October 2009

The futures came down to within a few pennies of a 17.160 target derived from last Wednesday's high. They looked bound for still lower prices at the close, but we'll need to see a little more of the 'b-c' follow-through leg before we can confidently assess sellers' conviction.  Hidden Pivots aside, the trendline in the accompanying chart suggests that lows in the $14-$15 range are hardly inconceivable if the steeper trendline breaks.

Is this the start of a big correction in gold? I have my doubts, although we shouldn't fail to notice that a search for conventional support could take the December contract down to lows in the $980s made in late September/early October.  Mining stocks would get hit harder, of course, but that's not telling you anything you did not know already. We'll have a better idea about how bad the damage is likely to be once we see how the impulse leg from yesterday's high plays out on the hourly chart. So far, however, there is not even a 'b-c' correction to work with. _______ UPDATE (1:45 p.m. EDT):  Moving with a raggedy kind of nastiness, the downtrend has found tentative support within two ticks of a Hidden Pivot midpoint at 1032.50. (A=1060.80, from the hourly chart, 10/26.) The actual low is above the midpoint, and that is mildly encouraging, but if it is decisively breached -- say, by 0.60 points or more -- you could infer that the selling will continue down to at least 1020.70, the 'D' target associated with the midpoint.  A close beneath 1032.50 would likely clinch the climactic selloff.

With gold getting whacked hard yesterday, it was a time for sober reflection in the gold-obsessed Rick’s Picks chat room.  A trader who goes by the handle “Padre” saw “the Jungian collective unconscious” at work. We would take a less kindly view, more Freudian, that saw only id and ego in a state of gratuitous conflict.  But we’d be the first to admit that it can be far worse when these forces are aligned; for only then can they produce something as irresistibly corrosive as…money.  How so? Well, if you saw the classic sci-fi film Forbidden Planet, you may recall that the Krell civilization, using an infinitely powerful fusion reactor, built a machine that could conjure up all of their needs when ordered to do so telepathically.  Unfortunately, while they slept the reactor conjured up monsters from their primitive subconscious (see photo below), and that was what ultimately did them in.  Here on earth we’ve figured out how to do more or less the same thing with money, creating as much of it as we need, and then some, by simply changing certain digital information that has been magnetically stored on a computer. The Krell might have remarked, How very quaint! So what to make of gold’s dive yesterday?  Conventional thinking had it as a flight from a diverse basket of assets into the supposed safety of the dollar. We are not persuaded, however. It is one thing for the newspapers to keep blathering about an economic recovery that is nowhere in evidence for most Americans. But it is quite another for the media to have us infer that the currency of our bankrupt nation is correctly viewed as a safe haven for investors. We won’t argue the point about being bankrupt, either, because anyone who doesn’t understand this by now is living

Goldman's rally with just 21 minutes remaining in the session came too late, was too weak, and too suspicious for us to expect much (if any) follow-through when stocks begin to trade Monday morning. Note in the accompanying chart that the bounce occurred within 0.09 points of an in-your-face Hidden Pivot. On the hourly chart, however, buyers would have to run the stock all the way up to 185.51 to put the minor trend back on a bullish track.

A week's worth of white noise has left the futures in a state of tedious limbo. Friday's zig followed Thursday's zag, and if it wasn't entirely predictable before the opening bell, by day's end it looked like as orderly on the hourly chart as a seismograph of Kansas. The downtrend looked bound for a Hidden Pivot support at 1067.00, exactly 4.50 points beneath the actual low. That will be our minimum objective when stocks open Monday morning, but I'll update Sunday night if it looks like the Furies have had a change of heart. _______ UPDATE:  The futures are headed higher this morning for whatever non-reason, but the rally has the same old heart -- of a chicken -- as last week's go-nowhere, alternate-day bursts.  The 1067.00 target will remain valid in any event, provided 1095.25 has not been exceeded to the upside.

Although the Wall Street Journal’s classy copy desk deserves praise for adapting so quickly to the paper’s tabloid transformation under Rupert Murdoch, the headline writers appear to be struggling to find a balance between truth, sensationalism and, in this case, wishful thinking. Here’s the headline -- and see if you can spot the dereliction of syntax: “Microsoft Feeds Hopes for a Recovery”.  Did you infer that the hoped-for recovery  supposedly being fed by Microsoft encompassed the broad U.S. economy?  We did too, since it was logical to think that’s what the headline meant. After all, who among us knows a single person who even remotely cares whether Microsoft itself recovers from its Vista-induced kamikaze dive?      Turns out we were wrong, for it is solely Microsoft’s recovery that is being hoped for (presumably by Steve Ballmer and the population of Greater Seattle, if no one else). Nowhere in the article was there any mention of hopes for a broad-based U.S. recovery. Nor did the article speculate on whether Microsoft, the General Motors of the software industry, might help pull the rest of the economy out of the hole. Alas, we are left to hope only that the fortunes of the Redmond software behemoth continue to improve. Considering that with each new version of its operating system, Microsoft continues to lose ground to its competitors, Americans might have more to gain from hoping that McDonald’s expands its breakfast menu in 2010 – or that the Chicago Cubs make it to the World Series.  A Disconnect Concerning the Journal’s perennial state of hopefulness, the disconnect between headlines and news stories has become all too typical of the newspaper’s reportage on the supposed recovery. Mainly, it’s a matter of the stories failing to justify the bold headlines associated with decidedly sketchy “green shoots” items.

A dollar short-squeeze has always seemed more than merely plausible to me, notwithstanding the dollar's steady decline toward intrinsic worthlessness.  Drowning in dollar-denominated debt, the world is effectively short the U.S. dollar in cosmic size. The last thing debtors need is to have the dollar become scarce when they come under pressure to settle short-term loans that cannot be rolled.  What will happen when that day arrives, and short-term borrowers cannot beg, borrow or steal dollars?  I asked a half-dozen international-finance professors that question a dozen years ago, and they reacted as though I was crazy. A short-squeeze on the dollar!? What on earth was I talking about?  Since then, a few others have joined me in recognizing such an event is not merely possible, but likely. Click here  to access the latest, fascinating article on the topic.

On Friday, as the week drew to a close, the December futures appeared to be groping for traction near 1053.20, a midpoint HP support.  Some bounces during the afternoon from lows just a few ticks above that pivot produced barely any loft, implying that if the support is breached the correction is likely to continue down to at least 1045.00. If this minor breakdown occurs, a tradable low occurring very near 1045.00 seems assured, since it is backstopped by the conventional support of some lows recorded earlier this month.  You can try bottoming-fish there with a very tight stop-loss, but if it's hit, the next likely stop on the way down would be 1040.70, a Hidden Pivot. Alternatively, to effect a bullish signal on the hourly chart, the futures would need to thrust above 1070.60.  However, it would take just 1064.10 (an ideal spot to look for camouflage) on the very lesser charts to do the trick. _______ UPDATE (1:50 p.m. EDT): 1045.50 held for about half an hour, but the bounce was feeble, and the futures subsequently broke down to a so-far intraday low of 1041.10.  This is most surely bearish for the near term, but it would become more seriously so if today's selloff goes a little farther, exceeding an external low at 1039.00 recorded on October 7. FYI, I am using a 180-minute chart to spot the external lows that matter.

The Dollar Index continues to bounce very precisely from Hidden Pivot targets, but none of its sequential thrusts has been sufficient to suggest that a genuine turnaround is at hand. If DXY should fall anew, look for the next turn at exactly 74.36. Alternatively, a pop today exceeding 76.08, a look-to-the-left peak shown in the accompanying chart, would turn the short-term picture bullish.