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February 11, 2009

Let the Bad Times Roll

Equities played out today's session exactly in the manner traders would want... assuming said traders are bears. The S&P 500 posted a narrow-range consolidation along with the requisite lower volume. We also have the appearance of a trend line crawl. Ideally, price will crawl for 2-3 days before a big break, but I have the eery feeling stocks just aren't going to wait.

stock index chart

I did bump up my shorts in the wake of today's action, but I am not being as aggressive as I was at times last year. Recent action has simply been saturated with head fakes, and it is only natural to respond by cutting position size. Another response was to take some bets that were independent of direction, namely the straddles I described late last week. One of these bets paid of nicely today when RIMM tanked 18% in the early-going on a disappointing sales forecast. I have a policy to always reduce or close long option positions when they spike in my favor. In such circumstances the risk of give-back far outweighs the potential for further gains since one is not only risking the intrinsic portion of premium but also the fat (phat?) spike in volatility premium.

Gold posted an undeniable break of the consolidation downtrend line with a $30 surge today. Whether or not one believes deflationary forces will have one last lick, the odds favor the bull being back in force. Overhead pivot points at $980 and $1020 should now act like magnets for price, but I'm not planning on chasing things just yet. Some of my biggest trading losses have stemmed from fear of missing a move, so I'm going to just let my base position do its work here until I see a setup I can get a handle on.

Miners surged 7% today and GDX saw its highest single-day volume ever. By a wide margin.

stock chart

The volume surge could be setting miners up to smash through resistance, but there is another time when volume surges as such: at the end of long moves. Mining shares have more than doubled off the October low, and the 17M shares traded today could represent climactic activity. Now, I am in no mood to short a sector that has been delivering upside surprises, but you now have another reason why I'm not chasing things at this point.

Bonds and the dollar both edged up again today. I'm am eyeing these markets for the upside breakouts that should appear in conjunction with any selling wave in equities. For anyone so inclined, I believe Treasuries will, in the near future, offer a shorting opportunity at least as big as stocks in 2008. The key to timing is judging when the world hits the tipping point with regard to willingness to absorb debt in a currency that is being debased at a much higher rate than the commanding interest rate. We will then enter an economic period that decades of poor policy has set up for us: soaring inflation, soaring interest rates, and soaring unemployment.


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