Gold caught one heck of a tailwind this morning knifing through one resistance level after another as if they did not exist. It is evident from the ferocity of the climb that the shorts were squeezed in a big way with a plethora of buy stops being touched off in the relatively low volume trading conditions. Here is another example of that lack of liquidity I have been referring to over and over again with the declining open interest creating huge pockets of air both above and below this market. A few well placed orders, either on the buy side or the sell side, and the cascade or upside catapult ensues.
One look over at the currency boards and it is easy to see why the gold shorts were in trouble this morning. The euro took off to the upside, the euro-yen cross soared, crude oil moved up and away from the $40 level and back came the “risk” trades. The “risk aversion” trades were reversed or halted as traders latched onto the auto bailout news and attempts by the Central Banks globally to inject liquidity as a signal to plow back into the commodity sector. Nearly every single commodity quote on my board was once again in blue. Even if anyone did not understand the exact nature of the computer algorithms that these black box hedgies are employing, it does not take much in the way of observation to grasp the fact that those things are geared to movement in the dollar and the equities. That is why the signals always produce the exact same effect in the markets. They are all basically using the same computers to do their thinking for them. Hedge funds are basically mindless traders and if they are all using the same signals, then the result will be that they plow into and out of markets all at the same time. Nowadays this is referred to in the investing world as “genius”; that is, until the hedge fund goes belly up and shuts its doors.
Suffice it to say that today is the “reflation trade” –
Nonetheless, gold has had an undeniably strong technical performance. It is trading well above its 50 day moving average and peaked today right on its 100 day moving average. That level is very close to the downsloping trendline of the recent wedge formation on the daily chart. Should gold be able to muster the strength to take out the 100 day and then horizontal resistance from late last month near $830 – $833, it has the very strong possibly of beginning a trending run. Keep in mind that levels of open interest are low and the market is relatively illiquid so we will still want to see new fresh buyers coming in and not short covering alone. Light support moves up to near the $790 level followed by stronger, more substantial support near $770.
I am a bit hesitant to say with complete confidence that the mining shares as indicated by the HUI and the XAU have completed a complete separation between themselves and the broader market but they gave the first solid hint of that yesterday. Today they furthered the amicable divorce. Even as the broader market indices came off their best levels of the session, the HUI and the XAU seemed very hesitant to give up their gains. Yesterday the HUI and the XAU managed their second consecutive close above the 50 day moving average. That is generally enough to turn the technical posture into a bullish one. Sure enough the shorts began running today with indices easily breaking through their respective horizontal resistance levels at the late November highs. That translates to roughly the 250 level in the HUI and the 101-102 level in the XAU. To give you an idea how improved the HUI chart has become, the 100 day moving average on its daily chart comes in near 277. That is less than 20 points away from today’s session high.
The grains are looking more and more like they are forging a bottom although so far that cannot be confirmed with certainty. They are meeting up with selling resistance near the 10 day moving average in the corn and the beans. I still have my eye on this complex as I will feel much better about the overall commodity sector once the grains bottom. So many prices have been beaten down to levels that I believe were not justified fundamentally but went there nonetheless in a technical washout from the hedge fund deleveraging trade and the index fund redemption related selling. Just like that crowd overdoes things on the upside, they do the same on the downside. The trick is trying to figure out when enough is enough. Just about the time you are convinced that the blind selling is over, another outbreak of selling appears and down it goes once again. What I keep looking for is the time when traders are paying attention to supply/demand factors that are particular to each commodity market instead of just wave after wave of selling. That will tell us that informed traders and big money is moving back in to take advantage of “value”. I believe we are seeing that in gold but I want to see it in more than one market but would prefer to see it across several of them. Up until recently, no one, and I mean no one, has been willing to step in front of the fund selling and take on any serious long positions. That makes sense since if you are inclined to buy, why not wait until you can get it even cheaper. When you see the prices have fallen to the point where others besides yourself are licking their chops in anticipation of the deal, then you begin moving in as well. But you have to know that you have some reinforcements on your side to take on the hedgies who are busy throwing everything out the window without looking at what it is.
Incidentally, I heard some reports about guys in the oil patch buying the front month futures contracts, taking delivery of the crude and storing it in empty tankers with plans to sell it next year because of the degree of contango in the futures markets. The selling has knocked the front months down to levels that are out of whack with the premiums that the board is giving the back months. Those that know the oil patch very well and know where relative value is are taking steps to make a nice tidy sum of money thanks, once again, to the mindless hedge funds. Too bad we all don’t have some spare supertankers hanging around our back yards.
For a while it seemed as if the bonds were going to drop and drop hard. Yet, like they have done time and time again recently, they bounded up from their lows. That thing sure seems to me to be setting itself up for one heckuva fall but fighting the trend can be quite expensive unless you are very, very nimble.
Click chart to enlarge today’s action in Gold as of 12:30pm CDT with commentary from Trader Dan Norcini