January 2009

The futures were moving timidly higher Monday night, probing blindly for resistance. Since the rally comes off a low that exceeded our 863.00 target yesterday by nearly three points, we can only infer that this is not an episode destined for glory. Even so, it threatened to lift a Hidden Pivot resistance at 873.50, and thence perhaps to set the curtains ablaze overnight. I suggest judging the buyers' tenacity on the basis of whether minor thrusts on the 5-minute chart are able to pop past two prior peaks without a bend.

Citi should have gotten some lift from news that JP Morgan will take Smith Barney off its hands for more than mere peanuts. Instead, the stock has dropped like a brick, shedding nearly 20% of its value yesterday on top of an 8% loss in the previous session. All of the other financial stocks have come down hard as well, but it remains to be seen what has been troubling them. Meanwhile, the 14.79 target given here yesterday for JP Morgan, representing a 40% plunge from current levels, implies that something wicked is brewing.

The futures bounced for $7 from the 821.10 target given here yesterday, but the subsequent relapse to an intraday low at 815.10 is not a healthy sign. Whatever happens in the next 2-3 days, the juiciest buying opportunity I could conceive of -- one with relatively little risk -- would come into focus if the futures trace out a pattern similar to the one shown in the chart. Which is to say, our entry would come at the midpoint of whatever C-D leg follows the sharply impulsive drop from Friday's 869.30 high.

We challenged readers to tell us how inflation could possibly occur with asset values, credit and business collapsing around the world. The response has been overwhelming and hugely insightful, and we promise to air your comments in the days and weeks ahead. (So that you don’t miss out on the discussion, click here to receive our free commentary each day by e-mail.) One submission in particular warrants the urgent attention of all, however: a recent essay by Peter Schiff, The Fed’s Bubble Trouble. A fellow gloom-and-doomer with an impressive forecasting record and the guts to tell it like it is, Schiff offers a scenario that is as persuasive as it is frightening. It also holds extremely bullish implications for gold, although we would be wary about holding onto the stuff for too long (see the essay linked below). Schiff begins by noting that speculators started loading up on Treasury paper a few weeks ago, after the Fed explicitly committed itself to buying as much U.S. debt as it takes to hold interest rates down. For the speculators, this is practically a guarantee of riskless profits, and Schiff is most certainly correct to infer that the day is coming when the speculators will unload their inventory on the Fed with a vengeance. I won’t spoil the suspense for you concerning what is likely to happen next, since Schiff has spelled it out so lucidly in his essay. But suffice it to say, the outcome is hyperinflationary, and it would leave the financial system in smoldering ruins. Although there do not seem to be any significant holes in Schiff’s thesis, he doesn’t tell us how an investor might protect himself as the financial system whipsaws from deflation to hyperinflation, and then back to deflation. And that is exactly the way we believe

In quiet trading Sunday night, the futures were bound lower, presumably to a Hidden Pivot support at 866.50. There are other targetable downtrends in play, but a bid at 866.50, stop 865.75 would be the most conservative way to attempt bottom-fishing. I have included a chart that shows the ES at around 8:30 p.m., so that you can judge for yourself whether the opportunity has been compromised.It would take a robust rally to do so, since the point 'C' here is 914.75. _______ UPDATE: The futures slid past the 866.50 target, putting in a shaky low at 863.00. This corresponds to the higher 'A' in the chart, rather than the one-off 'A' that I used. If you plug in 942.75 instead of 939.75, you come up with a downside target at 863.50. This has been noted in the chat room in reference to bottom-fishing at the new target. A three-tick stop-loss would have been applicable, but I have suggested not attempting to enter the trade if you did not catch it the first time. With the financial stocks getting savaged, today's weakness has the potential to turn into an avalanche.

Friday's $24 upthrust, encouraging though it may have seemed, failed by a little more than $2 to surpass a key short-term peak at 871.40. If it had succeeded, that would have created a promising new impulse leg on the intraday charts. As it stands, and unless 871.40 is breached, the burden of proof over the near term will remain with the bulls. Specifically, a bearish, 821.10 target will remain in effect, as well as an 846.25 midpoint. A close below that last number, or a decisive move below it intraday, would raise the odds of 821.10 being reached soon. _______ UPDATE: Our target nailed the low of a $34 decline within a dime. Thereafter, the subsequent bounce of (so far) $5 would have allowed a stress-free exit on partial profit-taking, or a generous trailing stop on a single-contract position.

Even with government backing up-the-wazoo and a fat price from Morgan for Smith Barney, Citi has not looked very impressive; nor have any other financial stocks. This seems a clear warning that the strong consensus, even among reputable technicians, calling for a big stock-market rally to begin the new year should be viewed with heavy skepticism. Note in the accompanying chart how JPM closed beneath a well-defined midpoint support at 26.19, implying more weakness all the way down to 14.79. Citi is well above its corresponding midpoint support at 3.12, but that's only because of the helping hand it has been receiving from a Federal Reserve evidently determined to chop up the bank and dispose of its parts before concern re-erupts over the quality of its assets.

The 85.22 pivot shown in the chart can be bought with a stop-loss as tight as 6 cents, and you could also short near 86.11, the c-d midpoint, with a stop as wide as 20 cents. This is for experienced traders only, and you'll be on your own if either order fills. Officially, we'll try to buy two Feb 87 calls (DAVBI) if the stock comes down to touch 85.24. _______ UPDATE: The six-cent stop-loss would have worked, since the Diamonds have bounced sharply off a so-far low this morning of 85.18 -- four cents beneath the pivot target. Now, offer one of the calls to close for 3.25, making the order o-c-o (one-cancels-the-other) with a stop-loss on two contracts at 3.10. _______ FURTHER UPDATE: We scratched the trade when the Diamonds resumed their decline after rallying to 85.69. The fact that the rally lasted for only 30 minutes is evidence that still more weakness lies ahead.

Hey, inflationists! If any of you can explain how we’ll recognize the return of inflation, or perhaps the beginnings of a hyperinflation, I’m all ears. Click here and drop me a line, because I’d really like to know. Will hyperinflation steal up on us in the form of a doubling, then quadrupling, then octupling, of the minimum wage? Will homes in my neighborhood that have been sitting on the market since 2007 start to attract bidders waving freshly banded packets of $10,000 bills? Can we expect to shell out $100,000 at some point for a cart full of groceries? Will it cost $500 to ride the subway? If I hear from anyone whose inflationary logic is both detailed and persuasive, I’ll reprint it here. But let me tell you up front that I’m skeptical -- so skeptical, in fact, that I doubt that we would see hyperinflation even if the Federal Government were to pay off the mortgage of each and every American, or declare a one-year moratorium on income taxes. I will explain why in a commentary that is scheduled to go out over the weekend. I also intend to make clear why I believe that only those who possess physical gold are likely to come out ahead -- relatively speaking -- as deflation crushes all asset values. If you are not a subscriber and want to receive this commentary free via e-mail, click here. Meanwhile, as promised, here’s a letter I received from an erstwhile gold bug who is no longer certain about bullion’s future. The author is Myron P, a Canadian who like myself was once a floor trader. He writes as follows: Let's see if I can get these thoughts across in something less than a thesis. Overall question: Which way for Gold? I think up,