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September 30, 2008

Pillow Talk

Snapping back from extreme short-term oversold conditions, equities gave us a spectacular rally, though not quite as spectacular as one we saw what seems like eons (actually, 8 days) ago. Today's action carved out the shape of what I call a bull run: a day that gaps higher and then rallies steadily throughout the day and into the close:

index chart

Bull runs materialize off either very oversold conditions or on pattern breakouts and can usually be identified about half way through the day. Bull runs are also usually followed by low-volume, narrow-range consolidation days (to set up a continuation of the rally) or by outright failure and a return to lower levels. Given my belief that we will revisit... and perhaps marginally eclipse... yesterday's low in the near future, I waited until just before the close... to let the bull run run its course, of course... and then added back the shorts I ditched yesterday afternoon. As may be expected on a 5% rally, short-term indicators swung to their polar opposites.

indicator chart

The Senate is scheduled to vote on a slightly revised version of the bailout bill tomorrow. After Wall Street's reaction to Monday's outcome in the House, it would seem impertinent to debate whether or not they will pass it. I suspect equities will undergo a relief rally when the vote is recorded, and actions to be taken in its wake will simply depend on the nature of any such rally. For now, and until technicals persuade me otherwise, I am simply operating on the presumption that the low will be tested.

Silver was once again slaughtered. I suppose we will find out soon whether its agony is related to quarter-end liquidation, but the chart does not look healthy.

silver chart

gold chart

I'm not really keen on speculating about whether gold will launch higher off a test of $850 or fail and sink to new lows. One or the other will happen and probably happen in an impulsive fashion. Therefore, if the December $850 straddle is reasonably priced when gold makes its test, I'll be a buyer of volatility.

A pillow is whispering my name. Until tomorrow...


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