11/05/2010 by Philinje.

Currencies and equities came back to their breakdown level yesterday and currencies have been sagging again, while gold just about touched its all-time high just minutes ago, reaching $1224.  Silver jumped up again and is now above $19.

The mood seems to be skeptical. Another huge bailout - will that work? There are rumors about the Fed re-opening swap lines with Europe to enable buying of the Euro, ie, intervention. Intervention might cause a short squeeze in the near term, but ultimately the market will have its way.

It’s an interesting question whether gold will rise or fall or stay level with a falling dollar. Assuming the Euro gets defended, the dollar will drop. But does that mean gold will fall as the perceived need for a safe haven is lessened? Or will it move up or stay stable because the world is waking up to the massive money printing going on? Or will it rise along with commodities?

Regarding silver, the New York Post has followed up its recent piece about the whistleblower with this story:

http://www.nypost.com/p/news/business/feds_probing_jpmorgan_trades_in_gZzMvWBqOJpB55M7Rh9vwM

Apparently the CFTC is pursuing a civil probe and the Justice Department is pursuing a criminal probe into JP Morgan’s silver trading. Interesting. Could that have something to do with silver’s strange behavior of late? The past few days in silver look like perfect steps - absolutely flat until the next move straight up. After watching silver on a daily basis for the past few years, I can attest that this behavior is bizarre.

Anyway, gold and silver are the only commodities moving up and it seems they have some kind of fuel that is not so tied to the dollar or the equity markets. Could it be that the obvious recourse to money printing, now firmly reinforced by Euroland, is finally causing a broad exodus to gold and silver?

Well, investors in Europe will definitely see gold as an alternative to their currency. US investors, on the other hand, have the dollar as a safe haven. So the huge strength in Euro gold could be a big factor in gold’s strength.

Regarding my earlier post, it’s still possible that there will be another move up in equities shortly that could exceed Monday’s highs. It’s what happens after that that will be interesting. And keep in mind there could be some intervention in the Euro before too long.

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11/05/2010 by Philinje.

Opinions on the equity markets at present diverge wildly. Some people say the recovery is back on track after a possible further 5% drop and others say this is the beginning of a massive decline.

What seems likely is a short rally then a further drop. The levels to watch for are 11,000 or less in the Dow Jones and 1190 or less in the S&P. If prices don’t make it past those levels and then cross below 10,300 and 1100, last Friday’s lows, another decline is underway.

The ending levels of another decline could be below 9870 and 1066, the lows of last Thursday.

In terms of the dollar and Euro, there may be another move up to above 86 on the dollar index and to 1.25 or less for EUR/USD. The Euro’s low in Oct 08 was 1.23.

One commentator has pointed out that Oct 13 08, the day after a major crash and when bailout funds were forced on major banks, is very similar to last yesterday, May 10 10, in one very important respect: NYSE market breadth in terms Advance/Decline numbers spiked to record highs, meaning there was a huge rebound. But that lasted all of 2 days last time, and ultimately led to the Mar 09 low. This time, it’s Euroland getting a trillion-dollar bailout and will things be different?

The dynamics seem similar to Oct 08. Governments moved too slowly and then threw enormous bailouts at the problem just as the markets were coming undone. That didn’t prevent further declines. Now we’ve had a recovery that achieved the 61.8% retracement of the decline (11,246 on the Dow), which is a natural level to achieve, and the same bad movie is playing out.

You need to form your own opinion but personally, I’m looking for a top in the next few days. Currencies are already pretty tired today, so it’s possible we won’t even get above yesterday’s highs. But if we do, there is plenty of resistance overhead.

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08/05/2010 by Philinje.

It happened. Gold closed at a new weekly high, its highest ever. With a relatively neutral NFP release and equity markets figuring out the mood is quickly getting bearish, gold bumped into $1210 again and closed at $1207.

Considering the lengthy consolidation of the past 4+ months and the relatively gradual climb to above $1200, it looks likely that gold will see some more upside. The near-term projection of $1350-ish seems healthier than ever. Of course that is no guarantee - there are no guarantees in the markets.

Interestingly, silver caught up in a big way on Friday. Some folks must have decided its monetary aspects were a bigger factor than its commodity nature, which had been holding silver back earlier in the week. As the problems in Euroland seem to sink into the market’s psyche, monetary safe havens are the name of the game.

Speaking of which, gold in Euros was turning parabolic this past week. It eased off a bit on Friday as the Euro stabilized, but basically Euro gold was looking like a hockey stick curve getting to a peak. If the Euro bounces, a good buying opportunity might present itself. And yes, the performance of gold in Euros is a nice supportive indicator - precursor, if you will - of what could happen to gold in dollars.

Looking at the ugly situation in equities, it may behoove us to discuss stops. An absolutely essential element of any speculative trading includes stops, and when it comes to anything in equities these days, stops are now essential. This is NOT a buy-and-hold market. Anyone still with the mindset that parking a bunch of retirement savings in GE or Intel with no stops and a timeframe of 10 years is playing with fire. Many of us got burned in late 08, early 09 - don’t let that happen again.

Absolutely the worst mentality to have is the conviction that the market will come back to eliminate losses and then you can safely get out. That is the highest risk strategy possible in the current scenario, and a bad one in general. Do not get suckered by your own psychology.

As prices move up, move your stops up. That’s called a trailing stop. When the price plunges through your stop, you are out, end of story. In terms of where to place stops exactly, that involves some familiarity with the particular stock and its volatility, but as a general rule of thumb, normal equities should have a 25% stop (25% below the current price or just beneath a recent support level), and highly volatile instruments like gold could use a wider margin of safety. Some junior gold stocks, for example, might require a 50% stop. But think about it, that means you are willing to lose 50% of the value. Are you, really?

Another rule of thumb is to move the stop above your entry as soon as possible, meaning after the price has moved about 25% above your entry price. That way you will not lose money. Every day that your stop remains below your entry, you are at risk of losing money. Without any stop, you could lose all of it.

So the trap many people fall into is getting into a bad loss, then holding until the position comes back to breakeven. That is the worst possible way to trade anything. Instead, a stop should have triggered a small loss and then if it makes sense, a new lower entry could be initiated.

But assuming you have one of these bad losses still limping along, what do you do now? Step 1: Put a stop underneath the current price. Step 2: Move the stop up as the price moves up. Ok, maybe that particular stock has a support level 40% below the current price, such as an all-time low. Then set the stop just under that. You have to know enough about the stock to be intelligent about where to place the stop. If you dont know enough, why are you in that stock at all? Get rid of it, ferchrissakes!

The point is, your entry is not that relevant after you’ve initiated a position. It’s only relevant to your ego. The market will do what the market will do. A trailing stop will get you out automatically, with no emotion or ego attached.

Having said all that, using stops with gold or silver is extremely difficult. The best approach is to get the best possible entry and keep a stop well below a recent support level until the price moves up significantly to a new area. But the price swings can be large so stops may get triggered. As a rule of thumb, the less confdent you are about a position or entry level, or the bigger the gain gets, the closer the stop should be. That’s the inverse of what you would think intuitively.

Think about it. Let’s say a month ago you bought some GLD at just under $1100, knowing that was a major support level. Then a stop at $1040 or so might make sense, because that would be a key area that indicated a major breakdown was occurring. Your loss would be large, but not as large as it could be. Then, when the price broke through $1160, a major resistance area, you move the stop up to $1090. I know that breaks the rule about getting above your entry ASAP, but with that excellent entry and the behavior of gold, it makes sense.

On the other hand, if you initiated a position at $1130, and felt a bit queasy about it, like you were just putting your toe in the water to see if a crocodile bit it off, then keep the stop pretty close, like at $1110. That way, a major swing down would take you out with a small loss and you could get back in at a lower and better level. An entry you are not confident about usually means the price has to move rapidly in the right direction for you to get to a place of safety, and that may or may not happen. Also, as price moves in your direction it gets more and more likely to turn around, so sneaking stops up closer to the price as it gets toppy is a good way to preserve profit.

Please note that the level of stop relative to the entry is what determines the size of your position. The potential loss has to be calculated at least roughly in advance so you don’t use too much money on any single position. That’s common sense, but it’s amazing how many people don’t follow this basic technique of money management.

Ironically, the better entry with the wider stop will require a smaller position. Shouldn’t you bet more money as the entry improves? Yes, and no. Getting in at a major support level is good, but speculative, meaning the price could still move to an even lower support level or just bounce around at this level. Once price moves in the right direction, it could make sense to add more, albeit at a worse level, but it’s less speculative. Your tighter stop will compensate for a larger position.

There are variations of this approach, and to each his own. But the principles are always the same.

I wish some of the books I read about trading had given me what I just wrote here.

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07/05/2010 by Philinje.

Well, that was interesting. As equities crashed late in the US session yesterday, gold went up and broke through $1200, getting as high as $1210. Throughout the day here is Asia, gold has floated around $1200.

Whatever the cause of the crash - a mistaken sell order or a case of bad nerves over Europe, or both or neither - this behavior cemented the case that gold has re-gained its safe haven status, despite the dollar also being a safe haven. This marks a major milestone whereby gold has gone full circle around the financial crisis back to where it started,  and now has “crisis legs” as well.

The dollar and gold now share the qualities that they could rise due to evidence of recovery AND risk aversion causing a flight to safety. That’s kind of cool, because it means strength from both rising and falling markets.

In a few hours is Non-Farm Payrolls, the biggest monthly event in the currency world. The ADP report this week was moderately good, and continuing unemployment claims decreased slightly, so expectations are there for some moderately good news. Last month’s NFP established a move in a positive direction, so any bad news tonight will be very bad for the recovery thesis.

This means there is slightly more likelihood of disappointment, which would be bad for commodities. That will be bad for silver, which has not participated as directly in being a safe haven. It also could be bad for the dollar, which would lose the benefit of an anticipated rate hike in the near future, though a panic would send it higher as a safe haven. So the negative scenarios could be good for gold. Conversely, if the NFP release is good or very good, the dollar could stay put and commodities could rally. Gold may not benefit as strongly, but it should stay strong.

Since gold has broken through $1190 and $1200 this week, signs are very good it will get past its old high of $1227. And if it closes around $1200 it will have achieved its highest weekly close, ever. Let’s see what happens.

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01/05/2010 by Philinje.

Let me repeat the disclaimer I have made in the past. This blog is not trading advice. Your investment decisions are entirely up to you and everyone’s situation is unique. I am not a financial planner and personally, I don’t recommend the advice of most financial advisers, but again, that’s up to you. And let me make this crystal clear: there is no certainty in the markets, no matter what anyone says.

As of Friday, the signs of a near-term peak in gold, silver and the gold mining stocks are good. Meaning, further upside from here within a month or two is still possible. Gold keeps marching higher while silver caught up in a hurry as the sovereign debt downgrades faded quickly from the marlet’s memory. General equities, however, don’t look so good. If I were to give a warning to my friends, it would be to be careful with most stocks.

Also on Friday, the gold mining stocks achieved a weekly breakout and nearly closed above the recent January high. They are within spitting distance of the all-time high last December. So is silver. Gold had exceeded its January high already and looks like it might hit its all-time high fairly soon. One source talks about a reverse Head and Shoulders in the gold mining stocks that projects 600 in the HUI, and if the HUI exceeds 525 (its all-time high), over 800! The HUI closed at just under 464 on Friday.

GDXJ, the new ETF for junior miners, is a handy way to play strength in the mining stoks with even greater movement both up and down. The original GDX is useful for the big miners. Considering that there will likely be a wave of acquisitions by major miners of junior miners, GDXJ is a great way to get diverse exposure to a range of healthy juniors.

Another source sees Monday or Tuesday as the likely time for gold to make a decisive breakout. We shall see. So far, gold has been extremely resilient above $1100 and has been consolidating after tumbling off its all-time high last December. And we have seen it separate from the traditional inverse relationship with the dollar, as it re-gains its safe haven status. So there are a lot of reasons traders have confidence in gold right now. In Euro and pounds, gold has already hit new highs. It would be nice if Euro gold would ease back down a bit to give an ok entry, but sometimes gold just doesn’t allow that to happen.

Because of what we saw earlier this week, I have more confidence in gold than silver at this point in time. The reason is, silver will suffer with risk aversion, along with other commodities. And there is no telling if there will be more bad news out of Europe, or China for that matter.

One thing seems especially likely: if gold sails through $1200, there will likely be a lot of money piling in and causing some big moves up. So, I don’t see the former high of $1227 as a particular target. This would be part of a scenario where gold bumps into $1190 and bounces against $1200 a couple or three times before breaking through. On the other hand, if gold barely makes it to $1200 before sinking $50  to $75, then the picture is considerably worse. As things stand now, the projected peak of $1350-ish, based on a large reverse Head and Shoulders pattern, is alive and well.

Lately, gold has been surging through resistance levels without a lot of fuss, so a lot of strength is already evident. With May starting on Monday, and recent futures and options settled, there could be a big surge as the source I mentioned above has predicted. We’ll see soon enough.

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