Sunday, November 23, 2014

Market Analysis for Week of 11/24/14

It looks like Draghi squashed any notion of a deeper pullback in the Dollar and Euro.  Anyone playing the breakout of the Euro downtrend line on Wed got their face ripped off on Friday.  With the shortened, lower volume holiday week upon us, there's a good chance the Euro stays contained and moves sideways toward the end of this triangle before breaking down.  With some luck it will grind back up to the trend line and give a low risk entry.

When it closes below the long-term uptrend line from 2003, a fairly quick move down to horizontal support at 1.2054 and then 1.1884 should be in order.  From there, we may see a backtest of the breakdown before going lower, but that's too far ahead to worry about.   

The dollar on the monthly chart is looking like a rocket ready to launch.  The Dec Fed meeting will likely add fuel to the fire.  I'm thinking the Fed learned from last December that the time to break bad news is right before the holiday break, so the risk is high for December to be the month they remove "considerable time" from their language.  Either way, the dollar looks ready to go boom.  

USD/JPY will likely make it to 124, but it's so extended, so the risk is high of a pullback at anytime.  The Yen is doomed for a long time.  

Gold continues to creep higher toward its daily downtrend line on the back of significant short covering and new Spec longs who will soon be getting their face ripped off.  

Note the significant increase in Commercial short contracts of 30,315 is well above the increase in Spec longs of 10,687 contracts.  They also absorbed the 14,692 shorts the Spec covered, and initiated new Commercial shorts as well.  This by itself isn't necessarily a smoking gun type sure-thing piece of evidence because the Commercials will fade the Specs as high as they want to push it.  And it's not a timing indicator.  However, they didn't HAVE to short any additional contracts than the Specs went long and covered, so the fact that their short increase was MORE is just a piece of noteworthy evidence that they are urgent to lock in prices.  Does this mean a sharp turn down is imminent?  Not necessarily.  But in context of what is happening with the dollar and the risk of the upcoming Fed meeting, I'm thinking yes, the time is near to short.  

Here's the weekly chart of gold.  I'm looking for it to rollover at or near that downtrend line with the little white bubble around $1225 and head toward the big white bubble at $1040.  I will scale into half my position and then once it rolls over I'll will be building an inappropriately large position, but I'm gonna do it in SLV put options out in April (delta 25 strike 14).  The reason for half  at a time is just in case I'm early, or wrong.  I'd prefer to scale up a winner.

I'm hoping silver can make it to $17.40-ish first.  I'm not trying to be perfect here.  I'd like to get past the Swiss Gold Referendum next Sunday, but if it makes it to my number by Friday, I'll go half in before.  I'm looking for silver to make it to $13 by the Super Bowl and eventually to $8.50/$9 area.  I can hardly stop thinking about this. 

Normally, this price action in the NQ is what scares me.  Big gap ups that reverse all day are usually signs of impending pullbacks and sometimes tops.  However, it happened on options expiration, so you can't treat it the same.  Also, we are heading into a shortened holiday week, so there's usually not the volume for big selling.  Plus, none of the indices closed negative.  If it were a sign of a serious top, they would have closed negative.  There's no choice but to take some profits on big gap ups like that, and while I would love to see a pullback to either of the white bubbles, I'm not holding my breath.  We might see a slow sideways to upward grind thru the holiday.  This is not even remotely my concern right now.  The silver trade has my highest attention.  I don't care about anything else. 

Same thing for the ES.  If we do indeed grind sideways to higher along the upper channel line, there's a chance we see some selling after this week.  I don't know how you stay real long under the upper channel on a move that went straight up.  When we do have the next serious selling episode, force yourself to not see it as the beginning of the end, but the best buying opportunity for the following couple months.  

Here's the weekly chart of the ES.  Note the yellow weekly uptrend line that was supposed to mean something when it broke.  I'm thinking all serious pullbacks will be contained by it for the foreseeable future.  

It's interesting to watch investors and traders get psychologically steamrolled by this bull market at different times and different degrees as price gets further and further disconnected from reality.  It's not easy to trade against what you believe, but clinging to the shoreline of value and fundamentals as the river continues flowing upward is even less healthy.  Know your risk and become Buddha-like in acceptance.  You can't control it.  You can't stop it.  And there's no prizes handed out for understanding the consequences before they happen.  It is what it is.  Desperate, ignorant, usually unethical people in power trying to prevent systemic collapse from their predecessors' flawed and corrupt ideas.  I don't believe this is an evil, nefarious plan by central banks to steal wealth from the people. It's the end result of a monetary system unhinged from the restraint to gold to limit the issuance of debt.  It's too late to stop it now.

If the central banks step aside, the system will implode, which is going to happen anyway when they lose control, so what difference does it make if it happens now or they fight it until it overcomes them?  The fact that they don't seem to understand the root cause of the problem is more disturbing to me than their feeble attempts to hold off the tsunami of debt deflation that's coming.  And for that I applaud and encourage the folks who are fighting the good fight and trying to express the Truth to put those Keynesians back in the bottle from whence they came.  The only way to prevent a deflationary debt destruction is to not allow the inflationary boom to happen in the first place, and for that you need sound money.  I still think this bull market will end when there is a real threat to the financial system like a Japan default, or a Eurozone banking crisis.   Something that causes sustained fear over time from an evolving crisis that can not be contained.  Anything less leads to a controlled short squeeze.

The Tech Bubble ended with the realization that two guys in a room with a computer and an internet connection doesn't lead to actual earnings.  The Subprime Bubble ended with the realization that people working at McDonald's can't afford mansions in the burbs.  So it makes sense that the Sovereign Debt Bubble will burst with the realization that governments can't issue debt in excess of the underlying growth to repay it in perpetuity.  Until the rubber meets the road via the threat of a bond market or currency implosion, the bubble doesn't have to end due to overvaluation, especially since I agree with the notion that central banks are in the market, but not to the extent some people think.  They only need to show up at critical times to contain selling and pressure shorts into covering.  Why anyone would vehemently deny that as a very real probability?  The stated goal of the Fed was to create a wealth effect through inflating asset prices.  Why wouldn't they defend it?  

I haven't commented on bonds in awhile because I think the bond market is confused, or maybe I'm confused about the bond market.  Bonds want to keep going higher to respond to the slowing global growth, but the Fed keeps talking about a path of normalizing interest rates, which makes no sense whatsoever.  So the bond market seems to be thinking: how crazy IS the Fed?  Can they actually raise rates?  I would think the answer is no they can't, and bonds will eventually head higher, but playing chicken with the Fed may or may not be a good idea.  I'm interested elsewhere.   

Parting thoughts?  Apple to $150.  Nasdaq to internet bubble highs.  Silver to $9.  And I'd like to remind you, at least for entertainment purposes, about those two silver dreams I had, which were the same quality as the one I had that showed silver trading in the $18 handle when it was at $32.  

The first dream (Nov 2013) showed silver trading in the $9 handle and then bouncing hard to $13.  The 2nd dream (March-ish 2014) showed silver getting aggressively sold thru $14 and $13 with a football game on in the background.  I've tried my best to figure out the timing.  In hindsight, I was an idiot to take until silver made it from $22 back down to $20 to let go of the idea that it was going higher first.  But the real trade is still ahead.  I'm telling you this because if it plays out again, I want to force you to question the nature of reality. lol.  And hopefully, you make some money.  It appears all the pieces are falling into place.  I don't know how high this retracement will go for sure, so the most conservative way to play it is to wait for it to clearly rollover first.  But I'm gonna fade it, hopefully in the $17s, and hopefully my timing is right.