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October 29, 2009

Bull Trap in the Works

As anticipated, the 65DMA on the SPX provided another inflection point for price. Yesterday's post outlined two potential paths the bearish scenario could unfold assuming the 65DMA held: either we see a failed attempt at the high or price crawls along the moving average before breaking lower. Equities made it abundantly clear that the latter scenario is out.

s&p 500 daily chart

Anyone still have doubts about the power of 65? I wonder how many suckers got double-suckered yesterday because they prefer to stick with what TA books tell them to use rather than observing and thinking for themselves. Anyway, I'll quit before the vocubulary becomes too pedantic.

We should now be looking for the point which will turn price lower for a more substantial impulse lower. A bull trap is being set. I'm guessing we see the turn either at the pivot just above 1075 or near the 1100 high. Unlike many of my neighbors (electronically-speaking), I do not think the next turn will necessarily take us to new nominal lows, but it will be large enough to make most think we are heading into the abyss. The decline should finish in conjunction with the end of the dollar's countertrend move. We should then see equities move higher into springtime, but the gains will be nothing compared to what precious metals have in store for us.

Speaking of the dollar, guess where its decline was tempered?

dollar chart

So we have a little quandary. How are equities going to move higher when the DX has no room to fall and still hold the pivot? First, there is no rule that says equities and the buck have to move inversely every day. Second, perhaps we see a rather quick failure of the SPX at the overhead pivot rather than at the high. These thoughts are simply postulations at the moment. Sitting and waiting for further development is the primary luxury of being flat, and I enjoy that position at the moment.

Precious metals rebounded strongly today, and the temptation is to chase the move. However, the bigger picture must remain in focus, and right now the picture sports a beautiful view of stacking silver contracts at the end of the dollar's countertrend move. Whether those contracts get purchased at a higher or lower price is not as important to me as the correct entry for optimal risk control.

I'll close this evening with a reference to some leisurely financial reading. A bullish case for gold is laid out quite well by none other than Paul Tudor Jones in the Tudor Investment Third Quarter Letter. While the read may be akin to preaching to the choir for most of us, it is always a privilege to gain the perspective of such a successful trader.


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