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February 12, 2009

Gold is King

That was one hell of a gap fill. The magic goggles must have been revealing the 3:00 SPX chart when I gazed through them last night... or at least the non-government interference version of the action. Equities played out exactly as anticipated except for that late-day ramp. I did expect the SPX 805 level to be defended again, but certainly did not see a 3% spike in the works. I was half fortunate to have been skeptical of the sell-off due to the fact that the NDX was showing strong relative strength (see the comments under yesterday's post), and because of this view I started scaling out of my shorts as price broke the morning lows on the SPX between 2-3:00. I say "half fortunate" because I only got out of half my shorts before the moon shot. It was nevertheless a profitable day for the Docfolio.

The pressing question now... or perhaps I should say "squeezing" question... is whether we just witnessed a significant turning point for a greater equity rally or simply a nasty short squeeze. I am unabashedly going with the short squeeze scenario for several reasons. First, the ramp was spurred by another numbskull attempt to save the world by our leaders. The present inanity involves stealing taxpayer dollars to support irresponsible people who bought homes they could not afford. Of course, loads of those stolen taxpayer dollars will be burned in bureacratic overhead. Naturally, the plan was worded in a slightly different manner by the presenters, but semantics aside, markets are likely facing the same result witnessed every other time the government has squeezed the market: failure within a few days. When will these clowns learn that central planning doesn't work. (Maybe the italics will get their attention.)

Second, the big boys sold the 3:00 squeeze. As of that hour, the spyders were nowhere to be seen on the Wall Street Journal's Selling-on-Strength chart. By the close, they handily took the #1 spot with a resounding $247M of selling. Finally, although today's price pattern formed a bullish hammer on the SPX chart, it did so on weaker volume than recent days. Hammers have much more efficacy when they occur on standout volume.

stock index chart

Zooming in to an hourly view, we have a very bearish pattern:

stock index chart

I've got to think today's squeeze was part of the shake out preceding a plunge. Based on the height of the consolidation on the hourly chart, any big selling wave should take us to the vicinity of the November low, and I will be hunting spots to re-apply the shorts I closed today.

Finally, I want to close with a note on trading precious metals. I know that a large portion of The DOCument's readers are subscribers to Gary Savage's newsletter. Our recent scribings on the subject of chasing this gold move have, on the surface, seemed to differ. However, we are not really so different. We are both currently long PMs with sizable chunks of our portfolio. My core position, which was built several years ago, currently constitutes over 25% of my total net worth (not just of my trading accounts). It is a position I will hold until we see a Dow/Gold ratio of one (sound familiar to you Smart Money subscribers?). For this reason I am quite comfortable waiting for an entry to push my bets. The entry may come at a higher price, but the key is that I must personally have a handle on the situation. Otherwise, I could get shaken out too easily and at the wrong time. Each trader's approach and tolerances are different, which is why we each need a different plan. But in my opinion, any plan that does not include a substatial core position in precious metals is simply reckless.


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