August 2010

Russia is having its hottest summer ever, and the effect of this on the wheat crop has driven prices into a parabola.  But even parabolas must end somewhere, so let's use 745^06 as a target, or 770^04 if any higher.  The derivation of both of these Hidden Pivots is shown in the accompanying chart.

We're already short via a backspread we've written off, but the temptation to try again at 107.61, a Hidden Pivot target that comes from the hourly chart (A=96.61 on July 6), is irresistible.  Accordingly, I'll suggest buying four September 104 puts if and when the target is very closely approached. The best way to price the puts is to monitor the bid/asked spread for about 15 minutes as the rally closes on the target. You should stop yourself out of the position if the puts trade for $20 less than you paid for them.  The theoretical risk implied is about $100. including commissions.

Silver has been making steady headway, so let's set the bar high today to tell us whether there is breakaway strength percolating below the surface. Specifically, we'll monitor the "external" peak at 18.820 recorded on June 30. A  move above a lesser peak at 18.690 just to the right of it would probably do the trick, but we'll want to demand "max" performance just to be sure.  Entry for night owls has already been signaled at 18.455 (implying midpoint resistance at 18.530), so you'll be on your own in finding camouflage to board belatedly. The five-minute chart looks right for this, referencing some very small peaks made on the way down from Tuesday's high.

Subtly bullish rumblings in Gold?  The December contract is up nearly $6 at the moment (9:08 p.m. EDT), and although this could be leading toward the usual disappointment on Wednesday, there are some technical details in evidence that are encouraging. Night owls should take note of the midpoint support/resistance I've flagged in the December Comex contract, since it may offer the only "camouflage" we'll see before takeoff, assuming bullion is about to take flight.

The futures have been up as much as $7 Tuesday evening and are currently trading 1192.80, just off the high.  My minimum upside projection is to 1198.20, but the only entry opportunity that I can see panning out would come off a pullback to around 1192.60, the midpoint sibling of the rally target.  It may be well worth night owls' diligence to try to get aboard, since a move above 1198.20, particularly on a closing basis, would indicate more upside over the very near term to as high as 1212.50. _____ UPDATE (12:33 a.m. EDT): Gold pulled back to 1193.30 overnight, narrowly denying us the entry opportunity we'd sought. It was still possible to get aboard for the $13 rally that ensued, but it would have required a camouflage entry strategy on the 3- or the 5-minute chart.  The high so far has been 1205.50, implying another $7 of upside, for a $25 move.  However, the rally is too well developed at this point to expect a conventional point 'X' entry to work except in its subtlest manifestation. 

Two hours into the session, the futures looked like they were headed up to at least 1127.25, having exceeded that Hidden Pivot's sibling midpoint resistance at 1120.25 by 2.50 points.  Instead, they turned tail and bounced lower, suggesting a failure of nerve just beneath Monday's high.  The rally target will remain valid nonetheless unless point 'C' (i.e., 1113.25) is exceeded to the downside, but we would suggest initiating a bull trade only if camouflage materializes in exactly the way show in the chart. The key "external" peak is a very obscure one at 1119.25, and its breach -- though not a breach of the 1120.00 peak just to the left of it -- would subtly announce a possible breakout toward 1127.25.  There are other camouflage possibilities that could develop, but the one pictured is as subtle -- and therefore as safe -- as any I can imagine. _______ UPDATE (3:55 a.m. EDT):  The 1119.25 peak proved important and useful, though not in the way we might have hoped; for instead of providing us with a subtle impulse leg to leverage, the seemingly obscure peak stopped a rally cold that had taken six hours to develop. Since the futures did not exceed the peak -- they double-topped with it at exactly 1119.25 -- there was no impulse leg and therefore no trade.

Bulls failed a key test yesterday when they were unable to push the Dow above 10719.  All it would have taken was a measly 44–point rally, but the blue chip average never even made it into positive territory. What does that mean? Our hunch is that August will be a so-so month at best for the stock market. Using Hidden Pivot analysis, we explain why in a five-minute video, “Bulls Are Chickens Underneath,” that you can view at the bottom of this commentary. Our flat-to-bearish outlook is notwithstanding headlines earlier in the week that waxed optimistic about a global economic recovery. Those stories were based mainly on strong Q2 earnings reported by European banks, but banks in Euroland are no healthier than American banks, which only seem healthy because they were allowed to unload more than a trillion dollars of worthless paper on the Federal Reserve.  The Government’s strategy is to sell the debt securities when the financial system gets stronger, but we don’t expect that to happen.  Instead, we look for deflation to continue for at least a few more years – long enough that the Fed governors, the politicians and the spinmeisters will eventually be forced to acknowledge that the securities, which are mostly collateralized by real estate, will have to be written off. In the meantime, Wall Street seems untroubled by the gathering storm. Yesterday, for instance, although the economic news more than hinted that the U.S. is slipping back into recession after a failed, multitrillion dollar stimulus, the Dow gave up a mere 38 points.  That is surely no show of strength, as we have noted above, but it is indicative of the blissful and evidently widespread state of ignorance that has more or less inured stocks to bad news since March of 2009, when the

Yesterday's dirge did nothing to alter my analysis for the near term, which stipulated that the futures must move above 1210.70 this week to give bulls some leverage. If you're looking something more decisive, use July 13's high at 1221.90 as a benchmark, since that's where bulls would be firmly back in the driver's seat.

The futures continue to lag the Dow, since yesterday's rally in the Mini S&Ps conspicuously failed to create a bullish impulse leg on the daily chart.  That would have taken an 1129.75 print, versus an actual high at 1124.25.  Coming in today, however, a print at 1143.00 is all it would take to remedy this vehicle's seeming timidity, since that would exceed two "external" peaks of daily-chart degree.  We're in crucial territory here, for sure, and it is essential that buyers take out both of the external peaks without pausing for breath if they are to dominate for the remainder of the summer.