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August 17, 2009

Where's the Beef?

Well, that was nasty enough. A little two percent spill in equities combined with a 5% slide in silver was enough to carve a thick, red candle into the Docfolio which is loaded with silver futures and mining shares. I wrote over the weekend that the only hope bears had of hanging onto the 1930s-style bear market was a gap down to start the week, and that's exactly what was delivered. But I have a question...

s&p 500 chart

It certainly is a big candle. But where's the volume? If I'm going to be convinced a top is in, equities will have to post some downside volume acceleration. If the SPX approaches its 65DMA with soft volume, we'll have to assume the MA will hold... until it doesn't. A safer entry here, as opposed to chasing this action, would be to wait for a breach of the 65DMA and/or the SPX 950 pivot. If a trip to the new lows is in store, there will still be 300+ handles to capture.

The silver chart looks broken as of today's action, but I'm not going to post it. Why? Because although I trade silver, I base my trades primarily on the gold chart. Gold is a much more active market and thus provides more accurate reads. While the daily gold chart also looks a little bent, my primary concern is the action in the weekly.

gold chart

Until gold loses the 80WMA, I'm not going to budge on my silver position. Besides, these consolidation periods tend to be quite tricky, and more often than not, multi-percent sell-offs are to be bought, not sold. Take a look at the consolidations that preceded the 2006 and 2008 vertical moves and note how many times the gold market appeared ready to crater, swiping positions away from weak hands before launching.

Another level to watch, as noted over the weekend, is our pivot point on the dollar chart.

dollar chart

If the buck manages a close above the pivot, I'd likely find myself at least reducing metals exposure for safety. If the SPX simulataneously posted another drop on accelerating volume, I'd probably also start rebuilding a speculative short position ahead of a break of the 65DMA.

Keep in mind that even if the dollar does break higher, the move would still only be classified as a counter-trend corrective move. I would expect the dollar to form a multi-week rise that would be halted by the 200DMA or thereabouts. At that point, some sort of catalyst would likely arise to make it apparent to the world that the financial system is still in shock. The news will initiate the next impulsive move lower in the dollar as the reality of endless money printing sinks in. Precious metals would begin their parabolic moves higher, and stocks may even continue sinking despite a weaker dollar. It is a scenario I have outlined before and one which nummy reminded us about in the comments.


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