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June 26, 2008

Commodities in Control

Today's action represented the post-FOMC digestive process, and it is clear that commodity prices have moved to the forefront of market psyche. Despite the enormity of the crisis facing our banking system, a significant chunk of market participants still feared a rate hike would come out of yesterday's session. What nonsense! Such fears were holding back commodity prices, but with the uncertainty out of the way, the floodgates opened. Oil surged $5. Precious metals gained 4%. Sugar, cotton, copper, gasoline, natural gas, wheat, corn, coffee and most other commodities provide very profitable days for their holders.

With inflation taking another lick out of our economy, stocks tumbled. Major indexes were down close to 3%. The selling was relentless. There was no head fake, no bounce of 1295 for the S&P 500. Just pure, unadulterated selling. The Dow set a new closing low for the year. The S&P 500 is close behind. It is nasty, and the bear market is doing what bear markets do: falling when the technicals say we should bounce.

To be honest, I fully believed my postulation from yesterday's post that we would test the 1295 area and then rally. In fact, when the SPX was in the vicinity of that target, and my indicators blared oversold conditions, I took a long trade. It is a testament to my day trading system that I actually scalped a profit on the long side out of today's bloodbath. I would have much rather been short, so kudos to those who saw this coming.

Is it conceivable that we now get the bounce I have been anticipating? Yes, but if so, I now expect any bounce to be much shallower than anticipated. We're talking Lindsay Lohan shallow. Any rally is likely to be sold faster than an employee of Heidi Fleiss. Whereas yesterday I thought a bounce would back-test the 1370 area, I am now looking at the 1325 pivot point. On the other hand, we could just crash.

Well, anyway. There is one curious but positive note to be taken from today's action: the BKX did NOT break its low from two days ago. In fact, we saw panic selling in a few of the major banks:

stock chart

stock chart

stock chart

Let's turn our attention back to commodities, specifically precious metals.

gold chart

oil chart

I believe... and have believed for some time... that the easiest play out there is to own precious metals. The Fed under a Bernanke chairmanship is going to fight this bear market tooth and nail. Greenspan did the same thing in the 2000-2002 period. Let's look at what happened to gold during that nasty period:

gold chart

And the miners?

stock chart

Yep. I may scalp some trades off the equity markets, but I won't let go of my core positions in GDX and the metals themselves. See you tomorrow.


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