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May 19, 2009

Jordanian Time

It has been a long time since I've suffered the effects of jet lag. You see, I'm pretty good at keeping myself awake, and the best way to reset one's internal clock after a long trip is to just stay up until the proper local bedtime. However, I was so exhausted from the trip home, which included 13 hours of flying time and 6 hours of airport thumb-twiddling... all after being awake a full day in Jordan... that I couldn't help but to put my head down when I saw my own, dear bed.

Ten hours later I returned to consciousness... a hearty night's sleep, only that it occurred during the day. And so I faced midnight, wide awake. I'm now spending the wee hours getting myself reacclamated to my home environment... unpacking, going to the grocery store to restock the fridge, organizing my vacation pictures and, of course, pecking out a blog post. Speaking of pictures, check out the ladies in this photo:

photo of petra, jordan

Despite the Martian landscape, this picture was taken on Earth. Petra, Jordan to be specific. Must have been a chilly day based on those long duds, eh? No. It was easily 105F. May have been 110. The sun felt every bit as much as one imagines it feels in the middle of the desert. How these women maintained even the slightest degree of comfort... especially the one in the full ninja ensemble... is beyond me. I do like the pink, designer purse, though. Nice touch.

In the comments setion this weekend, I noted a suspicion that precious metals were about to embark on a wild rally. If so, today's action sure constitutes a convincing shakeout move.

silver price chart

My thoughts were that price would leap forward to test the previous rally high at $14.50 then back-test the $13.90-$14 pivot one more time before going vertical. This break may seem like a minor point, but consider that the low of Thursday's hammer was also violated, and it gives a trader the strong feeling that demand has sprung a leak. I am by no means anxious to close positions. We are probably facing a minor correction that will take price somewhere into the $12.50-13 range, based on pivots. Also, check out the action in the miners:

gold miners chart

It will be another story if this flag fails, but I am neither adding to positions in anticipation of a break higher nor reducing them in fear of a break lower. Let's just wait for more information.

Before I move on to equities, I'd like to share an observation on oil.

oil chart

As you can see, the 175DMA is providing support for oil after price regained the average. The price cluster of the last week or so is also looking very much like a mid-point consolidation of the move out of April. The target would be about $72 per barrel. Fittingly, the large consolidation we saw from late March into April targets approximately the same point. If oil moves up another 20%, how many of you think the stock market will simultaneously fall? I certainly don't. Oil's price, like the stock rally, is occurring in an environment of sharply falling demand. These rallies are tangential, being driven by emotion, and they will fail together.

Let's have a look at the S&P 500. There was not much to like in the Monday session if you are a bear. First, price action rolled out a bull run:

s&p 500 intraday graph

Second, the day took out important resistance:

s&p 500 chart

Although volume wasn't impressive, I would be more enthusiastic about the continuation of the bear case if price had not closed above the floor of the topping price cluster. Barring an immediate reversal, I think it's very likely the SPX now makes a run at its recent high and perhaps even the January high. Prior to today's action, I had been expecting price to wind its way down to the 65DMA before mounting another rally attempt and planned to unload half my position on that approach. However, considering that the last 65 days will soon be entirely encompassed by the rally out of March, our favorite MA is about to accelerate sharply higher. Therefore, potential gains to this profit-taking point are about to shrink rapidly.

In fact, even if we have entered a new bear leg, holding short positions is going to be more nerve-racking than ever. As opposed to the October crash and the swoon into the March low, many more traders are looking for... or at least wary of... another leg down. Therefore, I expect any decline to be full of 3-4% rally days just to keep the majority of bears shaken. Look at the last roll over:

s&p 500 index chart

I guarantee you it's going to be even more difficult to hold shorts this time around. Anyone with a good head for filtering out noise will have holding power. For the rest of us, keeping position sizes small... or just staying out... will be the best course of action.


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