When they are only half way up they are neither up nor down!

GOLD (GC) S&P500 (ES)

The markets are always divided into two camps, bulls and bears. The bear camp for a long time has been calling the top in the stock markets and wants to see S&P500 dropped much below the March 2009 lows whereas the bull camp is calling for bears blood. In between we have analysts who have created an alphabet soup of recovery (or expected recovery) U, V, W, L are quite common.

There is a case by bears for “Grand Super Cycle” of stock market reaching an end and a catastrophic drop coming in not so near future to take out all excesses since the Industrial Revolution. Bulls seem to discount that as “gibberish” and keep putting their faith (and money) on unstoppable expansion of global economies (barring timely set backs but not catastrophe) as human race has managed so far since the day they walked out of African plains as apes.

A minor flaw in Bear analysis is that it relies on S&P 500 as measured in US Dollar terms. This is good for few years but for longer term data, the effects of inflation, deflation and other effects starts creeping in distorting the picture. For the danger of valuing a market in a debasing currency, just look at the performance of Zimbabwe Stock Exchange. It might look great in local currency terms but would be pathetic if you take into account inflation and foreign currency terms.

A reasonable alternative would be to pay attention to S&P500/Gold ratio, assuming (and a separate discussion required on this assumption) GOLD as stable store of value. I had written a note about this subject late in March 2009 here discussing the S&P500/Gold ratio. There I posed the following questions

a) Stocks are very cheap relative to GOLD (i.e. at the level they were nearly 20 years ago) and time to buy stocks.

b) Stock have dropped like stone and there is no faith left in these pseudo measure of wealth and time to pile into "real" assets like GOLD.

c) At least one of S&P or GOLD is overvalued relative to the other and therefore an inflexion point can be in offing.

Since then the ratio has started heading up, after hitting low in March 2009 indicating a faith in Stocks (over Gold). However over longer term perspective the current trend in S&P50/GOLD ratio is down (since 2000). On Elliot Wave perspective, the 5-3 wave correction appears to be over and therefore there is a point in the case that March 2009 was indeed the longer term bottom for the stock markets (in Gold terms) and even if a severe correction is in pipe line, the current direction points to stocks outperforming GOLD for some time (until the ratio is 1.81 – 3.125 range). That could mean Gold is due a severe correction and/or stocks are due a severe ride up (at current price of Gold, it implies S&P 500 at 1810 at least – taking out its all time high).

These appear certainly “mind boggling” at current stage but just to get the perspective, imagine this analysis in 1984 when the ratio was .45 and people who were long S&P short Gold made 12.10 times return in GOLD terms. I (accidently or by good fortune) was able to ride a very small part of this curve in 2007-2008 being long GOLD, short S&P500 and still managed to do very well in that trade.

So what appears as next steps: There are the following trades:

i) Sell Gold, Buy S&P500  and put stop loss at S&P500/GOLD ratio of 0.86

ii) Buy Gold, Sell S&P500 and put stop loss at S&P500/GOLD ratio of 1.81

iii) Buy GOLD, Buy S&P500. Even in the severe down turn in stock, this trade has only lost 4% since 2000 peak.

iv) Sell Gold, Sell S&P500. This is opposite of trade iii) and therefore with inverse performance.

Like before, I still do not have a firm bias as to which trade to take but I know that there is money to be made in this trade if traded correctly. I will take a cautious position on trade ii) with some hedges built with options in case it goes against me. I would also like to do more analysis on this subject. I could only get data up to 1984. I am sure the truth is out there if I try harder to get data going back a lot further but my laziness is getting better of me. Any readers want to present a table of closing numbers for GOLD and S&P500 for years before 1984?

Winter of discontent or Santa Claus is here again?

key levels – indices, Grains, OIL, Currencies, Bonds, Metals

WARNING – I could be spectacularly wrong here. Do not follow blindly and jump out on signs of trend reversing. 

It has been an exciting summer for many and as far as markets go, it was quite a choppy session. However a clear pattern is visible in all developed world markets (and much earlier in the Developing World – India/China/Brazil etc) and that of an abundant return of confidence.  Markets have rallied without a significant pullback since March 2009. It is bit tough to find a fundamental reason for such strong recovery when the underlying economy is still on crutches but who said markets are rational.

Autumn and Winter 2009 could be a great period for current trend as the Markets are now setting up into a vacuum zone as Oscar calls it.

Starting with a bullish stance in June 2009, I flattened my positions and took a bearish stance for rest of the summer expecting a correction which so far did not materialise to the extent I was expecting. Recent price action leaves me flat on my positions once again looking for next set of trends to build on.

A NOTE OF CAUTION – it could very well be a summer low volume play and the markets could very well reverse drastically on down side and the whole bull market hoopla turns out to be an pouncing opportunity for bears who return after summer vacation. After all the world has not changed much and there are still several reasons to start selling. Caution is required going into early part of September. Also I do not see this as start of a secular bull market, instead I see it as last legs of the current trends. Possibly we will have new chapter/direction later on the in the year.

S&P500 (ESu9/z9)

The case for bulls is quite strong and I feel we are in the final leg of the up move from March before a long term correction/pullback sets in. My key projection level on upside range from 1066 – 1229. A very wide zone I agree but some are key milestone targets where I will be tempted to watch the action (or move stops higher).

Current Position – Small Long (1025 area)

Bias – Build Long position on breakouts and pullbacks. 972 key level to watch on downside with stops below that level.

Nasdaq 100 (NQu9/z9)

Nasdaq has been much stronger compared to S&P500 and if the bull market is continuing, it should likely to benefit more on the upside. But given the same reason, Nasdaq had been butting against the key sell level (1633) for a long time and it should remain above this level for me to comfortable about the longevity of the bull market. So NQ will be my key barometer on this breakout market. My projections are 1633 – 2040 range (again very wide) but I have some intermediate levels to keep an eye on.

Current Position – Small Long (1635 area)

Bias – Build long position on breakouts and pullbacks. 1560 is key level to watch on downside with stop below that level.

Nikkei 225 (Japan)

The benchmark index of Japan has seen the mother of bear market and has seen decades of decline. In some sense Japan has witnessed the effects of a bubble burst and deflation, things which western world is panicking about today and also most central bankers are trying to avoid. There are however signs that finally after decades of savings, Japanese consumers are waking up to spending. Any global turn around should help.

My current projections on Nik225 are 12000-12384-13000. Break below 9600 will negate this analysis. I do not have any trades on.

CORN (ZCz9)

On my EW analysis, the current bear markets in Corns appears to be over and 300 level in Corn should act as good floor to build positions on. Fundamentally, there is abundance of Corn crop but I feel that is already priced in the markets. Inflation fears and rising crude oil should support Corn at these levels and possible shoot it higher. However end of bear market does not always mean start of next bull market and very often Elliot Waves are not accurate in exact levels (they are good for direction though). In terms of my trading plan, I am starting with key level long dated call options (360/470). Failure of a key short level at 344 could help me come into the trade properly.

Current Position – Flat

Bias – Start with longer dated options on key levels. Look for a short setup failure before getting long with stops below 310.

Wheat (ZWz9)

Wheat on the other hand does not confirm that the down move is over, though it is at support level here. Some of my silly (it seems now) see wheat all the way down to 317 level. I am not prepared to back such a bold bet as of now but instead I would look to sell breaks below current lows. Can act as a good hedge against the corn options.

Current Position – Flat

Bias – Small Sell breaks below lows (485) or watch for action along with Corn/Soybean

Soybean (ZSx9)

The most volatile and exciting of the grains complex is also the most fickle. Best used as a leading indicator for other markets or short term trades. So far I do not see any long term trends. 1180 are likely near term targets if the bullishness continues but none worth putting a fat trade on. Best to be traded on day by day basis.

Crude Oil (CLv9/z9)

Like other commodities complex, crude oil has also shown the return to bullish momentum since bottoming out at $35. From the EW perspective, the Crude should be heading to 88 – 95 region. The pattern with negate on the breach of $58 level on the downside. However given that crude is now trading at 74, the risk rewards are 1:1 on such trades and not worth putting a big position. Need to wait for next big wave. I will continue to trade on day by day basis if opportunities arise keeping the broader direction in mind. The whole energy complex except Natural Gas (NG) is setting up for this bullish formation and worth keeping an eye.

Dollar Index (DXu9/z9)

US Dollar appears to be heading for completing its last wave of down move which can take it all the way down to 72 – 75 region. Considering we are around 78-79, there is not much risk:reward in left in long term trade so worth playing on the downside on short term basis. If DX moves up to 82 I will need to think of a different scenario but until then I am not a dollar bull. Mostly on sidelines watching the fun. 

Along with Dollar, I feel GBP is another currency to sell in coming days and month. It seems to have topped and has a long way to go down.

T-Bonds (ZBu9/z9)

Bonds are one market which is sticking out like a sore thumb. If the world trouble are getting over, the interest rates should start heading up, especially the long term interest rates. And for a long time, I am of the view (which had been quite profitable) that the long term bull market in govt bonds is OVER. But current setup points that most bonds (T-Bonds, German Bunds and even UK Gilts) are looking up. The central banks are keeping the market distorted. Banks are also buying bonds instead of putting the money in economy to repair the damaged balance sheets and keep cushion. Or they are simply setting up for a juicy short somewhere up there. In all cases, I am on sideline watching them wearily. Hopefully some clue will emerge soon.

Gold (GCz9)/Silver (SIz9)

Gold and Silver markets have been consolidating in a range for better part of this year. Best is to play them on range breakout basis. For Gold, I am watching 966/900 level. Breakout above could lead it to 1220/1350 level. Breakout below could target 840-740 area.

Silver is in similar predicament and similar levels to watch for breakout are 15.40/12.40

Cocoa (Cz9 on liffe)

Cocoa is setting up for upside breakout once again. Buying dips and breakouts with stops below 1700 is the plan currently.

Gold is really getting interesting

GOLD (GCZ9)

Buy on dips, possibly all the way to 880 if required. Stop below 860 (or 800 if conservative). Target 1500 + on convincing break above 1000

In Jan 2009 I wrote about Gold chart making an interseting formation "Gold is getting interesting". After recent up and down, Gold chart has become really interesting from several perspectives. 

A) Gold will breach tripple top at 990 area if the up move continues. That is really bullish and can propell Gold to new highs. The good news is that no one is talking about it (news papers etc) as they seem to have given up on precious metals in light of recent stock market rally. So it can take some people by surprise.

B) Gold has also consolidated in an inverted head and shoulder pattern since March 2008. That consolidation is about to be completed and possible breakout is on upside.

C) on Elliot Wave perspective as well, Gold looks bullish. The correction pattern since first achieving 1030 high calls for the top to be wave 3, leaving final wave 5 in formation on long term charts. The fib extensions for the 1-3-5 wave and I of 5, III of 5 and V of 5 wave conincide around 1502 - 1540 area.

This setup interesting long term and medium term trading perspective for gold, one worth watching. The trade setups I mentioned in this post require larger stops and therefore good only for managing existing long positions OR with deeper accounts. However buying dips and trailing stops from key support areas on chart should also work on micro managed positions. It could also be worth taking position in longer dated futures (and waiting for price to reach your key points) and certain longer dated optiond around 1500 are still cheap, especially 1000 - 1500 - 2000 butterflies which give potential upside of 500 points.

Remember 1989

GOLD (GC) S&P500 (ES)

Still making up my mind about what to do!

Do you still remember 1989 - I was in school around this time in 1989, in class XII. Studying hard (?) for the CBSE exams and various engineering and medical entrance exams which all aspiring students in India ritually take. It was long time before I first got aware of the financial markets and not so long time before I got a taste of my first beer. Life was simple and carefree. There was no mortgage to pay (not even for my parents) and TV's have just stared to appear in my home town. Michael Jackson was still coming out with great numbers  around then. So what is common with 1989 and 2009. Well 1 ounce of gold buys same amount of S&P (a measure of US stocks) as it did in 1989. We certainly have not made much progress financially as the crow flies (without considering dividend of couse which make a significant proportion of the returns from stock market). In the attached chart left scale shows GOLD and S&P500 levels in USD and right hand scale plots the ratio of S&P to GOLD (i.e. how much S&P you could buy for 1 ounce of GOLD). The chart is in log scale to emphasise the relative change. At the time of writing, the ratio is hitting close to where it was in 1989 (0.78 region). 

Now it can mean the following three conclusions:

a) Stocks are very cheap relative to GOLD (i.e. at the level they were nearly 20 years ago) and time to buy stocks.

b) Stock have dropped like stone and there is no faith left in these psuedo measure of wealth and time to pile into "real" assests like GOLD.

c) At least one of S&P or GOLD is overvalued relative to the other and therefore an inflexion point can be in offing.

If you subscribe to option a) time to buy S&P futures and selling equivalent GOLD futures.

If you believe in option b) time to do the opposite i.e. sell S&P futures and buy equivalent GOLD futures (or even physical GOLD if you have lost faith the in whole fianncial world).

If you believe in option c) a market neutral trade can be put on by buying (or selling) equal amount of S&P and GOLD futures. Question would be which direction the ratio is heading.  If the ratio is turning and heading up, S&P would rise faster (or fall slower) than GOLD.  However if ratio is still heading down to regions before 1989, S&P will rise slower (or fall faster) than GOLD.

Certainly times are interesting and that is an understatement. I am tempted for Long S&P and Long Gold position to start with, turning into Short GOLD (if GOLD appears to be topping) or Short S&P (if S&P appears to be tanking further). Let us see what that brings.

For information, 1 S&P emini future is equivalent to 0.3773 GOLD futures so roughly 5 S&P for 2 GOLD.

Gold is getting interesting

GOLD GCJ9/ZGJ9

Buy 828/815/791 and break above 850 Stop below 760 Target 1020

I have been bearish on Gold for most of 2008 and had managed good trades on that. See all that shines is not gold (and associated trade updates chain). However chart pattern is developing in an interesting way. Since bottoming out in Oct 2008 Gold has been on an uptrend. However since March 2008 Gold has not been able to hold above 200d ema. This is forming a nice apex with a potential to break on the upside if Gold can find strength to close above 850 for some time. Bulls are not letting Gold fall too much and bears are not letting it rise. And all that is creating a trapped energy and one side had to give way soon.

The fundamental struggle is about deflation and inflation. If the govt efforts to fight the financial crisis is successful, inflation should be on the cards. This is also evident from most commodities (softs/grains/metals) except energy and oil sector which have silently started turning upwards. Govts would even welcome mild inflation. Afterall they are all borrowing heavily and the only cure for heavy debt is inflation. I am sure the focus would soon return on fighthing inflation but it is like trying to turn a tanker. You can easily oversteer unless the helm is in the hands of an able captain.

Another key issues would dominate would be the strength of USD. If american economy starts recovering, bizzarely it could be negative for USD as people will start taking risk again and USD safe haven will start flowing out again. Also with USD on practically zero interest rate, I would not be surprised if USD would be used as another carry trade currency once the trade returns. Basically a lot of people are scared and parked in govt treasuries at practically zero interest rate. On signs of dawn, these people will start venturing out.

So a bet on Gold upside is bet on sucess of Govts to save the economy and Gold's safe haven status limits the downside anyway.

Safe trade is to wait for break above 850 or 895 and then start entering longs. Adventerous traders can start buying on dips but it would require a closer position management as the trend is still not defined. Break below 791 would signal that uptrend is losing ground and longs should start looking for exit.

I have done one trade of buy at 817 few days back and sell at 835 today. I am looking to keep dipping my toes on the long side in Gold in near future.

Silver/Copper and Grains are looking interesting as well on long side. Cotton is also setting up for long side beautifully. More on that later.

TRADE UPDATE: Is silver setting up to outpace Gold?

My Development as a Commodities Trader: Is silver setting up to outpace Gold?

The trade has moved in right direction since the day I posted it. I have now able to build up a suitable position in short GOLD and long Silver with average ratio of 80.

Fed cutting rates to almost 0% is inflationary in nature and may give a rocket boost to commodities and may even plunge dollar. 

It seems time to become commodity bull is coming again. I am keeping an eye on that.

Is silver setting up to outpace Gold?

SILVER SIH9/ZIH9 GOLD GCJ9/ZGJ9 PAIR

Buy 16 Silver and Sell 10 Gold futures. 

Stop when GOLD/SILVER > 100

We saw spectecular run up in the the prices of Gold and Silver last year with Gold culminating into an all time high and silver in a significant high before both of these "precious" metals started falling like a stone so far this year.

Silver in particular has fallen by nearly 60% from its high whereas Gold has managed about 34%. This is quite expected as Silver tends to be more volatile of the pair and tends to shoot excessively in both directions (up or down).

Now I made an interesting observation that the last bull market in Silver started in March 1993, nearly 6 years before Aug 1999 when Gold bottomed out. So even though I am oscillating between Bear or Uncertain camp for Gold it "could" be that Silver has seen its correction and may be it is turning its head upwards. 

In addition the Gold/Silver ratio is hovering at 80 after hitting nearly 92.5 in October 2008. Such high readings were noted in 1993 when silver started turning up as I pointed out earlier. The reasonable level for this ratio is 50 and the historical mean level for this ratio is actually 16. This points that silver now is extrement cheap compared to Gold. 

An adventerous trade is actually to buy Silver with stop below 8.40 however in the current climate of volatility it could be safer to trade this as a pair and then cover Gold Short when inflation start raising its head again.

TRADE UPDATE: All that shines is not Gold

My Development as a Commodities Trader: TRADE UPDATE: All that shines is not Gold

I am out of this trade again at 760 (+24 points) though I was hoping to ride is much longer. The range action is frustrating me in most markets and I thank all my guardian angles whenever I can come out profitably on any trade in these markets. I am by nature a trend following trader and therefore the range kills me many times.

The price action on S&P during Friday session rang some alarm bells for me and I was in no mood to leave positions over weekend. In addition Gold did touch my first anticipated breach level (743) but bounced off strongly.

If I see weakness next week I might go in again as I am still not a bull of Gold but for the time being, remaining out of this market seems like a reasonable position to be in.

TRADE UPDATE: All that shines is not Gold

My Development as a Commodities Trader: TRADE UPDATE: All that shines is not Gold

And once again (after the holiday related rally is out of the way) I am back again shorting gold. For a small time I was wondering (when I closed earlier short position - see previous update) that I might have to turn to Gold bull soon. But it seems from chart that the recent rally was nothing but a counter trend push during holiday season (that is why it is a good idea to be out of positions during the mad holiday period).

I have taken April Gold GCJ09 short at 784 area with stops above 853. I am planning to add up to 834 and looking for break of 743/699 and 688 for confirmation of trend. I am targeting 650 as first stop and possibly lower thereafter.

These trades are continuation of main theme in the first update so I am not repeating the arguments. Or simply follow the chain in the trade updates.

TRADE UPDATE: All that shines is not Gold

My Development as a Commodities Trader: TRADE UPDATE: All that shines is not Gold

I am now (once again) out of this trade at 729 (about 42 points). Failure to breach 681 concerns me today. I am out of this trade now and need to watch if I end up becoming bull for gold in near future.

TRADE UPDATE: All that shines is not Gold

My Development as a Commodities Trader: All that shines is not Gold

I am back in this trade now that two uncertainties are out of the way. Fed has cut as expected and BOJ has cut as well. This should help bring some "stability" in the markets and cut those wild swings we have been witnessing lately.

Since long bonds (TBOND) anticipate future interest rate move, it is quite reasonable to expect that chances to interest rates rising in future for US are higher than lower. They anyway do not have a lot to reduce. There is of course talk of US rates going to zero or further down but I feel that would require a real armagadon to surface. As of now I am not hanging my hat on zero rates in US. Therefore I only see downside in long bonds. See Few bubbles left to burst.

With that said, I would expect Dollar to go up, Yen to decline (after an initial bounce up may be until 0.010600 area on IMM futures (JPYUSD) (94.34 in USDJPY term), bonds to fall and stocks to go up (possibly after testing some downside around 900-880 in S&P 500)

All this would leave gold on a precipatious path. The diwali demand from India is over and they did not buy as much jewelary as expected. Rupee decline has made Gold expensive in India even after recent fall in USD terms and the trend is likely to continue. My target for 650/550 remains and some projections are pointing to 450 level as well but that is bit far and I am merely keeping an eye at that level.

I have gone short at 771 level yesterday with stops above 840. At the first instance I am looking for breach of 681 where I will add to shorts and move stops down. I am looking to remain short gold until the inflation starts raising its head up and that would require the economies to improve.

What can de-rail this analysis is if US end up lowering rates further. Or stocks fail to stabilise and make new lows.

TRADE UPDATE : TRADE UPDATE: All that shines is not Gold

My Development as a Commodities Trader: TRADE UPDATE: All that shines is not Gold

I am out of this trade today at around 690 region. I have not turned bullish on gold yet but something is in making and I will look at that carefully during weekend.

TRADE UPDATE: All that shines is not Gold

My Development as a Commodities Trader: All that shines is not Gold

My first trade was stopped but I see the same trade valid again and I am going back in. Stops higher than 940 this time. Break below 830 to signal trend confirmation and place to add to shorts.

All that shines is not Gold

GOLD (ZGZ8/GCZ8)

Sell up to 900 Stop above 935 Target 650 - 550

This is a risky trade. Gold has recently made bold upward moves nearly $110 in just two days. The world appears to be running out of physical gold. The recent headlines are all bullish for Gold.

Investors start a fresh gold rush

Wealthy investors drain supplies of gold by hoarding bullion bars

It seems that the world is running out of Gold. Most GOLD ETFs have reported huge inflow of funds in recent days. So why do I look for downside in Gold. My reasons are all based on chart. It is quite evident that recent moves in Gold were driven by extreme panic. It is also a fact that extreme panic is usually short lived and it is best to fade (counter trade) the panic moves.

I have also been suggesting strong dollar (When going gets tough .... the Dollar gets going).
A careful analysis of the charts indicate that dollar has turned corner against all major (and minor) currencies and the bear market in dollar appears to be over. If dollar is strong usually that is not good for Gold.

Another source for Gold demand used to be jewellery demand from India. This is significantly low this year for obvious reasons. The price is too high and economy is no longer booming. Apparently India has imported 75% less physical gold this year.

Even in these panic moves, Gold has failed to make new highs or even hold on to current highs convincingly.

Factors which can go against this trade are - another round of panic or relentless hoarding of cash in Gold by rich investors who have lost faith in all world banks. Also LBMA (London Bullian Market Association) is forecasting a price of 980 by this time next year and they are usually quite accurate. But that does not exclude possibility that we can see a sharp move down and then return back to safety of Gold later when it is confirmed that the "bail out plan" does not solve the economic problems.

I have taken a small short in December Futures at 890 level. I am planning to add more after a breakout below 850. That could also be a time to start moving stops lower.