Monday, December 1, 2014

Market Analysis for Week of 12/1/14

Pretty impressive short squeeze in gold and silver.  I'm not a believer in the sustainability of this rally, but I am torn about it.  On the one hand you can view all the action below $1180 as a blow-off bottom.  However, it would take a close above $1300 to validate that, imo.  And nothing has changed in terms of the current monetary environment, or the underlying cycle of positioning.  This is what you can expect when the Specs get too close to being net short.  In order for me to become a believer, I would need to see the dollar lose its uptrend line and the Fed change its tune about raising rates.  Otherwise, you can expect the buyers to run out of steam as the Commercials absorb every long contract thrown at them. The question is when.

I was bummed over the weekend because I took some time off over the holiday and it looked like I missed the big short trade I've been stalking for weeks.  We'll see how the rest of this week goes.  If gold pulls back and consolidates above $1200, I'm likely going to buy a third of my puts on Friday after NFP, which is often the spike high before it rolls over.  I'm still thinking mid-$1220s for gold and lower $17s for silver.   However, if gold clears this downtrend line at $1220 and closes strongly above it by Friday, I will probably hold off and look to do it higher.  I did snag a nice day trade with futures today, which helps with the risk to fade it short.  At least, I think of it like that.

I would like to add that I much prefer gold to be going up and want it to return to a bull market.  I just don't believe that is going to happen.  We're still in a deflationary environment, the Commercials are still looking to get really short, the Fed has not given up on talking about raising rates yet, and the dollar is just pulling back to support.  As impressive as this squeeze is, it's just a squeeze at this point. The mentality hasn't changed yet.

I would like to point out that this reversal stick in silver is EXACTLY what I look for in a reversal, however, for the reasons mentioned above, I'm not convinced it's sustainable yet.  It does put a damper on my short mojo, but I'll be comfortable with my initial risk if I'm wrong.  Still looking at April puts.

The dollar would have to lose its uptrend line and the 50-day to make me a believer in the sustainability of the rally in the metals.  If the dollar breaks to the upside I believe the metals will run out of buyers.  All the pieces have to fall into place.  It is worth considering that the dollar long side trade is kinda full, but trades can stay full for a long time.  Look at how long it took for oil to rollover from its record long Spec positioning.  All trades unwind at some point.  I just think unless the Fed changes tune dramatically that it's not time for the dollar.  And therefore the metals.

We're getting the post holiday profit taking in equities.  Not surprising.  They had to pullback at some point.  The 20-day EMA is at 2041.  That's the first spot to watch.  I'm gonna wait until NFP day to see if we can get a deeper pullback.  Hopefully down to previous highs at 2015.

Same for the NQ.  First spot is the uptrend line at 4266.  I would love to see a deeper pullback to the previous highs at 4124, but that might be a long shot.  This is likely the typical "between expiration" pullback that finds a bottom and rallies thru the holidays.

The Euro is still holding its downtrend line.  It will be interesting to see if we get a resolution on NFP day, or whether it will take until the Fed. The triangle in the Euro will run out of room before the Fed, so maybe it breaks this week.  

A lot of big name stocks are not healthy on the charts.  And the market is clearly overvalued as a whole.  But that still doesn't mean we're topping anytime soon.  Every single pullback feels like the end.  And there's always a good reason.  I would love to be shorting the rallies, but I'll be looking to buy the dips.