analysis. Instead it goes up based on whether or not the Central Banks will spit more liquidity into the marketplace.

Heaven help us all.

Trader Dan on King World News Weekly Metals Wrap

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

http://tinyurl.com/3bwf22e

Fed's Balance Sheet not growing but not shrinking much either

Take a quick look at the chart below to get a sense of what is taking place as a result of the cessation of the Fed's QE2 program and the inception of its "Operation Twist".

Recall that Operation Twist is nothing more than a rolling over of maturing shorter term Treasury debt into longer term Treasury debt in a deliberate attempt by the Federal Reserve to manipulate the rate of interest on the longer end of the yield curve.

While I personally find the idea that a small group of individuals presumes to be able to determine the exact rate of interest to fine tune an economy and make in move in the direction of their choice to be repugnant, it is what it currently is. I believe this constant interference into the interest rate sector is causing more complications than it is supposedly curing. It was the lowering of interest rates down to 45 year old levels some while back that paved the way for all this malinvestment and contributed to the excess that we are all too sadly aware of by now.

The notion that the same people who were partly responsible for creating this mess are the saviors to rescue us from it is laughable for its stupidity.

That being said, the Street loves nothing more than a Fed-induced liquidity party. As you can see, during both episodes of Quantitative Easing, I and II, the S&P 500, which is an excellent proxy for the US stock markets as a whole, moved higher, nearly reaching levels that it had climbed to just prior to the bust of Lehman Brothers in mid-2008, which ushered in the credit crisis.

As long as the Fed was expanding its balance sheet, there were "Blue Skies - nothing but Blue Skies, do I see" ahead. When the FOMC pulled the plug on QE2 in June of this year, down went the S&P, and it has not yet been able to recover from that cold turkey withdrawal of Billions in liquidity.

What the Fed is now doing with its Operation Twist is not expanding its Balance Sheet but is rather rolling over some of the maturing shorter term debt into longer term Treasuries. The effect has been to basically keep the Treasury portion of their Balance Sheet from not shrinking but also from not expanding. As their Balance Sheet flatlines, the broader stock markets are buckling under the weight of the rotten economy and global slowdown that is now taking hold.

Given the current conditions, it is difficult to gauge what might be a driving factor that would take the S&P anywhere near back to its recent peak just below 1400. Without another injection boost of liquidity, the best that the market could hope for is a period of sideways movement.

Another down day for the Metals

Both gold and silver continue to move lower and towards the bottom of their trading ranges. In the case of gold it dropped through $1620 and fell to just above $1600 where buyers showed up. It is currently attempting to get back over the $1620 level.

Silver violated support at both $31 and then again at $30 but it did encounter some decent-sized buying just below that latter level and has bounced back above $30 as I write this.

As expected, the HUI, once it sank through the support region near 520, fell all the way to the next support zone near 500 which extends down towards 490. This needs to hold if the mining shares are going to avoid even steeper losses.

The HUI is already deeply negative for the year but has been able to recover on each trip down towards 490 for nearly an entire year now. We would not want to see this level give way. If it does, the critical Fibonacci of 50% comes in near 470 and one would expect that to stem the selling. Should it fail there really is not muchn on the chart as far as support goes until we get all the way down towards 460-450.

Note that the weekly uptrend line on the chart has given way. The shares will need a strong rally tomorrow to go off the board for this week on a better note.