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January 12, 2009

Golden Eye

Equities hit the skids again today as earnings season got kicked off. A large part of the drop can be attributed, I believe, to that giant sucking sound coming from the bond market. The long bond rocketed a point and a half. Curiously, corporate bonds, which are only a step away from their own implicit government guarantee, tanked. It seems there continues to be very little appetite for risk in the hands of big money these days.

Another curious thing happened in the S&P 500:

index chart

As you know from recent posts, I've got a close eye on the volume situation. It would be frivolous to read too much into a small uptick, especially since it is the first time daily volume has increased on this pull-back. However, if volume ticks up on a few declining days in a row, it would be a concern. Even if we are ultimately forced to conclude this sell-off will evolve into something more ominous, I would expect a back-test of the 65DMA before the big dive, so I am not rushing to pile on shorts.

Back to bonds, I'm not totally buying into the strength we've seen the last few days.

bond chart

I believe bonds will present a tremendous shorting opportunity sometime this year. I just don't believe we're there, yet. Assuming we're going higher first, it would be rather odd to have a one-wave correction. Volume patterns suggest we are traversing the B wave of an A-B-C correction. If bonds played out this way, it would also fit nicely with seeing one more rally attempt in stocks before we roll over.

Commodities had a bad day, particularly precious metals. Gold got clubbed for 34 bucks:

gold chart

Platinum also sported a very bearish reversal candle, and silver started to break down:

silver chart

The likelihood of a larger breakdown in metals would be augmented if we saw a couple of narrow-range days develop here. If more weakness developed immediately, I'd probably trade out of part of my gold short as a back-test of trend lines would be highly probable at that point.

As a side note, some of you may be wondering why shows a $2.82 gain for $WTIC when oil was down over two bucks today. uses an accepted method of charting continuous contracts whereby the front month is rolled out when the following month becomes more actively traded. The March contract became the active contract today, and since there is so much contango between the front month and the next contract, the roll shows a gain for the day. So how does one adjust analysis for this? I don't. I treat my chart analysis as if today sported a $2.82 gain.


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