Tuesday, September 27, 2011


In spite of all the media hype the stock market has basically gone nowhere now for awhile. Yes we are having these up and down swings that are hair raising for some, but net net, we have been in a trading range for about a month and a half. This is often what happens when you get a really volatile move down like what we had leading into August. There are no absolutes, this does not always take place. However, long time readers here will recall that I had repeatedly said I thought timing the next leg down was going to be tough, and it sure has been. I have taken one shot in the SP 500 and wound up scratching it after I had a huge open profit at one point in it. We do appear to be nearing another potential selling point if today holds up they way it is in the pre US open trading. The Russell is the weakest link along with the Dax, so that is where shorts should be done in my view, if they are to be done at all.

This is far from a no brainer trade now to me in that we are in the midst of a large congestion pattern. They have just spoiled all the fun. What we do have to consider is the following. We know the buy season is coming, typically the mid to end of October. If we continue to hold up this well, the buy could be a rip roaring trade when it gets here. Strength begets strength. It is too soon to tell. However, if the sell that should develop does not, the market is speaking and we need to listen.

One trade that is benefiting from this recent rally is the short side of the Bond Markets. It is a complete inverse situation now, and has been for some time, between stock and bond markets. You can see above in the chart of the 10 year, that we are right at a possible seasonal down period, so that gave some added support to shorting this market. Of course if we happen to get an equity sell, this is going to cause this trade some problems. Notice the trap pattern right at the high where we had a false breakout then reverse the very next day. I love these.

Well I suppose I have to cover the Gold market after what has happened. You can see the incredible down move we have had here. There is something interesting going on here. We slaughtered the short term trend line, but we have now dropped right down into the weekly trend support and bounced almost immediately. This is the line in the sand. If we close on a weekly basis below that level, the game is over for many years in this market. Until that time there is still hope for the Gold bulls. We could even see a large move up from here. I mentioned over and over that we would see $100 down days when the top came and we have seen that. My feeling at this point here is that with it now being in a weekly buy zone, the long side is the place to look for the time being here. Once we bounce, it will be time to take another look. I have no short term buys here so nothing at all for me here at the moment now that the shorts in Silver have been exited.

In summary, I do not know yet if this is the top. It is certainly acting like one, but as per the weekly support, I am not ready to declare it yet. Silver, of course made what will likely be it's top for many years earlier this year, and has fallen much harder than Gold. This is where I told people to short, so hopefully some of you listened.

I did read an interesting study done by someone who studied hyperbolic moves in commodities, and what happened during the ensuing 2 years following. On average they corrected 86% of the up move. I know Gold bugs will hate to hear that, and will have some reason as to why it will not happen in this case. I really have no idea, but the numbers are what they are, that is what has happened historically. The gentleman who did this study is Steve Briese, and he also was laughed at when he told people Crude would go back down the $30 when it hit $140 a couple of years ago. He was wrong, it went to $32! Go find his site if you are interested in reading more, he is one of the prominent COT analysts.

The next chart is the weekly Gold chart, and the trend is very clear here. My gut tells me we bounce and then completely crash over the next several months, but I have been wrong before in this market. As long as that trend line is holding the trend is still up.


When we get moves like this indicators tend to get really out of whack, so be careful shorting bounces. It is often best to let the dust settle a bit.

Good Trading


ya said...


Just discovered your blog & reviewed some of your comments. I have been riding precious metals bull trend. In your comments you state that there is no evidemce that PM provide safe haven under all circumstances & I agrre with that. Do you care to comment on another fundamental factor that are driving this market: competetive currency debasement & fear of ever increasing money supply around the world leading to inflationary pressure?
Thank you in advance

ya said...


Just discoverd your blog, lots of interesting perspectives. I have been riding PM bull trend. Besides safe haven argument the other two fundamental factors have been competetive devaluation of currencies around the world & fear of coming inflation due to endless liquidity creation in various forms. Do you care to comment on validity of these as continuous drivers of this Bull. Thanks in advance.

Chris Johnston said...

Thanks for reading and welcome. As to my views on those points you mentioned I guess the best way to respond to that is to explain how I trade. I trade based on somewhat mechanical patterns with some discretion added as to when to do what.

What you have mentioned are subjective opinions of something that might be happening. For all I know you are accurate with those views, but I do not trade on my opinions. I tend to see more of a deflationary environment at the moment with the FED being the one group that is trying to create inflation in real estate, stocks and other asset prices.

I just don't make trading decisions based on my opinions of whether or not something is happening or is not. I do not do well when I let my opinions get in my way.

This whole metals trade could very well be just a momentum trade on steroids driven by hedge funds. As a result, to me it is not conclusive mechanically what has actually caused this craze. It is the people selling metals investments that interject all of these other ideas which helps them sell their product.

I hope this makes sense. How would you like to be the guy who bought at the top, paid the 30% premium the dealers charge, and now has this paper loss on his hands?

The Steve Briese study I referenced is mechanical, and has set parameters of market movement over a period of time to qualify for the study. These are the types of things I use to make my decisions, not a subjective assessment of what I think might be happening.

Just my views, as I always say they could be wrong, that is what stops are for.

Anonymous said...

please provide your current view regarding the chart you posted on August 14, 2011


ya said...

Thanks, By the way you can buy physical for 2% ovet spot (product dependent);