July 2010

Friday being a quasi-holiday day that I'd expected to be a snooze on Wall Street, I'd promised to provide fresh guidance only if something "interesting" happened in the markets on Thursday. Yesterday surely qualified, and so I have addressed the action with timely new touts for the E-Mini S&P and Gold.

I cannot recall ever having seen a selloff obliterate Hidden Pivot supports as easily as yesterday's landslide did. I'd proffered 1212.80 target as a place to "back up the truck" because it was an exceptionally clear and compelling target.  In the actual event, the futures took a brief, $7 bounce from two ticks above that number...and that was it.  The fact that the rally died after just a few bars warned of the carnage yet to come.  The selling was best explained by Dan Norcini at Jim Sinclair's web site. He  saw it as an unwind of gold/euro hedges.  The euro soared yesterday, apparently buoyed by the idiotic notion-of-the-day -- that perhaps Europe's financial situation is not so bad as was thought earlier ("earlier," meaning, perhaps, the day before).  This is nonsense, since Europe is in the same deflationary bog as the U.S., irrespective of whether they take "austerity" to heart or instead choose to run the printing presses at full steam.  Equally nonsensical was the idea that gold was due for a thrashing just because of a (presumably fleeting) blip in sentiment favoring the euro. In fact, Gold has been rising -- and will continue to rise, once the hysteria we witnessed yesterday subsides -- simply because the entire global financial system is being kept (barely) afloat by lies, hubris and an epidemic of delusions.  Ditto for the dollar and U.S. Treasurys -- possibly the worst excuse for "safety" that an investment world gone insane could conceive of.  We'll give Dan Norcini the last word, since his assessment seems dead-on: "Gold is not going to lose its safe haven status because we experience a day of trade unwinding on a large scale. When the focus shifts back to the woes involving the health of the US currency, gold’s fortunes will revive and it will begin moving higher." Concerning the technical picture, there is no question that yesterday's slide

Hysterical short-covering in the euro yesterday is said to have been the cause of yesterday's plunge in commodities, including gold and silver, and the drubbing of the dollar.  The jury is still out on the rally's staying power, however, since it failed to generate a bullish impulse leg on the daily chart (see inset).  That could change as early as today with a push touching 1.2685 -- about 1% above yesterday's high.

Blame seasonality for the fact that sellers were unable to put stocks down for the count yesterday.  Weakness remains the underlying theme, however, since DaBoyz were once again unable to rally the Dow back to unchanged even though volume was relatively light.  The 992.50 target we've been using remains as compelling as ever, but our joy-ride will still be subject to a possible short-squeeze rally today to as high as 1061.00, the midpoint sibling of 992.50.  I wouldn't suggest shorting there mechanically if the opportunity arrives, but it shouldn't be too difficult to find camouflage on the first 'abc' downtrend following a print at or near 1161.00.

[This commentary from Rich Cash drew such a heavy response that we are re-publishing it today so that it can enjoy wider readership and a second round of debate in the Rick's Picks forum.  It is the second of two radical proposals we have aired for dealing with debt. In the first, Ben Rositas, a frequent contributor to the Rick’s Picks forum, argued for the redistribution of America’s gold bullion to households and to all who are owed.  In the essay below, Cash, another forum regular and blogger, broaches the idea of a return to Biblical Jubilee, or something like it. Although we’ll concede that neither idea is even remotely feasible politically, consider the alternative: a debt deflation that locks the economy into a grinding Depression for the next twenty years. RA ] Here’s Rich, with a message of (debt) forgiveness in his heart – and a plan: “One Friday in the San Francisco Financial District after work, a group of movers and shakers got together at Harrington’s Pub for a liar’s dice game that rocked their foundations and changed their lives.  There was such intense play, they ran out of Federal Reserve Notes. They played with cigarettes, matches and pieces of paper IOUs until stakes reached trillions. They worked in an industry where the credit of their word was their bond, yet the stakes of the game became so high, they agreed to forgive each other’s IOUs so they could live to work and play again. Leviticus 25 “In the Jubilee Year of Leviticus 25, those enslaved because of debts are freed, lands lost because of debt are returned, and community torn by inequality is restored. U2’s Bono invested a lot of time with the Jubilee2000 organization and World Economic Forum, arguing the best way to promote the development of poor countries

The trendline noted here yesterday still looks like the most logical place to look for support. Its rising slope implies a bounce from anywhere between 18.270 and 18.290, depending on what time of day the support is touched. Alternatively, buyers would need to push the futures to a close above 18.900 today to put bears on the defensive.  That's a midpoint resistance whose 'D' sibling lies at 19.43.

The futures remain in a delicate recovery, having topped two ticks beneath the 1249.00 rally target flagged here yesterday.  Odds favor more weakness over the near term. Even so, I'll recommend bidding 1230.80, stop 1230.40, if the futures fall to that price without having exceeded 1248.80 to the upside. The rationale for this trade is shown in the accompanying chart. _______ UPDATE (10:36 a.m. EDT):  A flurry of weakness stopped us out this morning for a loss of about $40.  Our 1230.80 target was a midpoint pivot tied to a 'D' at 1212.80 that should be viewed as a "back-up-the-truck" buying opportunity. The next stop below is 1223.30, but it's possible the futures will hold here, at least for today, since they may simply be homing in on the "structural" support represented by Tuesday's low, 1227.60. _______ UPDATE (1:10 p.m. EDT):  The decisive breach of 1212.80 by $7 has created a bearish impulse leg of daily-chart degree. The last time this occurred was exactly a year ago. Gold subsequently rallied for a few days and took one more nasty leg down before embarking two weeks later on the powerful rally that achieved the recent high at 1266.  _______ UPDATE (2:41 p.m. EDT):  The tradable low came at 1213.00, two ticks above the pivot, but produced a bounce of just $5 before the futures relapsed and headed much lower. Breakdown stops could have been anywhere from 1207.30 to 1205.50, yielding a loss of as much as $750 per contract if no partial profits were taken on the bounce.  I would not suggest carrying a position overnight, since the selling here is the most persistent and powerful that I can ever recall, blowing out Hidden Pivot supports effortlessly.

There will be no updates or fresh commentary on Friday or Monday, although I will post timely guidance for traders if stocks should do anything interesting on Thursday or Friday.  Also, because Rich Cash's "Jubilee" essay drew such a heavy response, I plan to re-post it on Friday so that the discussion can continue on the front page.  Have a great Fourth of July weekend!

Were bulls saved by the bell?  By my lights, the Diamonds were on their way down to at least 96.13, or possibly even 95.42, when yesterday's session ended.  If so and the lower number is approached, that would bring our short offer of four July 90 puts within range. Time decay has pushed down their value since I first suggested offering the puts for 1.40, however, and they would now be worth closer to 1.00 if the underlying vehicle hits 95.42 by week's end.  Accordingly, I'll suggest lowering the short offer to 0.95, with 0.10 of discretion. The important thing is to short them irrespective of their price if and when DIA gets near  95.42.  We continue to hold two August 98 puts for 1.06 and four July 96 puts for 0.70.  I've included a snapshot of the calculator I used to determine a fair value for the puts.  The 37.5 volatility comes from TradeStation. _______ UPDATE (Friday, July 2):  DIA fell to 96.17 today -- four ticks from the projected low -- setting up the obligatory pre-holiday bounce/waft.  Although there is zero buying interest other than very feeble short-covering, sellers still lack the inspiration and/or moxie to effect a washout.  The 95.42 target is still valid, but bears should be cautious about the rally threat because of the precise bounce that has occurred from our first target.