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Saturday, December 26, 2009

WEEKEND EDITION VOLUME II



The Strong vs the Weak

Here is something I rarely see anybody cover publicly. Maybe they do and I just do not come across it. This is a basic tenent of trading. You always want to buy what is strong and sell what is weak. So many people want to do the opposite. They think buying things weak makes it a "better deal." It might be at Walmart, but not in trading. If you are a precious metals bull, you need to be buying Copper not Gold right here, and if you are a bear, you need to be shorting Gold. This is the reason my recent short trade here worked so well, I shorted the weakest of the three main metals. I had someone recently tell me that you always want to sell the strong during a breakdown, because it will catch up on the down side during a decline. I just gave them a spock type raised eyebrow reaction and moved on. Obviously that person had done no research on this idea whatsoever, and went on to lose (OF COURSE) on the trade he did with that theory while the rest of the complex that market was in went down. Dumb ideas like the Pet Rock work in some industries, but dumb ideas will get you cleaned out in this business.

You can see from the chart above that Copper has now broken out to new highs way ahead of all the others. Copper is an industrial metal, so it does tend to correlate with stocks more closely because of this. With the rip roaring stock bull market, it makes conceptual sense that this would be stronger than the others. I have to admit to having been within seconds of taking that Copper long trade, but ultimately passed on it due to nitpicking one of my indicators. Oh well I make bad decisions sometimes also. I know I will never get them all right, so I just move on after a blunder. Also, as everyone knows who reads here, I am very bearish on this sector as a whole, although really more on Gold and Silver, not so much on Copper.

WHAT ABOUT NEXT YEAR?

The following are forecasts of what I expect to see overall, fine tuning needs to be done

1) Stocks to continue to rally until we reach possibly as high as 1235 on the SP 500, then a downward move of some significance. It is impossible to know at this point if it will be a buying opportunity or not, I doubt it. The recent tendency has been for a first quarter decline, but this bull move has ignored alot of things that in the past have indicated turns, so I cannot just blindly call for that here. I have never seen a move like this since I have been trading.

2) Big deflationary wave across the board in commodities. Gold should drop about 50% from the highs, Grains should take out the lows of this year, Crude revisiting the 30's. The Gold decline will be fun to watch, and one for the ages. I think we will see one or more days where it will be down over $100.

3) Big US Dollar rally. It is interesting now how I am reading people now getting bullish in the Dollar. I don't like that personally, I would prefer to be the opposite of them, but you can't always have it all.

4) Bonds continue to decline until the Equity selloff starts. Once that begins, there should be some flight to quality into Bonds. We know this market typically bottoms in June - July, so that could line up once again.

5) Softs - we are seeing a potential sign of a major top forming in Sugar, I expect that market to make a major top and have a large decline. Cotton also, although I am really mixed on that market right here. It may be topping right now and rolling over.

I will update these as we go along from a timing perspective. Who knows if they are accurate or not. I trade off actual pattterns, but still like to have an overall view or basis to work from. Also, part of trading is adapting. If I see evidence that I am dead wrong on a market I will change my view. This is what you have to do, stand fast and follow your principles, yet admit when you are wrong and adapt.

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