Risk vs Reward

Risk vs Reward

Chart wise, the dollar is consolidating and poised to push higher, Gold has made a great run so I’m taking those profits while I have them.  further upside potential from here, at least on a 30-60 day horizon, is limited IMO.  Technically speaking Gold put in a high a few days ago and the dollar is coiling.   The big test will be how Gold puts in its next low.  So far Gold has been making “lower lows” since the $1900 run-up.   If it’s next low is a still lower low (below $1520) it would be a cue that more downside may occur.  Should it make a higher low (above $1520) it would be a promising sign.

Fundamentally speaking I think the ramifications of a Greek default and it’s likely domino effects could trigger Dollar run-up and a vigorous equities sell-off. European default is a deflationary event.  Sure the Fed and Central Banks will try to offset this but in a short term it could possibly result in a Lehman type event.

So the risk/reward here is somewhat asymmetric IMHO.

NOTE: All of this would be negated by a push above $1767

Re-entry signal rules

With positions all in cash the focus is not on a re-entry signal.

Risk vs. Reward

Recall last week PM longs were liquidated, shorts entered then liquidated.  Aside from a minor bounce trade all positions are neutral (i.e cash). The focus is now on a trade opportunity.  Do we see one?

The price action in Gold does nothing to dispel the notion of a deeper correction.  The initial move was swift and a short term bounce is expected.  As shown from the above chart, the correction shows no signs of abating just yet.

The Silver Chart is downright haunting:

A text book bounce off of the 50 DMA, followed by subsequent weakness – not good.  Silver needs to close above the 50 DMA before any thoughts of re-entry are entertained.

This is risk trade.

Risk in PM’s is still to the downside.  From the chart we’d expect a reversion to the trend line as a minimum, while keeping the overall trend well in tact.  The question now is one of risk.  For that we go to the US dollar chart:

Clearly a bounce of some sort is still in order and appears in progress.  A mild bounce should take us to the convergence of trend lines near 78.  A more vigorous bounce would bring us back to the 87 range.  The dollar chart implies further pain the PM’s.

Can I get a bounce?

From Monday: Gold tags an upper trend line and oversold secondary indicators 
 show its ripe for a correction.


Today:  (right this minute) AG tags a lower trend line providing a nice to start a position.  

 

In closing, there's a good chance we'll go lower still in PM's.
Although primarily a technical basis, some fundamental market 
forces supporting a correction are:

A Dollar that has been stretched to the downside - It's due for 
a bounce.

QE2 Ending

The Post Fed announcement rally fading

A hyper run-up in Silver which is now extremely overbought.

UPDATE: The chart below makes it painfully obvious why position size
 is important to establishing any position. yesterday I entered a
 probing micro-position on odds of a bounce at the 50 DMA. 
This did not occur and caused almost no account erosion. We 
will likely see the 200 DMA challenged.
 
 
 

Inflection Point

Today’s post is less about forecasting direction and more about managing risk. A look at the weekly chart for the S&P shows the market approaching a key resistance level, it’s 200 week moving average.  Despite the enormous gains since the cyclical bottom of March 2009, the market has yet to break this trend.  With everyone expecting “good things” to come in the form of QE2 we have some disturbing signals emerging.

As contrarians know when the herd runs left, smart money goes right.

UPDATE: With a decisive push through resistance the market is clearly showing it’s hand.  QE2 is having the desired effect (god help us all) and gunning all investment classes higher, clearly putting scenario “A” on the table. An important level has been breached signaling further gains ahead. A successful test of this former resistance would be the cue to add to strengthen long positions.

Resistance

The above chart shows the approach of overhead resistance converging precisely when the ”good news” of QE2 is expected to be announced (Nov. 3).  In the above chart two scenarios are plotted.  While “A” is certainly possible, “B” is the contrarian choice if one were to “sell the news”. Secondary indicators confirm momentum has reached a maximum, indicating overbought conditions.  Unless this momentum is sustained these same indicators will trigger classic sell signals.

NO Fear

The fear index (the vix) is scrapping it’s recent lows at just over 21.  For those not familiar, the vix is a measure of the premiums investors are willing to pay for put options, which act as downside insurance. These low ”premiums”, affected by supply and demand, are effectively saying investors feel comfortable foregoing insurance against a fall in equities. Investors are largely Bullish. Historically this complacency is often a necessary component to market deterioration.

All In

Minyanville contributors enumerate ”10 Warning Signs of a Major Top” citing among other things “[Mutual Fund] Cash has just hit a new record all-time low at 3.3%!”leaving but one direction for that money to flow.

Mish notes Bullish sentiment is at an extreme high (AAII Bull Ration).

So the emphasis is on risk.  While both scenarios are on the table, we are at a potential inflection point in the market. Wise investors would do well weigh any potential upside reward to downside risk.  The best course of action might just be to wait it out.  Cash is a position.

Rare Earths, Gold and the Dollar

MCP

Showing strength in the face of a sharply down market on news of an expanding embargo of Rare Earth Exports.

UPDATE 11/3 :  Having tagged $40 and sharply retracing MCP is now riding the lower trendline of it’s channel.  Watch this trendline for weakness

The Dollar

 Gold

 

Tag! $1350

With the upside target of $1350 tagged yesterday it’s a likely place for a retracement. $1260 marks the first rung of support with $1170 hiding beneath.  We see both CCI and Stochastics in agreement on an iminent break of momentum.  As with any bull market retracements are best viewed as opportunities for further buying into an already profitable position.

Secondary indicators provide an early clue of a retracement.