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August 30, 2009

Subject to Change

I was reminded this weekend of one of the mental attributes possessed by George Soros which made him such a successful trader. It is said he had the ability to quickly change his mind, no matter how strong his original opinion. He could be wildly bullish about a long-term advance in stocks and then be caught heavily short the S&P the next week. Contrary to conventional thought, this type of manic mentality is quite valuable to a trader... but of course, only if you also possess the market vision of a trader like Soros.

I bring up this story because my idea of an impending short squeeze may have to be reversed or at least qualified. Let's begin with a view of the SPX chart:

s&p 500 chart

One of the trading mantras discussed on the pages of The DOCument is that the market will repeat a pattern twice to condition traders, thereby setting them up to be relieved of funds the third time the setup occurs... because it won't behave the same way a third time. We are now sitting on our third coil in less than three months. There are two ways in which I see traders being fooled. First, the coil could break higher rather than lower. The short squeeze hypothesis jives with this scenario because if the mass is positioned for a third consecutive break lower, they will panic when prices break higher. Second, we could break lower, draw in all the buy-the-dippers, and then just keep going down.

The market will do what it needs to do to trick the most people, so any valid insight into which of these scenarios will unfold will make a trader a lot of money. If the NDX is any indication, the inital break will, indeed, be lower:

nasdaq 100 chart

Keep in mind that should we see a squeeze, it should consititute an ending move to this rally. So whichever scenario unfolds, I anticipate much lower prices within a couple of months. Of course, we have the luxury of being patient here. A squeeze allows us to sell at much higher prices. A move lower will need to be confirmed by a break of the 65DMA. There is no reason to take any aggressive action at the moment, and the only shorts on my book are those which I have placed to hedge my silver position around action in the dollar.

Speaking of silver... our star performer on Friday... I'm beginning to wonder of the dollar hedge is really necessary. I've mentioned that ultimately the dollar index will not matter to precious metals because everyone is debasing. The dollar's relative performance versus other fiats is inconsequential to the PM bull. We got a taste of this reality Friday as gold and silver rose along with the buck. The silver chart is looking ripe for a run higher, and guess where gold's price got stopped?

gold chart

gold mining shares

silver chart

I'm not sure how to resolve a move higher in metals with a move lower in equities at the moment, but I do expect them to be trending in opposite directions at some point. For now, the best policy is sitting tight on long-term positions in metals and waiting for a setup we can jump on.

 

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