Filed under: Trader Dan Norcini
Dear CIGAs,
Two significant developments occurred in today’s trading session which bear mentioning as both have important repercussions for the future.
The first is the clear breakout above $87 in the crude oil market which is heralding a further rise in the cost of crude and with it, all of the liquid energies including gasoline and heating oil. The catalyst was a report showing a drawdown in the amount of crude in storage. Needless to say, this is not welcome news to cash strapped US consumers who are already feeling the affects of higher food costs. Now into this sordid mix comes higher energy costs. Food and energy – what are more essential than these? Nothing!
The second is further downside follow through in the long bond after it breached an important chart support level in yesterday’s trading session. There are so many false breakouts and breakdowns in today’s markets on account of the algos that I am becoming a bit more conservative when reading the price charts but the lack of additional buying in the bonds even in the face of a weaker equity market is ominous. It seems to me that this market, which had been supported only by the Fed’s QE buys is now discounting those buys and has shifted its focus to the sheer volume of supply which is hitting the market. In other words, bond traders are discounting the price of bonds to reflect the fact that demand is not going to keep up with supply at current levels of interest rates. Bond traders are in effect signaling a return to inflation on the long end of the curve as the effect of the QE impacts the economy at large. So far the decline has been rather orderly so we are not looking at a rout or a sharp spike in long term rates, but it could very well be that the days of low long term interest rates are behind us. I still want to see how this market closes out the week however before becoming too dogmatic on things. I have been tripped up too often with these things to get overconfident.
Gold and silver are today feeling the after affects of the margin rate hike in silver. Combine that with a pop in the Dollar and a general wave of commodity selling, and the hit to silver in particular has been quite dramatic. It is currently down over 6%. Oddly enough, even with a downdraft of this extent, its chart does not look all that bad as the uptrend is still intact. If it can close out the week this Friday above 26.75, it will have dodged a bullet. If not, look for further downside with a move down towards $25 very possible, where it should garner buying support if the uptrend is to stay healthy.
Gold’s ability to recapture $1,400 in the face of the rout in silver is very impressive. It seems to me that a goodly number of long silver/short gold spreads are being lifted today. That is part of the reason gold is holding up so much better than silver. Silver had been leading to the upside and now it is leading to the downside. Gold is also responding to woes in Ireland as investors in Europe are driving the price of gold above the €1010 level priced in Euros. In short, although the yellow metal is weaker, it is holding together quite well thus far.
Incidentally, gold just missed setting a new all time high when priced in terms of the Japanese Yen at today’s London PM fix.
Downside chart support in gold was touched earlier in the session where buyers came in and brought it off that level. That serves to validate the levels shown on the chart which are marked in red. The ideal price action would now be not a sharp spike back up in price but rather a sideways period of consolidation to allow end users to become acclimated to the higher cost. Sharp run ups in price tend to put the damper on the physical market overseas whereas a climb, followed by a drop in the level of excitement and some price stability gives buyers the courage to step in once they see that prices are now at a new and higher sustainable level and not just the result of a wave of speculative hot money flows which can dissipate all too quickly.
The Dollar is reaping the rewards of the crisis involving Ireland’s debt. That brought some rather intense selling into the Euro but I find it telling that once the Dollar pushed towards the chart resistance levels near 78.50 on the USDX, it could not hold its gains. The fact is all of the paper currencies are under stress and that is why gold will continue to perform well and will be supported on price dips.
The HUI is showing remarkable strength which is interesting. I think some of what we are seeing there is those ratio spread trades being unwound. That involves buying the shares and selling the bullion. I view that as a good herald as if this is the case, it indicates that the hedge fund crowd is throwing in the towel and abandoning that strategy. We’ll see. Either way, it is difficult to see much more in the way of enduring selling pressure in the metals themselves if the HUI stays strong. Silver is a money game right now so try not to read too much into the chart action as it will take some time for the margin hikes to weed out the weak-handed long side specs.
Cotton has been all over the place today nearly hitting limit up in overnight trade in Asia, then getting whacked and moving almost limit down, then rebounding over $10 and then dropping almost limit down again. Right now it is down but above any limit move. I keep seeing signs in the department stores being changed every 30 minutes to reflect the change in the cost of a pair of cotton socks or T-shirts. Pity the poor clerk who has to keep running in and out of the storage section! Seriously, cotton is evidencing the same kind of wild volatility that silver is experiencing. Ditto goes for sugar which has been all over the place today. The fact is hot money is sloshing all over the globe and moving in and out of markets in huge quantities making trading extremely dangerous for all but the most fleet of foot or the most experienced. Be careful; be very careful out there if you are trading. Scaling down in size is not a bad option as you can still make a great deal of money if you are right in your trades with a small position but at least you can survive if some of them go bad. A large number of hedge funds are not going to survive this period in the markets as these types of extreme ranges in price are going to claim a significant number of them. You can carve that in stone. It is not a zero sum game for no reason.
The grains are seeing weakness today but the fundamentals in there are so strong that it is difficult to see them staying down for any length of time. Food is not going to get cheaper, even if we get a few down days in the commodity markets. The genie is out of the inflation bottle and it is too late to put him back in.
DAN'S CHART:
http://jsmineset.com/wp-content/uploads/2010/11/November1010Gold.pdf
Two significant developments occurred in today’s trading session which bear mentioning as both have important repercussions for the future.
The first is the clear breakout above $87 in the crude oil market which is heralding a further rise in the cost of crude and with it, all of the liquid energies including gasoline and heating oil. The catalyst was a report showing a drawdown in the amount of crude in storage. Needless to say, this is not welcome news to cash strapped US consumers who are already feeling the affects of higher food costs. Now into this sordid mix comes higher energy costs. Food and energy – what are more essential than these? Nothing!
The second is further downside follow through in the long bond after it breached an important chart support level in yesterday’s trading session. There are so many false breakouts and breakdowns in today’s markets on account of the algos that I am becoming a bit more conservative when reading the price charts but the lack of additional buying in the bonds even in the face of a weaker equity market is ominous. It seems to me that this market, which had been supported only by the Fed’s QE buys is now discounting those buys and has shifted its focus to the sheer volume of supply which is hitting the market. In other words, bond traders are discounting the price of bonds to reflect the fact that demand is not going to keep up with supply at current levels of interest rates. Bond traders are in effect signaling a return to inflation on the long end of the curve as the effect of the QE impacts the economy at large. So far the decline has been rather orderly so we are not looking at a rout or a sharp spike in long term rates, but it could very well be that the days of low long term interest rates are behind us. I still want to see how this market closes out the week however before becoming too dogmatic on things. I have been tripped up too often with these things to get overconfident.
Gold and silver are today feeling the after affects of the margin rate hike in silver. Combine that with a pop in the Dollar and a general wave of commodity selling, and the hit to silver in particular has been quite dramatic. It is currently down over 6%. Oddly enough, even with a downdraft of this extent, its chart does not look all that bad as the uptrend is still intact. If it can close out the week this Friday above 26.75, it will have dodged a bullet. If not, look for further downside with a move down towards $25 very possible, where it should garner buying support if the uptrend is to stay healthy.
Gold’s ability to recapture $1,400 in the face of the rout in silver is very impressive. It seems to me that a goodly number of long silver/short gold spreads are being lifted today. That is part of the reason gold is holding up so much better than silver. Silver had been leading to the upside and now it is leading to the downside. Gold is also responding to woes in Ireland as investors in Europe are driving the price of gold above the €1010 level priced in Euros. In short, although the yellow metal is weaker, it is holding together quite well thus far.
Incidentally, gold just missed setting a new all time high when priced in terms of the Japanese Yen at today’s London PM fix.
Downside chart support in gold was touched earlier in the session where buyers came in and brought it off that level. That serves to validate the levels shown on the chart which are marked in red. The ideal price action would now be not a sharp spike back up in price but rather a sideways period of consolidation to allow end users to become acclimated to the higher cost. Sharp run ups in price tend to put the damper on the physical market overseas whereas a climb, followed by a drop in the level of excitement and some price stability gives buyers the courage to step in once they see that prices are now at a new and higher sustainable level and not just the result of a wave of speculative hot money flows which can dissipate all too quickly.
The Dollar is reaping the rewards of the crisis involving Ireland’s debt. That brought some rather intense selling into the Euro but I find it telling that once the Dollar pushed towards the chart resistance levels near 78.50 on the USDX, it could not hold its gains. The fact is all of the paper currencies are under stress and that is why gold will continue to perform well and will be supported on price dips.
The HUI is showing remarkable strength which is interesting. I think some of what we are seeing there is those ratio spread trades being unwound. That involves buying the shares and selling the bullion. I view that as a good herald as if this is the case, it indicates that the hedge fund crowd is throwing in the towel and abandoning that strategy. We’ll see. Either way, it is difficult to see much more in the way of enduring selling pressure in the metals themselves if the HUI stays strong. Silver is a money game right now so try not to read too much into the chart action as it will take some time for the margin hikes to weed out the weak-handed long side specs.
Cotton has been all over the place today nearly hitting limit up in overnight trade in Asia, then getting whacked and moving almost limit down, then rebounding over $10 and then dropping almost limit down again. Right now it is down but above any limit move. I keep seeing signs in the department stores being changed every 30 minutes to reflect the change in the cost of a pair of cotton socks or T-shirts. Pity the poor clerk who has to keep running in and out of the storage section! Seriously, cotton is evidencing the same kind of wild volatility that silver is experiencing. Ditto goes for sugar which has been all over the place today. The fact is hot money is sloshing all over the globe and moving in and out of markets in huge quantities making trading extremely dangerous for all but the most fleet of foot or the most experienced. Be careful; be very careful out there if you are trading. Scaling down in size is not a bad option as you can still make a great deal of money if you are right in your trades with a small position but at least you can survive if some of them go bad. A large number of hedge funds are not going to survive this period in the markets as these types of extreme ranges in price are going to claim a significant number of them. You can carve that in stone. It is not a zero sum game for no reason.
The grains are seeing weakness today but the fundamentals in there are so strong that it is difficult to see them staying down for any length of time. Food is not going to get cheaper, even if we get a few down days in the commodity markets. The genie is out of the inflation bottle and it is too late to put him back in.
DAN'S CHART:
http://jsmineset.com/wp-content/uploads/2010/11/November1010Gold.pdf
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