Night owls who followed my advice yesterday could have caught a ride worth as much as $2,000 per contract, on initial risk of as little as $130. For those who made money on the trade, here’s another night owl special that comes from the two-minute chart: Bid 38.92, stop 38.87. I typically recommend a stop-loss of at least 20-22 cents when trading against swings in this vehicle, but the pattern from which I’ve derived the target is so delicate that we should look for a very precise bounce here, assuming one occurs. _______ UPDATE: The midpoint support gave way easily, telegraphing the considerable weakness that followed. The obligatory short-squeeze came eventually off a low at 36.94, but it unfolded in too many stages to suggest there is any real buying power here. It would take a print at 57.25 to hint that anything worthy of our attention is happening. My gut feeling is that we will see oil trade below $20/barrel, and perhaps below $15.
From the monthly archives:
December 2008
Newmont seems unlikely to indulge our lazy bid below the market, so I’ll suggest getting long today on an impulsive break above the two peaks labeled in the accompanying chart. You should only attempt this one if you understand why the rally must have no b-c corrections in the space between the two peaks. If you use stock to get long, a 40.41 buy-stop limit is suggested on 200 shares. _______ UPDATE: We hold 200 shares for 40.41, off a buy-stop triggered when Newmont popped (so far today) to 40.59. This morning’s reversal has beeen quite sharp, so expect some consolidation before the stock attempts to take on some resistance highs near 45 from late October.
Assuming the Diamonds blow past the 86.92 midpoint pivot that arrested yesterday’s spree, they will likely be bound for a minimum 88.30 thereafter. I’ll leave it to chat-room Pivoteers to improvise a boarding strategy for the ride north, but if and when the rally reaches its projected terminus at 88.30, we’ll want to attempt shorting there by buying a January 88 put (DAVMJ); or alternatively, naked-shorting a January 90 call (DAVAL). I will update with more-detailed guidance if the trade gets in range before the final hour, so keep your bulletin launcher open if you’d like to be alerted in real time. _______ UPDATE: A short from 88.30 would have worked nicely, since the Diamonds plunged 1.47 points (!) after making a top that day at 88.37. They have since recovered (and then some) on the first trading day of the New Year, but if you managed the risk properly, you would have come away with an easy profit.
I’m seated in the corner of a Boulder café, ruminating on the day’s events, including a trade in the E-Mini S&P that we missed by a hair. The bid I’d suggested was intended to leverage a fat-and-juicy Hidden Pivot support at 852.75, but the actual low occurred two ticks above it, at 853.25. The subsequent rally trampolined 19 points, raising the question of whether we got front-run on our own advice. It’s possible, at least, since the target had been up on the Touts “billboard,” so to speak, for a few days. I may be able to avoid having my targets “stolen” by posting them in the chat room right before they get hit. Regardless, it would appear that drum-rolling them a day or two in advance risks undercutting the kind of delicately precise intelligence with which I try to equip subscribers.
The target itself was mildly important to the short-term picture, since the E-Mini’s apparent reluctance to pull back to it hinted of strength, or at least of a temporary shortfall in selling power, in the waning days of 2008. Seasonality will be powerfully on the side of bulls until next Monday, but if yesterday’s bounce from a subterranean Hidden Pivot was the best that bulls can muster, then come January, look out below! Not that our expectations for a Santa rally should have been any higher than, say, Macy’s.
Zip Code Man
Funny story: I bumped into a guy at the café named David Raifsdeitcher, an accomplished busker who is better known in Boulder as the Zip Code Man. In his act on Pearl Street, he gathers fifty or so people within a chain-link outline of the U.S. map. He first asks what your zip code is, and when you respond, say, 08406, he places you in the approximate location of Ventnor, New Jersey. Then, one person at a time, he recalls where each is from and also names some bar or restaurant that he supposedly visited in that town. His prodigious memory notwithstanding, every time I bump into David I have to re-introduce myself because he can never remember my name. Side note: The Zip Code Man is quite a juggler and can get seven objects into the air without breaking a sweat.
Seasonality will be operating at nearly full-strength today, but I wouldn’t expect much of a rally. Look at the accompanying chart and you can see how every surge since early October has lacked follow-through. In fact, there has not been a single burst that exceeded two prior peaks — a clear warning that the Santa effect is suffering from the equivalent of typhus. For today, I have no great upside targets to offer, but the one well below these levels at 827.25 will remain valid until such time as 878.00 is exceeded to the upside. If that happens you could use 895.75 as a minimum upside objective, but it’s not worth more than two ticks’ risk if you choose to go short there.
No change. Over the near-term, the number to beat — a Hidden Pivot resistance, as well as our minimum upside target — is 901.00. However, a decisive move above it would be strong evidence that the futures are capable of leaping to at least 972.20. In Monday night action, gold futures were so strong that even the one-minute chart was not yielding any buying opportunities on a-b-c retracements.
With the possibility of full-scale war looming in the Middle East, geopolitical tensions have so far produced only a modest blip in energy prices. A weak follow-through today could be expected to yield a tradable top near 41.13, a Hidden Pivot midpoint, but any higher would be warning of a last-gasp feint to as high as 44.74. You can short that last number with a stop-loss as tight as 22 cents, but you’ll be on your own thereafter. Note to night owls: a pivot at 38.05 offers a decent chance for bottom-fishing, but it would be invalidated by a print above 40.39. _______ UPDATE: The Hidden Pivot at 38.05 caught the low nicely, and you could have bottom-fished there with a stop-loss as tight as 13 cents (!), since the intraday bottom was at 37.93. The subsequent bounce was strong, peaking at 39.90. This means you could have made as much as $2,000 per contract in just under two-and-a-half hours.
I noticed this too late to act on it Monday, but 28.87 was short-able, based on the pattern shown in the accompanying chart. (In practice we’d likely have missed the trade anyway, or opted out, since the actual high missed the target by three cents — and it occurred in the final moments of the session.) The Hidden Pivot can still be useful for purposes of analysis, since any progress above it today will be telegraphing more buying power to come.
Although the U.S. Government has thrown an estimated $8.5 trillion so far into bailout measures and credit stimulus, this huge sum has yet to produce even a mote of tangible success. The goal for nearly two years has been to stabilize home values, but instead they have continued to fall. Policymakers and economists must be perplexed by this, even if beleaguered homeowners are not. Maybe the latter have remained gimlet-eyed because they’ve received only bailout crumbs to date. Whatever the case, at a time when households have become properly obsessed with repairing their balance sheets, who could blame them for being suspicious of Big Government’s so far fruitless collusion with the corrupt likes of J.P. Morgan and Goldman Sachs?
Even so, a government rescue of individual homeowners cannot be ruled out. Our friend Jim Willy of GoldenJackass.com thinks it’s inevitable, and he expects the Government to attempt it in 2009 by way of a new Resolution Trust Corp that would put a floor under home prices. The agency would channel enough printing-press money to lenders to allow them to write down mortgage receivables significantly. We’ll concede that such a plan might extricate homeowners from an otherwise bottomless hell-hole of deflation. However, we do not see the enactment of such a plan as inevitable, since letting homeowners off the hook with an ocean of printing press money would simultaneously wipe out lenders on the other side of the mortgage equation.
On that day, bond markets would collapse along with the dollar, and only hoarders of physical bullion would likely escape ruin. On that last point, we agree completely with Jim. But there is one point on which we disagree �’ i.e., the matter of whether the global financial system is experiencing deflation, or, rather, what Jim calls “liquidation.” He sees liquidation as part of a process leading inevitably to hyperinflation; we see liquidation as the essence of deflation itself. If we are right, deflation has become too powerful to arrest and will run its course no matter what countervailing tactics are tried. The only alternative scenario we can imagine would have the Government assume virtually all debts, public and private, and then monetize them directly via unlimited Fed purchases of Treasury bonds, bills and notes. Although that would lift the burden of debt from homeowners with skip-and-go-naked finality, it would also gut savers and lenders for a generation, along with their institutional conduits, most crucially the bond markets.
$4 Trillion Stop-Gap
Under the circumstances, Jim’s RTC II would seem to offer no more than a stop-gap against deflation. He estimates that as much as $3 trillion to $4 trillion of printing press money would be needed to arrest the real estate market’s collapse, but we doubt that even twice that sum would do the trick. At peak values, U.S. homes in 2007 were “worth” perhaps $20 trillion (click here for the source of that estimate), and it would arguably require write-downs of at least half that, or $10 trillion, to even temporarily stabilize home prices. But just how much stability could we expect that to buy in the context of a global deflation that has already sucked perhaps five to ten times that amount �’ including more than $40 trillion in stock-market valuations — from assets other than real estate?
No question, homeowners would breathe a sigh of relief if their mortgage debt and monthly payments were halved. But keep in mind that whatever positive impact that might imaginably have on the real economy �’ i.e., on capital investment �’ it would be negated by the corresponding ruination of savers and lenders, of the U.S. currency system, of the banks and the bond markets.
Bottom line, the deflation that Jim Willy would treat dismissively is in fact many orders of magnitude larger than any inflationary countermeasures our political leaders are likely to attempt. In the end, nothing short of outright and deliberate hyperinflation will reverse the deflationary tide. Obama the Populist might risk it, but surely he knows what each of us knows even now — that there is no chance that a hyperinflationary settlement of debt would put the economy quickly on the road to sustainable recovery. Better times would come eventually, as they always do, but destroying the dollar would likely set the process back by at least a decade, and perhaps by as much as a generation.
A $901 Trigger For Comex Gold
by Rick Ackerman on December 31, 2008 11:21 am GMT
The number 901 looks like nothing special in the chart below, but we’ve kept it prominently in mind as the trigger point for a potentially explosive move to at least 972. Both numbers are what we call Hidden Pivots, and we have come to regard a breach of these resistance points as a very reliable sign of more strength to come. In this case, to avoid a false signal, we’ll stipulate that February Gold close above 901.00 for two consecutive days before we infer the big surge is under way. Of course, if and when the futures get to 972.20 (the exact target), they undoubtedly will feel the magnetic pull of $1,000, which was last tested in mid-July.
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