Sunday, March 20, 2011


The more things change the more they stay the same. Here we have 3 charts in markets that would normally be unrelated to each other in terms of intermarket influences. However, as we have seen for the last couple of years with a few minor breaks, almost all markets are trading in the same direction. Miyagi in the karate kid taught wax on wax off, this is kind of the same thing. The three charts I have are in order, Crude Oil, Gold, and Coffee. Risk has been off for awhile, but I think it is about to be back on.

We can argue here that the incredible influence the Dollar is having on everything is the explanation for all of this. I would argue it is actually something different, although my argument is related to that. It is my feeling that the artificial upward price movements engineered by the FED to ward off the deflation wave that would have otherwise happened, is what has caused all of this. Part of their plan is to deflate the dollar to make our whole we are digging with debt less of a problem. So I guess from that standpoint the common argument is similar to mine. The difference is that I think deflating the dollar is the result of what they are doing and not the primary goal. Either way in the end, it is what they are accomplishing by what they are doing. They are trying to inflate their way out of this mess, while at the same time telling us all there is no inflation. Any idiot who was born yesterday could look at these three charts and see there is inflation. All 3 of these commodities have been going sharply up. However, the report that basically measures inflation in all things that are not inflating, shows no inflation. What a coincidence.

We are really at a very important inflection point right here. You certainly could have justified getting long across the board a couple of days ago when the high of the low day in these retracements was taken out, because we are still in long term up trends in all of these markets. If you have done that you may get a major lift off again and you will once again be rewarded. When I project my oscillators for Monday, they all show the lines continuing to rise even on a down close, so that tells me that we are likely to get another up close Monday. However, that is not a precise prediction, if we start to roll over strongly, I might very well front run the oscillator movement and get short some things, it will be a game time decision. I really want to get short GOLD again.

If you are bullish, stops should be under last weeks lows pretty plain and simple. If those lows get taken out in the SP 500 or any of the above markets, or any others, we got big trouble on our hands. It might not be a bad idea to watch volume. As we have seen and I have stated this many many times, the PPT cannot stop volume. If we happen to get strong volume going on a big down day, look out. If we get light volume on a day that is moving down, look for the PPT to reverse that back up. They certainly know how critical this spot is, they are basically very short term traders with what they are doing. They are well aware of the danger of last weeks lows breaking.

It is imperative that you understand right now that almost all markets are once again the same trade. You have to take this into account when determining what to trade, how much, and when. A short in Crude is the same as a short in the Stock Indexes, which is the same as a short in Gold etc.. These correlations are so high, that if you were to be long all of them or short all of them, you need to expect the moves to go in the same direction. If you risk 2% in trades in each of those markets, you are really risking 6% in one trade.

It is my feeling from looking at the COT data, that the odds favor the next big move being down in several markets, so that is why I am leaning in that direction. The Small Specs have gotten historically heavily long in many markets, and although in recent times thanks to the PPT they have gotten away with it, historically this has been a recipe for downward price movement. The artificial market manipulations have warded that off, but they will not be able to control everything forever. As I have stated in here, there are going to be big consequences for what they have done at some point, and if last weeks low does not hold, we might be close to seeing some of them.

Here is one trade we have on in both our personal accounts and our Robbins contest account, Natural Gas.

You can see that I was within just a few ticks of being stopped out on this trade at one point. We have now started to move up some. This is a crazy market that completely trades to it's own theme song. I am glad I was not watching when this sucker dove down that one day close to where my stop was. If you don't have to watch live ticks, don't. There are alot of people calling for the industrialized countries to start using this for energy, and some of them are saying this little spurt here is proof that is starting to happen. I tend to think not, this market has been beaten to a pulp for years and has had many false starts. It is way too soon to tell if this little move so far is anything or not. I do have an exit target that is well above, and I doubt we will get there but you just never know. Plans may not always work, but you need to have them in case they do. I have my stops above where I am in now, so worst case here is a small profit, with the potential for a big one.

It looks to me like Tuesday is going to be the day to look for shorts in most places, unless we get a monster up day Monday, which could take some of them off the board. As per usual, we have to let them turn the machines on and see what happens. Must see TV coming to be sure. Speaking of TV, there was a great joke I heard last week. Barry's wife was popping off again about fat people ( she apparently gives herself a pass on this categorization excluding herself ), claiming all the out of shape people are a danger to our national security. Our armed forces are diminished by this. There was a comedian that suggested that we then have a fat army and a regular army. The fat army only fights on level fields, and the other one goes into the hills. I kind of like that idea! Could you imagine the sight of the fat army plowing across an open field heading towards an enemy? Classic! Maybe we add a new category to the COT report, fat traders and regular ones? The Fat Golf Tour and the regular one, where does it end? We could have a lot of fun with this idea, kudos to Barry's wife for getting this started.

Good Trading


Anonymous said...

Hey Chris...I've been at this game awhile myself and heard our friend Trader Dan give an interview to Eric King a couple of weeks ago regarding the COT. It is a given in every trader's life that the CPI and other reports and govt. data are fixed and manipulated to the point of ridiculousness. Been that way forever, right? So Dan's talking on this interview about the silver COT. He didn't charge any big conspiracy or anything like that but he just said that he couldn't really make any sense of it and it lead him to doubt its veracity. I never really got deeply into COT, but many traders do. Ya think it can still be verified in our "new normal" times?

Chris Johnston said...

It is hard to say but this past week for example the gold and silver markets both showed commercial buying in the COT report on the dip and boom a good rally. This is normal. What I do think has changed is that seeing activity against the trends of the market has to be completely ignored unless it gets to big extremes. Gold got to a big exteme in small spec longs which led to a very brief decline. Since good commercial buying came in on the decline we have to defer to that instead of the small specs, hence I still think it works. It is alot trickier to use nowadays.

I am fairly sure that the government is behind inflating the metals but I have no proof. They always want to inflate a bubble somewhere for people to go to hedge their losses elsewhere. Whether or not they are manipulatin the COT data to hide it I have no idea but I would not put it past them.

Anonymous said...

Yep, they're behind it alright, either directly or indirectly :) I've been a technician my entire career, so I really don't rely on other macro data much to base trades on, but I do occasionally like to listen to a good story. I do pay attention to sentiment numbers, though and noted your comments about how all the brokerage community were getting all dot com-y bullish on stocks. CNBC has become unwatchable for me, so I watch Bloomberg (not much better, except for the graphics) with the volume muted. I get the II numbers and also get the feeling that a lot of people have missed this move and it's the most hated big rally of all time. Just IMO, but gold's trading in $25 moves and silver's trading $1 now (never thought I'd be saying that but hey, it is what it is.) Point being, though, every time we get those downside breaks the goldbugs start wailing and you can actually hear the newbies to silver getting wiped out.

I went to a cash only restaurant the other day and pulled out a numismatic silver eagle and offered to pay the tab with it (I wasn't really gonna do it!) and the waitress looked at it and said "what is it?" So, I asked her to show it to the manager and he knew he should take it but he still said no. So, this is my real long-winded way of asking if you think sentiment has gotten way too bullish on the metals yet? Bloomie always trots out guys saying sell and short gold...haven't really heard them go either way on silver. And the most important sentiment indicator of all, the taxi drivers, haven't said anything about gold and silver yet.


Chris Johnston said...

Certainly anecdotally the sentiment has been extreme for an incredible period of time. Professional sentiment is not off the charts yet. The metals rally is unlike anything I have ever seen. It is being completely driven by individual investors. I cannot think of a single instance where the wrong crowd has been right for this long and this far price wise.

I agree with you on the rally being the most hated of all time. I think that is true because it has not been driven by what normally drives markets so those that have some experience have completely miscalculated this market including me. I also never thought I would ever see a $1 move in Silver commonly happen in 30 minutes. I remember the days when 10 cents was a big range and gold traded in $3 ranges.

I have no idea what the tipping point in the metals will be but I find it hard to believe that something driven exclusively by small specs can keep going like this too much longer. Of course that is where the government could be playing with the numbers, where they classify whom.

There is something very strange about this whole metals and stocks move and I think most people even novices are starting to get that something is amiss here.

Never the less as we know the trend is still up so no sense in throwing away money fighting it.

Anonymous said...

I dunno, Chris. I'm hearing that there's some big fund money in the PMs. Einhorn at Greenlight is probably the highest profile with his "long apple-gold-pfizer" trade. I also heard that there's a "ratio spread trade" (love these names) whereby a fund will short the DX for the mark-to-market carry credit, short the GDX and buy the GLD. Look at its recent history and it's at least coincidental, if not true. Even on selloffs, the GDX falls further than the bullion and demoralizes the goldbugs who really don't know anything about how to buy or trade the gold, just "diversify" with the GDX. Now that is just trader talk from my crowd from the midwest to west coast.

Also, re: the hated rally. I think ZIRP is the trump card. Not paying interest at the bailed out banks forces the money into the market. But, you remember dot com. EVERYONE was a believer. You're hearing that again, but I'm not. So, whatever that's worth. One last thing. Lay a chart of this market over 1998-2000. That market, that everyone LOVED, actually pulled back. This thing may be now...maybe.

Good luck this week. To all of us.