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January 26, 2009

The Year of the Unemployed

There were no great surprises in today's session. We saw a mild advance in equities on declining volume. The SPX assaulted the 850 pivot area without success, and recent tendency of the market to post nasty intraday whipsaws continued. It's no surprise that equities can't hold any rally together. The Year of the Unemployed kicked off today with hefty layoff announcements from Pfizer and Caterpillar. Banks have swallowed a trillion bucks to no avail, and our new President has spent his first week in office annoying industry with regulations. Obama's lack of leadership experience has quickly revealed itself through his expression of frustration that Republicans won't simply cooperate, he being the President and all, and the new Chief has also shown a dire lack of comprehension with regard to the financial crisis by targeting hedge fund regulation as his first priority for addressing the repair of the financial system. Someone please tell me why hedge funds need to be burdened with regulation by an agency that, if it had properly done its job, could have significantly mitigated the effects of the current crisis?

Of course, The DOCument is not a political blog, but we all know how much a role confidence plays in market behavior. Increase uncertainty, and appetite for risk wanes, translating into lower prices. I'm beginning to suspect that the reason the stock market managed to hold things together so well last week, despite numerous setups for a larger breakdown, was simply hope: hope that a new administration would quickly announce novel plans to commence a rebuilding process. Obama's initial bumblings may be just what equities need to initiate their next swoon into the abyss.

For now, I'm watching a rounding bottom pattern on the 15-minute chart of the SPX to clue me into the next big move:

stock index chart

Generally speaking, a break out of a rounded bottom will occur as an impulsive move. Given the recent propensity of the market to throw head fakes, though, I would curtail position sizes on such bets.

In the meantime, I was tempted to re-apply my GDX short just before today's close. As you can see, mining shares suffered a hard reversal on heavy volume:

gold mining stocks

As noted over the weekend, I have my doubts about the veracity of the gold rally. I sense a head fake, and an approach of the $38 pivot by GDX would provide an opportunity to express my doubt with a close stop. Of course, I would still need some corroborating sign.

Where gold itself moves from here depends, as we all know, on action in the dollar:

US Dollar Chart

If the buck gets turned higher by the trend line or the nearby pivot at 83, gold will likely turn lower and head into the final decline we long-term gold bulls have been dreaming about (one more chance to back up the truck). Further weakness in the dollar index will send it toward an eventual date with the 200DMA and will likely be a game-changer with regard to our approach to the precious metals markets.


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