Posted by dfwalsh97 on 24th of Aug 2008 at 10:48 pm
from Kitco Matt/Steve what about DBA???
Today's first main topic is the implications of the current
commodity bounce, and how to track it.
Whenever any asset class has plunged from a particular trading
range all the way down toward an important support level, its
immediate subsequent behavior gives you valuable clues as to its
future direction over the next several months.
As a rule, when any very depressed asset attempts to continue
to decline, while experiencing gradual positive divergences, this
is a classic setup for a sustained rally of higher lows. For
example, if gold and silver had continued their pullback, while
gold mining shares had fallen each morning and mostly recovered
each afternoon (see May-August 2005 for a classic example of this
behavior), this is how powerful bull markets are made.
Whenever a recently collapsed asset instead enjoys a powerful
rebound, while closely correlating asset classes move in nearly
perfect tandem, this sends a danger message that the recovery is
false and cannot be sustained. As a rule, bear-market bounces tend
to be heavily synchronized; they tend to induce heavy short
covering by an army of late-arriving amateurs; they tend to see the
formerly weakest groups suddenly becoming the strongest; and they
tend to be particularly intense.
We are experiencing exactly this kind of false rebound for
commodities and their shares. Not only did precious metals move
higher today, but so did all other commodities. The U.S. dollar,
which clearly remains in a major bull market that began on March
16, 2008, plummeted sharply.
In other words, all of the general commodity/currency trends of
the past five months saw a nearly perfect inverse day in the
opposite direction of these trends.
Why did this happen? The answer is simple. As commodities
continued and accelerated their respective downtrends, the media
began to turn gloomier toward commodities. A number of analysts
began to ask, is the commodity bull market over? Especially during
the past two weeks, amateurs have been piling into commodity bear
funds and unloading their commodities and commodity shares. Amateur
short positions were piling up.
The financial market hates any crowded trade. Therefore, it
will always shake out all late-arriving participants to any
important trend by staging a dramatic countertrend designed to
scare anyone who is not an experienced player.
Many people had asked me whether precious metals had bottomed,
or whether other commodities may have bottomed. Until today, I was
not sure. Now I am positive that they have not, because the only
possible sequel to today's action is the eventual resumption of
another major downtrend for commodities and their shares.
How will you know when this downtrend is about to resume? The
key lies in the behavior of a fund which is little known to the
general public, but which should be familiar to readers, DBA.
DBA is an exchange-traded fund of futures contracts for wheat,
soybeans, corn, and sugar. Agricultural commodities, having been
the latest hot-money investment choice since August 2007, seem to
have been established as the leading edge of the hedge-fund trading
universe.
Therefore, for all of the past year, if you see what DBA is
doing, you know what the commodity complex will do the following
week.
Today, DBA reached a mid-morning peak of 38.16. If you take the
high for DBA of 43.50 from February 27, and the low of 32.88 from
August 8, the midpoint is exactly 38.19 which almost matches
today's high. The 61.8% Fibonacci retracement is equal to (43.50
32.88) * .618 + 32.88 or 39.44. Therefore, additional upside is
possible, but today's high must be watched closely.
If DBA begins to make a pattern of lower intraday highs over
the next several trading days, while the U.S. dollar continues to
decline to complete a reverse right shoulder, this would be a
classic indication that the commodity downtrend will resume in full
force as soon as the greenback begins to find support and forms the
next phase in its uptrend.
On the other hand, if DBA continues to form a pattern of higher
highs, then keep an eye on the 61.8% Fibonacci retracement level of
39.44. This may be broken by a marginal amount, and then a pattern
of lower highs may ensue. Otherwise, if this level can be easily
broken to the upside, followed by additional higher highs, then
commodities will be enjoying an extended short squeeze which will
continue for the near future.
Either way, DBA will give the most accurate signal of when the
commodity downtrend will continue. The recent intense, coordinated
rebound ensures that the downtrend must continue, and therefore it
is only a question of when, not if."
Watch for more words from the "Hole" and for
Lehman-related developments. Flash e-mail chatter crossed many a
laptop about a Korean buyout of the firm (KDB). Monday will tell
more. A second week of repairs/consolidation is almost an absolute
must at this juncture. Show of hands, anyone?
Market Analysis
Posted by dfwalsh97 on 24th of Aug 2008 at 10:48 pm
from Kitco Matt/Steve what about DBA???
Today's first main topic is the implications of the current commodity bounce, and how to track it.
Whenever any asset class has plunged from a particular trading range all the way down toward an important support level, its immediate subsequent behavior gives you valuable clues as to its future direction over the next several months.
As a rule, when any very depressed asset attempts to continue to decline, while experiencing gradual positive divergences, this is a classic setup for a sustained rally of higher lows. For example, if gold and silver had continued their pullback, while gold mining shares had fallen each morning and mostly recovered each afternoon (see May-August 2005 for a classic example of this behavior), this is how powerful bull markets are made.
Whenever a recently collapsed asset instead enjoys a powerful rebound, while closely correlating asset classes move in nearly perfect tandem, this sends a danger message that the recovery is false and cannot be sustained. As a rule, bear-market bounces tend to be heavily synchronized; they tend to induce heavy short covering by an army of late-arriving amateurs; they tend to see the formerly weakest groups suddenly becoming the strongest; and they tend to be particularly intense.
We are experiencing exactly this kind of false rebound for commodities and their shares. Not only did precious metals move higher today, but so did all other commodities. The U.S. dollar, which clearly remains in a major bull market that began on March 16, 2008, plummeted sharply.
In other words, all of the general commodity/currency trends of the past five months saw a nearly perfect inverse day in the opposite direction of these trends.
Why did this happen? The answer is simple. As commodities continued and accelerated their respective downtrends, the media began to turn gloomier toward commodities. A number of analysts began to ask, is the commodity bull market over? Especially during the past two weeks, amateurs have been piling into commodity bear funds and unloading their commodities and commodity shares. Amateur short positions were piling up.
The financial market hates any crowded trade. Therefore, it will always shake out all late-arriving participants to any important trend by staging a dramatic countertrend designed to scare anyone who is not an experienced player.
Many people had asked me whether precious metals had bottomed, or whether other commodities may have bottomed. Until today, I was not sure. Now I am positive that they have not, because the only possible sequel to today's action is the eventual resumption of another major downtrend for commodities and their shares.
How will you know when this downtrend is about to resume? The key lies in the behavior of a fund which is little known to the general public, but which should be familiar to readers, DBA.
DBA is an exchange-traded fund of futures contracts for wheat, soybeans, corn, and sugar. Agricultural commodities, having been the latest hot-money investment choice since August 2007, seem to have been established as the leading edge of the hedge-fund trading universe.
Therefore, for all of the past year, if you see what DBA is doing, you know what the commodity complex will do the following week.
Today, DBA reached a mid-morning peak of 38.16. If you take the high for DBA of 43.50 from February 27, and the low of 32.88 from August 8, the midpoint is exactly 38.19 which almost matches today's high. The 61.8% Fibonacci retracement is equal to (43.50 32.88) * .618 + 32.88 or 39.44. Therefore, additional upside is possible, but today's high must be watched closely.
If DBA begins to make a pattern of lower intraday highs over the next several trading days, while the U.S. dollar continues to decline to complete a reverse right shoulder, this would be a classic indication that the commodity downtrend will resume in full force as soon as the greenback begins to find support and forms the next phase in its uptrend.
On the other hand, if DBA continues to form a pattern of higher highs, then keep an eye on the 61.8% Fibonacci retracement level of 39.44. This may be broken by a marginal amount, and then a pattern of lower highs may ensue. Otherwise, if this level can be easily broken to the upside, followed by additional higher highs, then commodities will be enjoying an extended short squeeze which will continue for the near future.
Either way, DBA will give the most accurate signal of when the commodity downtrend will continue. The recent intense, coordinated rebound ensures that the downtrend must continue, and therefore it is only a question of when, not if."
Watch for more words from the "Hole" and for Lehman-related developments. Flash e-mail chatter crossed many a laptop about a Korean buyout of the firm (KDB). Monday will tell more. A second week of repairs/consolidation is almost an absolute must at this juncture. Show of hands, anyone?
Happy Trading. Pleasant Weekend.
Jon Nadler of Kitco.com has a
Posted by zaru on 25th of Aug 2008 at 06:30 am
Jon Nadler of Kitco.com has a lot of interesting posts. His latest on DBA as a leading indicator of gold caught my eye also, as I've noticed this trend of late. It's since the March top really - prior to March this wasn't true - and since March the 1 exception was in May.
FYI Bob Hoye says that silver is a leading indicator of gold, at least for tops. Bob is a historian in a major sense, so I believe him.
I made a small chart of DBA, GLD, SLV and $USD, to see for myself. Probably as ratio's this would be easier to see. In a long term sense they are indeed coorelated. Matt would know more.