Monitoring the reaction
As expected we have seen somewhat of a correction, with the metals being hammered more than most. Our own positions are almost entirely in cash, with the exception of FAZ, UNG and AXAS which have been waffling and trending down. The effect on our overall portfolio is negligible though since we have almost entirely in cash.
Combing through many of our breifings, the scenarios now can be examined more thouroughly. The market is still due to make another upward move. The chartists call for anywhere between 9,000 (which is already met) to 11,500. Therefore we need to leave room for some upside potential. However our candlestick formations, at least on the weekly basis will probably be all cancelled out.
One thing when following candlestick formations, is that they work best when there is a clear cut trend that lasts a few weeks, followed by a change in trend. The elliotwave folks talk about ‘all the same markets’ which has been borne out pretty accurately, as our signals almost switch from these intermediate trend changes all together.
These previous trend lasted about two weeks – too short to commit any cash. The question is if the trend renews itself up, is it time to buy for a short term play. Certainly there is more and more news emerging about the end of the recession, how to position your portfolio for the turnaround, etc. In otherwords, the psycology seems to imply a baked in sense that the recession will end soon (already the longest since great depression).
Yet psychologically speaking, very little has changed, especially the government response. We are seeing more households hording cash, reducing debt, increasing savings. However those pent up savings will unlikely be enough to jump start the economy, which has become structurally warped over the decades by excess credit.At the same time, we are heading down the path of FDR with higher taxes and more government spending which is only going to prolong the ‘great recession’.
Given that, we still may see an eventual recovery and several quarters of positive, but anemic economic growth. Will enough positive psychology spur the markets up one leg higher? We will look very closely. Any additional positions we will take will be cautious to say the least. What we will look for are signs of the C wave down which may be time to exit long positions and go short.
This current 2 week rally has been fast and sharp – and we have stayed on the sidelines thus far. The result is the below point and figure chart which has triggered a long tail up warning. This means a reaction is imminent.
At this point the probability is that soon we’ll see a reaction down. This wave down should provide an ideal entry point for those looking to trade the rest of this rally which may last into fall before the (C) wave decline. The (C) wave may even get pushed out to next year. However we’re set up to get plenty of alarm bells when we enter this period.
The big question remains is how the precious metals will react. Right now a push into the 970’s is the target. If gold can push through this target then the Elliotwave scenario is temporarily negated. The markets all have been closely correlated, so if gold is to go higher then it may well i ndeed follow the general market up into fall.
Here are the latest Blees COT ratings released on 7/24/09 for some key markets. Remember “100? is the most extreme bullish position on the part of commercial traders (aka the “smart money”) for the last eighteen months. “0? is the most extreme bearish position:
S&P 500 Index: 52
S&P E-mini: 77
Dow Industrials: 57
Nasdaq 100: 66
Nasdaq 100 Mini: 20
Gold: 26
Silver: 79
Crude Oil: 60
Copper: 63
Corn: 100
Soybeans: 53
Sugar: 30
Wheat: 94
Cattle: 25
Hogs: 71
U.S. Dollar: 100
Cocoa: 62
Natural Gas: 80
Again, the numbers for gold do not suggest a big push in gold. What we want to see if a nice pullback in gold, followed by much higher COT numbers.
It’s interesting that the dollar is now at 100. We do expect some short term dollar weakness – however the Elliotwave folks anticipate the dollar to rise during the next round of deleveraging.
Psychologically speaking, the media is awash with articles about a pending recovery. When the local papers who have no business giving financial advise start printing articles about how to “prepare your portfolio for recovery” indicates that we will continue to have a hope fueled rally as people almost instinctively think the recession will end very soon, as this is already the longest recession in month terms since the great depression.
There has also been talk about a coming dollar devaluation, which of course would be explosive for gold and commodities. I checked the Elliotwave site and found the answer, which makes sense :
“EWI’s earliest forecast for the bottom in the global economy is in or around 2012, and the US dollar should generally remain buoyant until then. Any transition to a new reserve currency is likely to take place after the bottom, because only AFTER the collapse will global governments attempt to come together to prevent the collapse, in typical ‘after the horse has left the barn’ fashion. One of the potential ‘culprits’ in their minds may be the reserve currency system, which leaves the US dollar’s status in a vulnerable position”
So while the dollar is vulnerable, the probability of a overnight devaluation at this point is low. And as we have seen from all the government responses – it is always reactionary. TARP, Stimulus I, TALF, etc. All these government measures came in the middle of the crisis, not the end.
Our watchlist program is currently malfunctioning, so we hope to have everything fixed soon. However nearly all the symbols were converted to full fledged buys this past week, as expected. However given the sharpness of this rally – we would like to see a sell off prior to entering any new positions.
Market surge
We’ve been just watching and waiting while we watch the action unfold and will summarize with charts this weekend. And expected pullback has not occured, rather the markets have been pushing higher. We are still expecting a pullback and will not chase and market that has extended itself such as what has been occuring in the past two weeks.
If one is in the markets now, it would be wise to stay in. Any new entries should be made only after a pullback, as the markets are vunerable to a short term pullback. However as we unfold it appears that the Dow 10,000 scenario will become apparant.
We remain uncommited except for our small positions which have been waffling.
wait and see.
The portfolio watch list has been updated, and as expected, ALL the sectors we followed issued buy warnings. We are going to wait however before commiting posistions since this move was expected and seasonally we do not expect the metals to rally too much higher. For us to commit additional money we want to see key resistance levels of 967 broken in gold.
Additionally the COT numbers as posted below do not encourage us that this rally will have teeth. We are also monitoring the stock market as conditions exist for a rally and a way to raise cash into fall.
Here are the latest Blees COT ratings released on 7/17/09 for some key markets. Remember “100? is the most extreme bullish position on the part of commercial traders (aka the “smart money”) for the last eighteen months. “0? is the most extreme bearish position:
S&P 500 Index: 43
S&P E-mini: 76
Dow Industrials: 57
Nasdaq 100: 59
Nasdaq 100 Mini: 28
Gold: 38
Silver: 76
Crude Oil: 49
Copper: 77
Corn: 91
Soybeans: 48
Sugar: 45
Wheat: 100
Cattle: 35
Hogs: 79
U.S. Dollar: 96
Cocoa: 68
Natural Gas: 76
Possible change…
We are monitoring intelligence which suggest we are at a tipping point for a near term rally. However as previously discussed, the COT structure is unfavorable to any dramatic rise in gold. We are going to review this weekend and determine a course of action. Gold still needs to make some headway past key resistance levels.
However, a new wave up is very possible and may be an excellent time to raise cash or trade the rally into the remainder of the summer.
We will also be checking out the candlestick signals this weekend.
COT numbers
Here are the latest Blees COT ratings released on 7/10/09 for some key markets. Remember “100? is the most extreme bullish position on the part of commercial traders (aka the “smart money”) for the last eighteen months. “0? is the most extreme bearish position:
S&P 500 Index: 46
S&P E-mini: 71
Dow Industrials: 0
Nasdaq 100: 65
Nasdaq 100 Mini: 26
Gold: 33
Silver: 71
Crude Oil: 49
Copper: 78
Corn: 87
Soybeans: 31
Sugar: 42
Wheat: 99
Cattle: 53
Hogs: 97
U.S. Dollar: 93
Cocoa: 69
Natural Gas: 83
Comments: Gold is still sporting weak numbers, so it doesn’t portend to higher prices. Silvers numbers continue to get better. The dollar is still high and natural gas is creeping higher. It is interesting how the DOW is now at a maximum extreme bearish.
Last year, prior to Lehmans collapse here were the COT numbers:
S&P 500 Index: 36
S&P E-mini: 20
Dow Industrials: 95
Nasdaq 100: 37
Nasdaq 100 Mini: 29
Gold: 72
Silver: 56
Crude Oil: 84
Copper: 79
Corn: 81
Soybeans: 85
Sugar: 41
Wheat: 48
Cattle: 79
Hogs: 18
U.S. Dollar: 0
Then later in October:
S&P 500 Index: 0
S&P E-mini: 2
Dow Industrials: 63
Nasdaq 100: 21
Nasdaq 100 Mini: 61
Gold: 85
Silver: 100
Crude Oil: 93
Copper: 93
Corn: 100
Soybeans: 100
Sugar: 62
Wheat: 100
Cattle: 96
Hogs: 12
U.S. Dollar: 12
Cocoa: 100
Natural Gas: 96
Or here in early feb (just prior to the march lows)
S&P 500 Index: 22
S&P E-mini: 21
Dow Industrials: 40
Nasdaq 100: 11
Nasdaq 100 Mini: 63
Gold: 41
Silver: 79
Crude Oil: 55
Copper: 100
Corn: 100
Soybeans: 88
Sugar: 48
Wheat: 84
Cattle: 81
Hogs: 26
U.S. Dollar: 38
Cocoa: 60
Natural Gas: 75
So the COT numbers by themselves aren’t always a good indicator, although it seems to be more reliable with gold and silver. But the market was taken by suprise in september when the dollar was at an extreme 0 bearish level, then soared after the collapse of Lehman.
The stock indexes were never extreme bearish prior to the meltdowns. Right now we have the DOW at zero, a pretty rare event. Copper never got to a zero, and then the market collapsed for it as well. However copper was an even more bullish 100 prior to the March lows, and it did go up from there.
So a maximum reading of either 100 or 0 is more significant, but we also want to make sure it is confirmed by a good candlestick reversal reading and other factors. Think of it as another ‘tool’ that can tell us if the odds are in our favor, but not to use a sole trading vehicle.
A waiting game..
Contrary to many other newsletters, we are not fully invested in gold and mining shares, nor do we believe that an imminent explosion in gold is on our doorstop. Of course we can be wrong – but we will take a wait and see approach rather than the ‘we have to be in or else the train will run off without us’ that many of the newsletters touted last year prior to the great metal meltdown.
Take this quote from a recent newsletter :
“Something big is coming soon and the danger of being out is greater than being in.”
The only thing wrong with this statement is there is no danger in being in cash. If a ‘big move’ is imminent, we will not miss the train, and such a ‘big move’ will see prices well over $1000.
As discussed last week there are three potential scenarios, and we have to look at the stock market as a whole because this will determine the fate of the metals.Currently we are seeing scenario 2 and 3 unfolding – which is either THE next big breakdown of the market otherwise known as Wave C(I guess you can call that the big move) or a brief and sharp downthrust followed by another powerful uprally (our more likely pick). Either way, it’s too early to tell if gld is ready to stage a real rally.
One item discussed this weekend, which I found interesting is the fate of the dollar which so many call into question. The point made was that in a fiat world – every other currency is ultimatly a derivative of the dollar. It is in nobodys interest to see the dollar trashed. More importantly, all currencies are inflating. China, even though they have grumbled about the dollar still prints more money than the US does. More importantly, not a single country is coming up with a currency that is backed by hard assets such as precious metals or commodities. Therefore without an alternative, we do not see a huge drop in the dollar. There may be volatility, but what we can see as being a possibility is a slow, orderly decline of the dollar – along with a slow orderly decline of all world currencies in relation to gold. However we believe other events, such as a flight to safety may be the fuel for golds next rise.
SHould the C wave down commence, the economic news will get much worse and the talk of a massive Stimulus 2 will become forefront. This may fan inflation fears and re-ignite gold. (that is one possibility). We believe that mood will ultimatly determine the price.
So our current stance is a defensive – neutral stance with a wait and see outlook. There are a number of formations in the markets and many analysts have cited the head and shoulders formation that is occuring. We do not yet know where the pattern will play out, and frankly it’s useless to discuss further until we have a clear indication of where we are.
Below are some charts of some of the indexes we follow and track:
Comment : Gold is continuing it’s downtrend and has an established support zone of 850-870 area. Should this support fail the Elliotwave target of 680 is a possibility. On the other hand, a reversal and break of the 96.97 mark will cause us to withdraw our bearish scenario. Although technically in a bullish disposition above the cloud charts, there are no reasons to enter long gold as far as we can see. The COT numbers continue to unimpress. What we would like to see is a steep drop followed by rising COT readings to give us a little teeth to the bulls argument.
Comment: Silver is in neutral territory still with support around 12. Should 11.64 fail then the Elliotwave bearish target is a real possibility.
Comment: We are right at the cloud, meaning a bounce could be expected soon. And right now we have a zone of support between 35 and 30.
Comment: PHO, our water index was unable to break through the cloud (observe how it hugs it beautifully). Resistance is thick, and we see this following the general stock market.
Comment: The S&P 500 is still bearish below the clouds and failed to attack it. The zone of resistance is dropping, so the trend is shaping down. Getting into the cloud though, would be significant since we may have our sharp rally to upper resistance that may be yet to some.
Comment : UNG is simply a devistated ETF, yet we are in it. What fun. As you can see we have been bounching along support for a while, and last week saw a buy warning (the only one we have right now). We expect action to be choppy for a while, since this is the time of year gas tends to underperform. But volume continues to be impressive and there is a lot of room to the upside at this time.
Comment: USO is not in good shape. However the resistance zone is dropping rapidly. This suggests that after a bottom in oil is establish we might actually approach the cloud and enter it, which may portend to higher prices.
Comment: The XLE energy ETF is pulled back sharply with oil and also has a dropping resistance zone.
We’ll post the COT numbers tommorow.
COT numbers
S&P 500 Index: 37
S&P E-mini: 68
Dow Industrials: 0
Nasdaq 100: 51
Nasdaq 100 Mini: 68
Gold: 29
Silver: 65
Crude Oil: 32
Copper: 80
Corn: 80
Soybeans: 23
Sugar: 39
Wheat: 78
Cattle: 56
Hogs: 100
U.S. Dollar: 94
Cocoa: 68
Natural Gas: 77
Nothing at extreme levls, the dollar number does indicate that any dollar weakness will not be long lived. We’ll see the numbers in a better perspective this weekend, and there will be new COT numbers out shortly (these were delayed).
Monday Morning update…
Due to the holidays we will be delaying the posting of the COT numbers. We will be monitoring this along with the action in the markets to determine our course of action.
After reading and listening to several discussions – again the impact of the head and shoulders pattern in the stock market came up. Ultimatly we will have to determine how the price action translates into what scenario is unfolding. As discussed in our weekend update, there are three possible scenarios that are unfolding and we will be watching closely to see which one it is. At the moment, scenario 2 or 3 are the ones the most likely.
One interesting bit of information gleaned this weekend is that is we do see a major selloff in the market, the flight into treasuries will be more muted than before, and thus the sell off in gold, in percentage terms. We will have to be nimble and identify the period where a dollar rally loses it’s steam and the pendulum swings back in golds favor. Only with a strong rise in gold will we see the indexes taken to new highs.
Natural gas, being one of our few positions continues to waffle. This morning a smart stop was triggered, however we are not selling. Even though we sit on losses, the downside is much lower than the upside. The COT numbers are getting more favorable by the week. So we’ll keep holding.
This should prove to be a very busy couple of weeks and we will be updating frequently.
Weekend report
This weeks action has been choppy. Ever since the June top Gold and Silver have sold off then bounced around in a narrow trading range. Oil has pulled back and natural gas is been waffling. Oh and we have been sitting mostly in cash. In fact our only positions now (all losing) are in FAZ, UNG and a little spec company called AXAS (a natural gas play).
We’ve discussed natural gas in a previous post, and all natural gas related investments will be held with no stops to be re-evaluated in the fall when the seasonals kick in. FAZ was a classic case of being too early. The good news is that it has stabilized for the time being.
We are not going to call bottoms or tops in the precious metals market. There are simply too many people calling for an immediate up surge in gold. Our candlestick indicator on our watch list is all over the place these past weeks. Gold and Silver are in sell mode, while potential buy signals in the miners emerged this week. Alas they are all of low reliability so there is nothing convincing about the signals The problem is candlesticks is they don’t act as good indicators in very choppy markets. This will not be the case for much longer.
So what to do? Wait and see. The COT numbers are certainly not bullish. What we will be observing is the seasonal strong period which is coming up soon:
GDX has been hanging above the clouds and so far has not been able to pierce it. So the test will really be within the next few weeks. The Elliotwave scenario is MUCH more bearish and totally at odds with the remainder of the metals community (who all pretty much see much higher prices in the weeks to next few months time frame). Currently the Elliotwave pattern calls for a decline to 680 (last years low) for Gold and below $8 for Silver. So far they have been correct with a stairstep decline in metals. However a close above $960 will be indicative that the pattern, at least for now is not ready to complete.
If one is truly bullish with the metals, then being in cash is no big deal right now. If gold does break out, we’ll know – and there will be enough momentum behind it, at least initially that we wont get caught with our pants down. However it may not be the big launch that everyone is expecting, so in that case we’ll be out should the market decide to reverse itself. Using stops or a nice juicy candlestick reversal indicator.
The general market is offering mixed signals. SH is in a buy signal but we are not buying. There is the potential for a Wave C decline, or another wave up to new intermediate term highs. If we use social mood as an indicator, I would say for now things are a bit tempered and confused with a short term negative bias. However, I caught this on AP:
ALL BUSINESS: Cash is king for investors
ALL BUSINESS: Investors choose cash as an asset class, which is bad for stocks
“That helps explain why Albin is cautioning against counting on a stampede out of cash and into stocks, especially after talking to his banks’ clients. They’ve been burned by the bear market and worry about having enough cash — especially those who invested in things like auction-rate securities that turned out not to be as easily accessible as they thought. Since credit markets remain tight, many are also finding it harder to borrow or raise money.
So they are clinging to their cash, especially in plain-vanilla accounts like money market funds, which now yield on average only 1.3 percent, according to Bankrate.com.
Albin has started giving a presentation to clients titled “Cash is an Asset Class.” He discusses how investors’ experiences in 2008 called into question two underpinnings of investment management — buy and hold and diversification. As a result, he sees many investors viewing cash as an important asset to have “in an environment where you need to protect yourself.”
Given a headline like this, investors will choose to remain cautious until the market does something to change their mind. My guess – that the market is going higher. I listened to a bit of the Mutualfundstore radio show (a retail investor show) that was dispensing the same advice (dollar cost average, etc). When the true bottom is in place, this show will probably no longer be on the air. So the retail investor will need some prodding to get the market moving up again.
So based on our data and sources, these are three possible scenarios:
1 – Market breaks out to upside (June highs). This would most likely take gold and precious metals stocks up. In this case we would re-establish our positions (FAZ is the only current position that would be the loser) quickly.
2- Market breaks DOWN taking the metals down with it. Since we are in cash, the only downside is our natural gas position – and the downside is limited since gas cannot go to zero and eventually will bottom out unless we want to run out of supply. FAZ would soar.
3 – Market breaks down breifly, and perhaps violently as shorts pile on. Then massive short covering rally that feeds upon itself, drawing cash from the sidelines in (we will probably see the media cheerlead again – and would create the situation Elliotwave sees – a rally to 10,000+ before the final collapse)
Timing is key, patience is key – observation is key. Despite some short term losing positions we are holding – the cash we have to deploy would be more than enough to take into account the above scenarios. Now we must wait for indication which way we are going. More than likely the next 3-6 will give us the price information we need to determine the actions we will take.
