Friday, June 4, 2010

Relatively modest rally targets for stocks and gold are taking too long to reach, sucking all the fun from the game.  Will DaBoyz be able to leverage the Friday Effect to remedy this tedium?  If so, the best plan for today might be to enjoy your leisure until the final hour.

Someone in the chat room wondered yesterday whether the dollar's strength might be ebbing, but look at the chart yourself and cease to wonder.  I see only a consolidation for a push to at least 89.62 that, once it gets started, will be impervious to supply. Gold has more than held its own during the dollar's curious run-up, and so we shouldn't be too concerned about the prospect of yet more strength in its paper nemesis.

A modest rally target at 1118.50 still awaits the short squeeze that alone can carry the day for nitrous-sniffing bulls.  It's obvious that ordinary, bullish buying -- Kudlow and perhaps his aunt from Minneapolis -- was not nearly sufficient to push the futures through Monday's ephemeral highs. More such supply awaits near 1122 and will give DaBoyz an incentive to milk the Friday Effect for all it's worth, so be prepared for a possible eruption of silliness in the final 30 or so minutes of the trading week. _______ UPDATE: With the Dow trading just above 10,000, I posted a minimum downside target of 9775 in the chat room.  The equivalent for this vehicle 1052.25.

Turning cautious is not necessarily turning bearish, although there will always be the question of whether a major correction looms whenever the futures grow heavy for a few weeks, as they indeed have. My strong feeling is that no particularly punitive swoon awaits, even if Comex Gold continues to demonstrate that it is in no great hurry to push up to minor rally targets, let alone major ones in the vicinity of 1300.  Most immediately, and from a technical standpoint, August Gold will need to avoid falling to 1191.00, the target of the pattern shown, in order to buck up buyers. That is a 'd' target, and it would be preferable if any decline today not exceed its sibling midpoint at 1200.70.  We'll be watching closely in any case and will adjust our numbers if the point 'C' changes. (See also: our recent gold coverage.) _______ UPDATE:  Nice rally off an 1198.10 low today, but the futures still need to eke out three more ticks to nail it for the bulls.  As things stand, they have failed by that margin to surpass a 1221.90 peak made yesterday on the way down. This means the rally is not yet impulsive on the hourly chart, and that fact should leave us mildly skeptical.

A shaky performance yesterday brought the futures down as far as they could go without tripping another alarm.  Notice that the low came within a single tick of the 17.830 correction target shown.  It is mildly bearish that this move exceeded the 18.150 midpoint support, but we'll give bulls the benefit of the doubt, short-term, as long as the low holds.  Because the decline was impulsive, we should set a high bar for a turnaround. An 18.175 print today would do it on the 5-minute chart, but it'll take nothing less than 18.730 to restore the hourly chart to bullishness.

Although the news media have tried without success to portray the Tea Partiers as racist right-wing agitators, the movement will only continue to gain strength and mainstream support as state and local budget issues come to a boil.  All politics is local, as they say, and the battle lines are being drawn in cities and towns across the U.S. for what could eventually turn into a civil war between taxpayers and public employees.  Private-sector workers are understandably angered in these very hard times by the unseemly spectacle of government employees fighting to hang onto the outlandish perks and benefits that they’ve long taken for granted – benefits that have in fact helped push many state and local governments to the brink of insolvency. California is the mine canary on this issue, and the public-employee unions there have been digging in their heels. As reported by our colleague Mish Shedlock, there’s a bill before the Assembly that would make it much more difficult for cities to go bankrupt. Assembly Bill 155 represents, in Mish’s words, an attempt by “outrageously overpaid California public union parasites” to “[suck] the last drop of blood out of every taxpayer.”  Quite so, we fear, since the bill would drastically limit the ability of such seriously beleaguered cities as Los Angeles, Redding, Sacramento and San Diego to enact the drastic measures that alone can bring their operating costs into line with tax revenues.  Reducing what amounts to absurdly generous pensions and health benefits would seem like a no-brainer these days, and it is probably inevitable that this will eventually occur. But for now, the public unions in California and elsewhere have been pushing just one solution: raise taxes. That may be a non-starter for most of us, but it has not kept Assembly Bill 155 from reaching

A wise friend who has Bob Farrell's Rules posted on his wall has written insightfully about Rule #8:  "Bear markets have three states:  sharp down, reflexive rebound and drawn-out fundamental downtrend."  Here are his comments: "While pondering how not to blow it by failing to cover my shorts at some reasonable level now that we are in the 'C' Wave of this Secular Bear Market, several light bulbs went on. I remember back in October 1987, we all went to a ballroom at the Hilton (there was no internet back then) to tune in to a Merrill Lynch closed circuit presentation for AEs and their clients to express the Merrill Lynch view after the Crash. The Merrill Lynch View back then was pretty much the Bob Farrell View and Bob was unequivocal about the 1987 Crash being completely different from the 1929 Crash. Unlike every other Wall Street Analyst, Bob correctly identified the Bull Market that began in 1982 as young and the Crash as a market event, not a forecast for Depression. That reminded me not to fight the last war. If the stock market crashes now, it will not be a market event so much as a fundamental event, algorithmic trading not withstanding. That is because we are in the early stages of a secular credit collapse and the fundamental, economic part of the crisis lies ahead. I was reminded of a quote that Art Zeikel included in "On Thinking". The quote was from Dick Stoken: " Because human psychology is slow to change, a broad economic move usually occurs in three stages. The first stage begins when some unexpected event shatters an overdone psychological environment (like the bursting of the housing bubble). Yet, while some people respond immediately to this new lesson, most people, as they find it outside their past experience, do not