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June 29, 2009

Oil Floats

Quite against expectations, crude oil not only avoided the downward gap move I was anticipating, but rallied to close above what appeared to be very strong resistance. There are two possible ways to interpret the behavior. First, there is such strong demand for oil that price will overcome bearish setups and rocket higher. Second, today's move was a big bear shakeout before a downward move begins in earnest. I will not harp on the dearth of demand created by global depression. We've beaten that path to death. Instead, let's return to an axiom of commodity trading which states that related equities tend to lead the commodity.

So, exactly how are the equities performing?

stock chart

stock chart

Doesn't look like equities are anticipating a much higher oil price in the near future. Like many apparent breakouts in recent months, I suspect the current move in oil will roll over and prove to be false, as well.

As you know, I was expecting either a sharp move lower or a narrow-range day in equities. Indeed, the SPX printed a narrow-range day, but with an upward bias. One has got to think that the only factor holding the equity market together here is oil's perseverance. As a testament to the importance of market psychology, note that most eyes in the TA world were focused on SPX 928. The high for the day? 127.99

s&p 500 daily chart

I suppose it's possible the S&P 500 hangs in there one more day as money managers try to paint their quarter, but if not tomorrow, I'm looking for a rapid break to the downside as the new quarter begins.

spx gold ratio

Nothing is impossible in the markets, but if anything were close, I'd say it's near impossible for stocks to significantly outperform gold on June 30, 2009. In fact, July should see a significant underperformance of equities against gold as this ratio drops back away from the trend line. For these reasons, I'm fairly comfortable with my equity shorts since I still hold my precious metals longs.

Just for the hell of it, I will now contradict myself... sort of. I think that any day now we will see a sharp move lower in precious metals prices. When I say sharp, I mean to the tune of perhaps $40 or more for gold and 60c or more for silver in a single session. Why? Corrections of the type we are now experiencing tend to end on panic days. Weak hands get washed out and those who were thinking of shorting follow the move. Both actions tend to be dead wrong. These panic days are to be bought, and I am stalking one right now. The indecision traders feel on such days is intense, especially if one has a long position, but know this: when it occurs, I will be gladly taking positions from the sellers.

There are both fundamental and technical (cyclical) reasons for a huge rally in precious metals in the coming 6-9 months. On a cyclical basis, gold and silver tend to spend the summer months either consolidating or dropping. Every big run we've seen since the beginning of the bull has begun between August and November and run into parabolic highs sometime between February and May. I believe that the current cycle will not only follow the pattern, but may constitute the most spectacular run of the bull thus far.

On one hand, we have the Obama stimulous package passed in the beginning days of his Presidency. Anyone remember that? What most do not realize is that the stimulous was back-loaded, meaning that Obama reserved most of the spending for 2010. Why would he do such a thing with the economy in such dire shape? Politics, of course! He wants to juice the mid-term elections. I believe the beginning of a big run in precious metals will materialize this autumn as a discounting mechanism for that stimulous.

On the other hand, we have the makings of a Treasury bond crisis. If bonds or some other factor cause another panic in equities, bonds will not be the flight-to-safety play. Precious metals will be. Furthermore, when Berskanke realizes he's losing control, the clown is prone to punch in the launch codes for the nuclear option on the printing presses. And I'm not talking A-bomb. I'm talking something more like this:

Well. Happy EOQ.


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