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September 5, 2009

Labor Day Pains

I had to grin Friday afternoon over how the action unfolded. Many bloggers were anxious over the market's reaction to the jobs report, particularly bears who were nervous about getting whooped again. When the reaction turned out to be a non-event, there was widespread relief and a lot of "why was I so worried" attitude. And then the market proceeded to slowly rally 1.4% into the close and whoop them anyway. Just the market fooling the most number of people, as usual.

The gains of the last two sessions have posted on very light volume. While the light volume can be attributed to the wind down into a holiday weekend, the axiom that light-volume moves can easily be reversed nevertheless holds. Note that the spyders suffered $155M in selling-on-strength, so one has to suspect the big boys have the same concern.

On the other hand, the dollar is yet to confirm any type of low. A spike down to 76 on the DXY along with our hypothetical short squeeze is still in play. Such a quick spike lower would be consistent with the typical process for printing turning points on the dollar chart and would also provide a tailwind for the anticipated $1000 breakout in gold.

us dollar chart

The dollar chart is just itching for a quick spike down to the 76 pivot.

As you know, precious metals stole the limelight this week. Silver and gold are hovering just below important pivot points at $1000 and $16 and change, respectively. Silver would then face a vacuum of resistance up to $19+ while gold would enter pristine territory.

silver chart

If the buck were to have its panic sell to 76, it would not be surprising to see silver undergo panic buying up to $19.50. Of course, no good panic goes unpunished. If we were to see a rapid move to that pivot, silver would likely then spend the next couple of months... during the corrective rally in the dollar... dripping back down to back-test $16. Once all the fools... err, weak hands... throw in the towel, precious metals would then explode higher as the dollar initiated its next major wave lower.

Just one more chart for you this weekend...

gold miners to gold price ratio

This ratio is a tool I used quite successfully when I traded at Citi. The premise was simple. A spike down to 0.19 usually concided with a day of panic selling, and I used those panics to load up. When the ratio approached 0.27, I would distribute my holdings back to the suckers. Last year's general liquidation event took mining shares down much more severely than gold, and they have yet to recover.

Consider that if gold stayed flat, miners would have to rally 60% to get to my sell point. Consider also that if one expects gold to rally to $1500+ by the next time a sell point is reached... as I do... then mining shares would have to double to reach the upper boundary of their historical range. If gold prices explode past $1500 and/or energy prices remain muted, we could see panic buying in the miners to a point well above that upper bound.


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