Market Outlook

Our real-time Q&A session yesterday covered quite a bit of ground, from the XAU to cotton futures, to LEAPS and Kansas July wheat, to Korean Pohang Iron and Steel (aka Posco). I was out of the office most of the morning and therefore unable to monitor the progress of the E-Mini S&P, whose high at 1191.75 fulfilled the forecast to the exact tick. Unfortunately it did so just after the day-session ended, making it a short for night owls only. Hidden pivot targets seem to work as accurately after-hours as during the regular session, but they must be traded more cautiously, since there is less liquidity to get one out of trouble. I'm more inclined to trade at hidden-pivot supports and resistances when they are touched at least two hours before the final bell. However, because I'm often up till 4 a.m. Eastern Time, I may be able to offer night-session DAX analysis for all of you insomniacs. We've also been looking recently at the E-mini Russell 2000, a vehicle which evidently is attracting its share of former S&P traders. Preliminary evidence suggests that the Russell dances fairly precisely to the rhythm of hidden pivots, but perhaps not quite so precisely as the S&Ps. Yesterday, for instance, my forecast called for a strong rally in the Russell 2000 to 628.30, and I suggested shorting there with a relatively wide stop at 629.10. The actual high was 629.90, which, although reasonably close, diverged from the dead-center bullseye achieved by the S&P target. What could account for the discrepancy? The simplest answer is that the Russell has been stronger than most other indexes lately. In fact, it is the only index for which we track and trade a mini contract that has already exceeded the market-wide highs achieved on January 18. While

The Dow Industrials would have finished the day unchanged, if not for the wallop that Merck took around mid-day. Shortly thereafter, I posted a Bloomberg article by Michael Lewis that marveled at the complacency that has seemingly kept financial markets from unraveling. Complacency was the theme of Friday's commentary, but Lewis took it to another level: 'On the face of it, the sheer calm in the U.S. financial markets is bizarre,' he wrote. 'The sort of bad things more likely to happen now than just a few years ago -- bombs exploding in shopping malls, U.S. air travel suspended for weeks at a stretch, religion-inspired coups in nations rich in either oil or nukes, the American military bankrupting the American government -- would seem to be just the sort of things that might disrupt the American economy, and panic the American investor.' It's been quite a while since we saw even a hint of such panic. I can't remember when, actually. But, Merck aside, investors were cool, calm and collected Friday while the news media were getting all lathered about the many things that could conceivably go wrong when Iraqis trek to the polls on Sunday. If there was any sign of trepidation in the markets, neither was it apparent in the bullion pits. Gold, historically a sensitive barometer of global tensions, was the deadest we've seen it in a week, trading inside the previous day's placid range before settling 80 cents lower on the day. (Click on image to enlarge) What Will Move Gold? What disquieting turn of events could dislodge gold from its funk? I received a chart (shown above) recently from Mike Korell at Chartsedge.com that provides a basis for speculation. It shows bullion quotes in a state of mild agitation until the end of February, then

I've been increasingly eager to short this market all week, but it stubbornly refuses to roll over. Even more frustrating is that the feeble rallies that have scored marginal new highs each day have fallen just shy of hidden-pivot targets where I'd told you to get short. The S&Ps, for example. The nominal uptrend has pointed for the last couple of days to a tradeable top at 1179.25. Although the futures have been heading in the right direction, their progress has been one millimeter at a time. Yesterday's high in the S&P futures, 1.25 points above Wednesday's, was 1178.00 ' not quite sufficient to trigger our short offer. But neither was the intraday bottom low enough to get us long. Our bid was at 1168.50, but the E-mini never went below 1170.25. Thinking the action might be more rewarding in the mini-Russell contract, I segued to a different trading screen. But it didn't take long before I decided to call it a day. Although recently the Russell index has shown the best relative strength among those that I track and trade, even it came up a hair shy of my offer, as the chart below shows. It feels like stocks are about to take a dive, and I know I'm not alone in thinking this. But as long as complacency rules, we must accept that they are likely to go nowhere. (Click on image to enlarge) Does the Market Know How to Price Al-Qaeda? By Michael Lewis Jan. 28 (Bloomberg) -- If in late 1999 someone had told you what the world would look like in early 2005, you would not have been surprised when they also told you gold would be near a 16- year high and oil would be approaching $50 a barrel. What you might never have guessed

Here's an eye-grabbing story filed from Switzerland yesterday by an Associated Press reporter: 'China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist said Wednesday at the World Economic Forum. At a standing-room only session focusing on the world's fastest-growing economy, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, said the issue for China isn't whether to devalue the yuan but 'to limit it from the U.S. dollar.' 'But he stressed that the Chinese government is under no pressure to revalue its currency. China's exchange rate policies restrict the value of the yuan to a narrow band around 8.28 yuan, pegged to $1. Critics argue that the yuan is undervalued, making China's exports cheaper overseas and giving its manufacturers an unfair advantage. Beijing has been under pressure from its trading partners, especially the United States, to relax controls on its currency. 'The U.S. dollar is no longer -- in our opinion is no longer -- (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time,' Fan said, speaking in English.' Deficits Matter CNN was there too, but played a somewhat different angle: 'Massive U.S. deficits pose a major risk to the world economy, which is enjoying its best performance in decades, and correcting them will prove tricky, top economists and business leaders said Wednesday.' If you're wondering why the dollar got hit yesterday, chalk it up to the powwow in Davos. Not that there haven't been a hundred good reasons for the buck to continue falling. But the current bout of weakness has come amidst a short-squeeze begun

I tried to get across the message yesterday that we needn't sit on our thumbs while waiting for the precious metals sector to come alive. Like many of you, I hold some mining stocks that I'd rather not think about at the moment, DROOY, Endeavour and Pacific Rim among them. But there are also some solid winners like Cepheid, and oversold bargains like Aquila, that have more than compensated. The bullion stocks will have their day, I'm quite sure, but if that day doesn't come soon, I'd rather not be in the position of having to hope for better. In the investment world, hope is the last refuge of the loser. Better to act than to hope, and to steer your capital toward the best possible returns rather than remain frozen at the wheel. I don't mean to suggest that the picture for bullion is grim. Far from it. But it's impossible to ponder the chart below without concluding that neither are prospects particularly sunny at the moment. Yesterday's $5+ drop affirmed that there is insufficient interest to create bullish impulse legs even on the hourly chart. The March contract came within less than a dollar of doing so on Monday, yet it couldn't muster that final push that would have turned the short-term trend bullish. Now, depending on which of two minor peaks we use as point 'A', the futures could fall to either 416.30 or 407.80. We'll know soon enough, but regardless, there's no point in remaining paralyzed until we are proven right or wrong. (Click on image to enlarge)

With crude prices stealing up on $50 once again and elections in Iraq just five days off, the bulls should be prepared to write this week off. For our part, we've been focusing on Dow and S&P targets somewhat below the market, attempting to bottom-fish hidden-pivot supports with very tight stops. They are not especially ambitious targets, just minor-cycle supports that ordinarily should be good for a nice pop in the first hour or two of the trading day. We must have plenty of company waiting for lower prices, though, because stocks have been giving up ground only grudgingly. In other words, despite rising oil quotes and escalating tensions in Iraq, investors are not exactly tripping over each other to get to the exits. Mondays have been especially turgid in this way, and yesterday was as soporific an example as we've seen in a while. The 15-minute chart below shows how the E-mini S&P oscillated within a 5-point range for most of the day before finally taking the path of least resistance lower. We had a bid in all day at 1159.25, but it went unfilled. Another bid in the mini-Dow awaited at 10371, and although it was hit when the futures were on their way to an intraday low at 10367, the print came too late in the session to be worth much. (Click on image to enlarge) For those of you who crave action in the mining stocks, the recent focus on index futures must seem like we're just biding our time. Not exactly. We're simply trying to exploit whatever price movement exists, regardless of its pedigree or provenance. But much as I'd love to shout 'Buy gold!' from the rooftops, I'm skeptical that this is the right time. My gut feeling is that the bear rally in

February gold turned energetically higher on Friday without having quite reached the 418.70 correction target I'd advertised. As a result, the near-month contract now looks like a solid bet to reach a hidden pivot at 431.20, probably within a day or two. This scenario impelled me to put out a bulletin intraday for subscribers eager to jump aboard. I included an intraday chart, since the price pattern that points to 431.20 is such a beauty. Actually, it's about as visually appealing as a wart, but it is just such hidden-pivot patterns that seem to play out the most precisely and reliably. I've included the chart in Monday's Touts along with instructions for getting short, even if only as a swing-trade. I've found that that's a low-stress way to back into a long position ' i.e., with a stop-loss cushioned by profits from a short that has preceded it. If you have a good idea of where the short-able top will form, then why not? Of course, there are no guarantees in this business, but odds of the target being reached are now about 80%, up a tad from the 75% given in Friday's bulletin. We should be encouraged if that happens, but I have my doubts that gold futures will be able to convert this booster thrust into the moon shot we've awaited for so long. Why? For one, too many of the gold issues we track have yet to reach their pullback targets. And for two, the Dollar Index doesn't look like it's about to roll over. In fact, the only technical evidence I can find to contradict this is the incipiently bullish look of the euro's daily chart. As you can see in the chart below, it wouldn't take much of a rally over the next day or

The dollar's modest rally yesterday stalled within mere hundredths of a point of a hidden-pivot target, but don't expect this flimsy impediment to withstand another charge. If and when it's breached, the March dollar contract will become an odds-on bet to climb at least another two percent, putting further pressure on gold quotes that have barely managed to hold their own since dropping precipitously in the final week of 2004 and the first week of the new year. I've already precise provided downside targets for the XAU, the HUI and bellwether Newmont, but below is another to help corroborate a potentially important turn in the dollar/gold relationship. Basis the March contract, the Dollar Index looks to be staging for a run-up to at least 85.47, provided it can get by a lesser hidden pivot at 83.76 that capped Tuesday's thrust. We should pay close attention as the higher target is approached, since its breach, even if slight, would imply that both bullion and the dollar are likely to continue in the same direction they've been moving ' lower and higher, respectively. (Click on image to enlarge)

News of November's record-breaking trade deficit sent the dollar tumbling yesterday, but don't be surprised if investors take leave of their senses soon again and the dollar resumes its bear rally. Until Wednesday, the buck was having a pretty good year, actually, with a gain of nearly 5% against the euro. It's a dead-cat bounce, to be sure, but the cat was acting as though it was about to receive new life from dollar shorts grown increasingly nervous about being on the wrong side of easy money. However, if a short-squeeze was indeed percolating, word of a record $60-billion trade deficit for the month of November put a lid on it, at least for the moment. This means that goldbugs who celebrated yesterday's bounce in precious metals may have been somewhat premature. I've reproduced a chart of the Philadelphia Gold and Silver Index immediately below that shows why. The XAU, which ended the day at 95.05, has a downside target at 86.46 -- about 10% below current levels -- that looks likely to be achieved. (Click on image to enlarge) Three Reasons There are three reasons for this, all of which derive from hidden-pivot rules. First, the A-B impulse leg that in December initiated the current bear cycle was clean and decisive, breaching two prior lows without an upward correction of more than a day. The leg is shown in yellow and extends from 110.76 to 95.93. A second bearish sign is that the midpoint of the prospective C-D leg, 93.89, was breached without generating a discernible bounce. And third, stochastic lows made, respectively, in early December and early January correlate with descending price lows. This non-divergent pattern suggest the trend that produced it ' i.e., the downtrend ' will continue. *** Try It While It's Still Free Futures traders