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November 19, 2009

Wedged

Thursday's session generated a couple of strong signs that our 8-month rally may finally produce its overdue correction. The S&P 500 was sporting a tall candle higher (Monday) followed by two narrow-range consolidation candles on lower volume. Typically, this setup results in a continuation higher, and such a result would have been the ideal action to draw in a few more glazed-eye bulls to which the big boys could dump positions, post a large selling-on-strength figure, and give us a fat pitch to short. Alas, the market gods rarely make things so easy.

s&p 500 chart

Typically, when this type of NRC setup fails, the failure will continue. After all, we wouldn't want to give any of the latecomers an opportunity to reverse their mistake, now would we?

Also, don't take your eyes off those banks.

banking stock index

Precious metals held up quite well as did mining shares. In fact, the miners posted quite a nice-looking bullish reversal. I have my doubts, however, and believe the market gods are more likely to trap today's buyers of miners just like the SPX buyers.

gold mining shares

Personally, I would be quite hesitant to add to PM positions at this juncture. In fact, I have eliminated my silver trading position and hedged my GDX shares by selling December calls against them. I do not intend to touch my junior miners or SLW positions. First, I am taking the account of Old Turkey... which Gary has repeatedly hammered into our heads... to heart. More pertinently, many of these positions should reach long-term status by the time we see the expected parabolic move in springtime, and I don't want to be hitting the reset button on my holding period.

For those nervous about staying long gold here... for fear of a large correction... or shorting stocks... for fear on Berskanke's printing presses... check out the recent action of equities in real terms:

spx priced in gold

Regardless of market direction, the trend is down in terms of equities as priced in gold. Staying long precious metals against an SPX short is a high-probability play. Therefore, my hedging will be done by selling ES contracts against my metals positions. In the intermediate term, this paired trade won't be as rewarding as simply staying long PMs, so I intend to lift the short book... and repurchase my silver trading position... as soon as I think we're ready to launch.

Ultimately, the action is going to follow the dollar's lead, so let's take a peek.

us dollar chart

There is still room for the buck to post a panic sell to the bottom of this channel. However, the action described above hints against this scenario. For what it's worth, I am not waiting for a channel resolution to take my shorts. I expect resolution to be explosive, and the SPX/GOLD chart is a compelling play.

 

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