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June 15, 2009

Artificial Dividend

The S&P 500 coil from hell, which saw seven straight closing prices with a total range of seven handles, has finally broken, and the result was down. As detailed on the SPX chart posted over the weekend, I now expect the index to retreat to its 65DMA which, depending on the rate of decent, should occur somewhere in the neighborhood of SPX 880. We should then see an attempt at a bounce before finally cracking that moving average and heading into a larger correction.

While I still have equity shorts, they remain the smaller portion of the Docfolio. Precious metals positions continue to dominate my holdings. Let have a look at what to expect from the PMs during a general market downturn.

silver price chart

I expect to see some sort of bounce higher out of this area. If we were viewing a true T1 move, we would then be off to the races, but I'm not so sure.

gold miners

Given the tendency of the miners to lead the metals, these support failures probably indicate a larger correction/consolidation is at hand. If GDX fails to bounce immediately, but rather pushes lower in the face of an already-oversold RSI, I would take it as confirmation of my suspicion. However, we may not really need further confirmation from the miners:

gold price chart

There is no reason to panic about precious metals longs just yet. The most likely message to be discerned from these trend line breaks is the first wave off the November low is over. We are now facing a extended consolidation period (wave 2), which will most likely plant the roots for the typical surge out of autumn into spring. By this time next year, I fully expect gold, silver, and miners to have left current bull market highs in the dust.

In the meantime, traders can hedge themselves with trades such the dollar long or gold short I suggested (and took). For the record, I already took my profits on both of those hedges. I am now looking for some sort of bounce into which I will sell calls against a portion of my GDX position. Think of it as selling the time I think it will take this consolidation to play out. I will choose a strike that is far enough out and sell a block that is small enough that I won't fret getting called out of the shares. If it works out, I will essentially have written myself a dividend check on the holding.

On a closing note, natural gas put a punctuation mark on its triangle breakout:

natural gas prices


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