Friday, May 13, 2011


Blogger was down for hours this morning so that is why this is posting so late.

Once again we are in a mode where over leverage is showing it's ugly head for umpteenth time. When I see moves like what we saw in Silver it is only a matter of time before the stories start coming out about people pressing their bets too hard at the wrong time and getting wiped out. Several prominent hedge funds have taken massive losses during the recent Silver collapse. I always find it ironic the term hedge fund. Hedge implies that you are diminishing your risk by doing something else. These hedge funds are nothing of the sort, they go balls out one trade after another, and although there are some exceptions, many ultimately are nothing more that river boat gamblers you just put all their chips in one time too many.

I can understand that when you are long during a big run like we have had, that when a pullback happens you have a draw down, but not $500 Million like some of these guys have had. They had to be scale in buying all the way up, and this movie has the same ending every damn time. How anyone with any trading experience at all could look at that price run in Silver and continue buying into it is beyond me. Now is when you should be adding to your position if you are a long term bull, on a sharp pullback. Momentum trading is very dangerous when markets get extended like this.

There is also now apparently an excessively high margin level going on collectively at US brokerage firms to similar levels to when we have had big stock market declines in the past. It is really unknown what our chairman will do in June, but it appears there is some big money betting he is pulling the chair so to speak. If he does and they just let natural market forces drive price, we are going to see quite a decline across the board. I don't think the FED wanted the huge run ups in commodities other than the metals, and of course they wanted stocks to rise and the dollar to fall. They always want to be inflating a bubble somewhere artificially to give folks a place to move money to. Then when the bubble pops they inflate another so people can chase their tails into the new bubble and on and on we go. Our great leader Greenspan wrote this play and directed it for years before syndicating the rights to it to the new kids on the block. They are just following the script or playbook that won the Super Bowl.

I have not done much trading this week and I will explain why. We are still in the "if the ES moves down 5 points so does everything else" mode. This means the world is one trade again. If we accept this premise and I do not know how anyone could not accept it, then we have to be looking for sell signals in the indexes if we want to short anything else.

You can see that just recently we had what I consider to be a pretty similar triangle type pattern as to what we have now. In that case we meandered about for a bit before finally giving way. We had one false breakdown of the pattern first, similar to what happened this week. The Bernankes ( the stock indexes ) have had many types of setups like this over the past couple of years, almost all of which have just launched higher, so even though I do have some things I use that say to sell here, I have been treading lightly. I do have sell orders for today under the market at levels that I seriously doubt will be reached, but in case we rollover here I wanted to have something there. I do not think they will be filled. If we do move down then I think there is a green light to sell other markets also. Until that type of thing occurs I would rather sit still than get smoked in another short sale trap. I have shorted a couple of currencies including the Canadian Dollar and Pound which I showed the setup of the other day. However, I have kept it light.

The other problem we have going on here is that the ranges in some markets are so big that the stops to take the trades are just not prudent risk management. As tempting as it is to get fired up about all the money you can make right now be aware that these are periods where hedge funds implode, not prosper. This makes for treacherous swings in prices.

Since the DX is being controlled by stocks, it is no surprise that we see indecisiveness there as well. If you recall a couple of weeks ago I put up a chart that showed at the time the sudden huge spike in Small Spec longs. I also showed that the prior times that had happened we made a new low then bounced. You can see that is exactly what has happened here. I have not gone long this market yet, but as I have stated above I am short some currencies so that is the same trade basically.

A long in this market will also require a stock decline to work in all likelihood.

I came across an email this morning from someone telling me about a convention where there is now a new way to look at commodities. Of course I needed to read no further before thinking sell, sell, sell. This reminds me so much of the "they are not making any more land" argument the real estate people were making back in 2005. If you take the time to sit back and think rationally about things, it is amazing how simple it is to frame the right approach to all of this. Of course there is no new way to look at commodities, please..... That is obviously a major top type of signal when we hear things like that coming from commodity producers.

It it just the same Ole Crap over and over isn't it?


John M said...

Just wanted to say you have a great blog here, Chris. Every post makes me feel sane in the midst of the wackadoodle environment we've had with all the bubbles and their bursting.

Kudos, brother.

Konrad Sherinian said...

Chris - I have more or less come to the same conclusion; this move down will end - probably today, maybe on Monday, and we will end up roaring back. That said, I have shorted the Russell, Gold, the Aussie, and went long the dollar on day trades - in a few cases multiple times :) I've made real money on a few trades, especially the second down leg in the Russell today, but there is not a lot of sense trying to swing the market(s?) right now. Oddly, I had a short in a few days ago on Wheat, which, at least as far as I can tell, should have been filled. Alas - no luck there.

Enjoy your weekend, and good luck with the Loonie & Pound.

Return to Resistance said...

In which entry did you talk about the spike in small spec longs? Why was this time different? It looked like there was a spike in small spec longs in Jan'11 but that marked a top as the DX resumed its downward trend.

Also why do you think the DX is being controlled by stocks? My take is that it's the other way around...stocks declining because of the rally in the DX.

Thanks for sharing your insights.