The recent slough in metals prices came to a head today with gold off $40 (6%) while silver plunged over a dollar (12%). We may look back one day soon and interpret today's action as capitulation for the recent pull-back in prices. For the record, I picked up some silver via futures contracts for the first time since late April. Whether or not we see a bottom today is insignificant, really. It just seems that prices are likely to start bottom fishing around these levels. Despite all the inflationary rhetoric spewing from Fed clowns, one has to believe that smart money will eventually start soaking up metals and provide the type of support that leads to basing formations.
Speaking of Fed rhetoric, they have certainly done a superb job at snapping the rise in commodity prices. However, their recent expressions of concern about inflation are slightly misleading. What they are really concerned about are inflation expectations, and the Fed measures those expectations primarily via gold's price behavior. With gold off about 20% from this year's high, they must be feeling mighty glum. These types of sharp corrections, though, are a natural part of bull markets. As disheartening as they may seem while we're in the midst of the action, the long-term setup has not changed one iota. Whether in 6 weeks or in 6 months, Bernanke will be faced with a crisis that will force him to fire up the printing presses, and metals will go wild, whether he likes it or not.
It would be easy to blame today's metals rout on the higher-than-expected core PPI figure published this morning. However, two facts put that idea to rest. First, the metals were already down heavily ahead of the report. Second, the PPI report was mixed. Although core inflation was higher than expected, the total PPI figure was lower than expected, so markets could have interpreted the results any way they pleased. In other words, when a market is ready for a move in one direction or another, any news becomes an excuse, not a cause.
As for equities, it was business as usual. In a replay of their recent script, we saw an opening bluff to the upside, followed by a slowly deteriorating session, and an exit at the lows for the day. However, there are a few subtle points that set today apart from Monday and Tuesday. First, today's opening bluff was quite strong... strong enough, no doubt, to fool some traders into thinking a rally was on for the day, myself included. Since a rally did not materialize, the tendency to distrust an opening upside move was reinforced. One has to believe that once enough people are trained in this response, we will then see an open to the upside that leads to a significant rally day. It's just the way of the market to set traders up and fool them in this manner.
Second, the bulls attempted a rally in the last hour that was even sharper than the one at the open. The rally lasted all of about 25 minutes before being fully rejected by bears. Whether this action means anything, I don't know. It just struck me as odd, so I thought I'd note it. Perhaps we'll learn something from this action or perhaps we'll just discard it from the halls of knowledge.
Finally, intraday charts of major indices such as the Nasdaq 100 and S&P 500 show a strengthening RSI situation reminiscent of the setup that lead into a 3% rally less than 2 weeks ago. This setup could suggest that tomorrow will see the rally of fools mentioned above. I would by no means count on this rally. It's simply prudent to look for situations that may suggest a shift toward defensiveness.