MENA in the spotlight

While there are a huge stack of bearish fundamentals in the US and across Europe, today once again we are reminded of the delicate situation that is everyday life across the Middle East and Northern Africa. I have written many times that the Egyptian revolution has only started, Mubarak was a scapegoat and was gong to be disposed by the ruling elite of the country, the military. Today we are once again reminded of tensions in the Middle East that have the capability to completely shift the balance of power not only in the MENA region, but across the entire world.

This from ABC News on the attack of the French and US embassies in Syria as Assad's grip on power slips more and more each week.

The Trend Is Your Friend Until The End When It Starts to Bend

This was something I pointed out to a member/friend in an email this weekend. I also warned that reversals are often full of volatility and are not always the clean "V" type or "U" type of reversal, especially after a rally such as the one we just saw.

I included a chart like this in the email to drive home my point, which was, the back of the uptrend if broken, now the market will likely flop around a bit like any creature with a broken back, it's the equivalent to the "Bend" part of the title of this post. So I want to show you a few charts of historical reversals, the depth of the reversal isn't important right now, just the reversal itself.

Here are the faces of a reversal

In this example, the back of the trend is broken at the red arrow, but there were 5 days of volatility before price really started moving lower.

This is a sudden shock type of reversal, the trend's back was broken at the red candle, likely there was a surprising key fundamental event that occurred, but this is not the norm.

This is more of a trend "bending", much of the volatility was in place before the back was broken.

This example is more like the downtrend reversals I'm use to expecting. The back of the trend was broken at the red arrow, followed by 3 noise/volatility candles, before it resumed down. At the green arrow there was a 2-day shakeout. Most bear market downtrends will see nearly as many up or noise days as they will see down days. This is why I've been trying to prepare you over the last week to identify what is important in a trend and what is just normal market noise.

Finally this trend is the best example of the title of this post, a pure trend bending. While it also appears to be on of the nastier downtrends we've seen in these examples, remember that our emotions live in the now, TODAY. In retrospect, we'd all call this bearish, but how would you feel about the bearishness during the periods in the white boxes? There is a week-plus long volatility zone that would have many questioning the trend, there's another 3-day rally that would have an emotional impact on short sellers, yet this is still a severe downtrend.

It's better to be prepared and understand what to expect from a downtrend so you can put each day of price action in to perspective.

Finally I want to end with this article from ZeroHedge. I agree with much of what is said in the article, except for this excerpt,

"The move the past two weeks was foreseen by no one and hurt a lot of shorts while making longs feel smart yet again."


Well that part isn't true, we foresaw this coming in early June and despite many days in which the market could have snapped lower any second, 3C was giving us a strong signal that we would rally. So I would say we foresaw this move, the rough target, the reason for the move, which included squeezing shorts and trapping longs.


Please though, take a look at the article. I have a feeling the next leg down will be one of the worst we have seen in the last 2+ years.

And An Algo Is What It Appears To Have Been

First take a look at this article from Zero Hedge explaining the compression trade, remember it's intraday.

Now take a look at this article with yesterday's Divergence between E-minis and the risk basket 

Note how it's only the ES in Orange (basically the S&P futures) that rises, while most other risk assets in what's called the risk basket in white, don't follow along. What's happening is the market is being bid up by an algo program, but there's not a broad market move as the risk basket including treasuries, gold, oil, etc are diverging.

Yesterday's divergence shown in the link above resolved with today's downside move. Here's the article showing the resolution and you know what happened in the market.

And today at the end of day, I noted some odd trading patterns. Then I found this posted at ZH.  This should clear that up, the implications you can probably piece together.


I wish I had a Bloomberg Terminal. 

The Miner Trading System Update

Today we had an entry in to DUST, closing out the NUGT position from last night's system 1 signal. As I suspected, system two followed suit today and is signaling a long trade in DUST Monday morning-don't forget to close NUGT.

HFT?

It looks like some kind of HFT algo has been deployed

 5 mn chart, higher highs/lows like short covering and big green volume

But break it down to the min and it looks quite a bit different.

XLF and the Long View

Remember, since early June, the idea of the market bouncing as it has the last few weeks was based on the long term 3C charts looking strong, even in a market that looked very frail.

That's why this chart of financials-XLF is so interesting....

The green arrows denote strength and confirmation of the uptrend, look what happened yesterday and furthermore today on the hourly chart!

SPY update

Trade has been pretty dull, but I have a feeling this triangle is going to decide the action in to the close. Keep an eye on whether it can sustain a move or fails.

SLV

I'm not going to go in to a broad discussion of SLV right now, but I did want to point out 1 chart.

This 15 min hart shows this morning's gap up in the red box, with a negative 15 min divergence. I've seen this pattern a lot and usually it's a good indication of a downside reversal.

PCLN, Bucking the Market or Setting Up a Short?

PCLN's trade today has been interesting, take a look...

 The daily chart looks strong with a new high for this leg!

 Here's the intraday trade on a 5 min chart, note volume when it crossed above yesterday's close and volume spiked again when it posted a new high for this leg.

 3C 60 min

 3C 30 min.

 After great confirmation, 3C 15 min goes negative.

 3C 5 min negative at new highs

And the 1 min chart negative at new highs.

This looks like it could set up a decent speculative short with a break (best if volume is big) of the trendlne at $547.34. A stop could be placed above the highs of the day which would represent minimal risk. If it breaks down hard on the trendline, this could easily snowball down into the close.

Answering the Gold Question

My overall feeling is gold is still a good trade, but there are pullbacks that are deep to the 150-day moving average that happen 1 or 2 times a year and this level has shown consistency as being a good place to be a buyer. The current question is what does gold do from here, move higher or pullback to the long term mean average?

There are so many undercurrents in the PM space, fundamentally gold is difficult to analyze.

One trend I do suspect that we will see develop is the bargain gold trade, which is in buying the miners, but this s over a long term perspective, not a swing trade-we'll leave those trades for the Miners trading system.

One of the fundamental questions is what effect the Dodd/Frank bill has on gold, silver, oil and various other asset classes that trade on large leverage on the OTC markets now that the bill is taking effect. In the consensus interpretation of the bill, which Bernanke himself says is confusing, it seems even hedge funds or at least a large portion of them may also be banned from trading on the OTC markets. In the short run, it would seem that those positions would need to be closed. The bill supposedly goes in to effect on July 15th of 2011, but many OTC market places are requiring customers to close positions prior to that date. From a common sense perspective, it would seem that this would put downward pressure on gold as massively leveraged funds close positions. There's also the question of what the market does over the next week or two and whether there's a safe haven flight to gold?

 Here's the weekly 3C hart of GLD, while there's been some slowing of momentum, it certainly does not look like there's an imminent crash building.

 On the daily chart, (speaking of false breakouts), GLD had a false breakout in the red box, the daily 3C chart confirmed this and in fact warned of it. Since there's been a mild positive divergence and gold has bounced back some, but 3C is NOT confirming this bounce by following price higher.

 The 15 min hart shows some more details of recent trade starting with the false breakout, the positive divergence at the lows around the 1st and a current negative divergence as GLD enters the area I defined several days ago as "gong to be sticky" as far as resistance goes.

 For intraday trade, we saw a late positive divergence yesterday afternoon and snce GLD has been more negative in to higher prices today. It's important to note that prices today are in the area of the triangle's apex, which is typically a resistance area.

 MoneyStream, once again as I explained earlier can have some excellent daly signals, is also signaling some trouble ahead if you look at the relative price points and divergence.

 Here's the 150-day moving average and the pullbacks that I mentioned that are seemingly great areas to buy. While our current top shares some characteristics with the white box, overall, I think it's more similar to the red box, which did pullback to the 150 sma.

Looking at the same moving average with pullbacks at the white arrows, we see some negative 3C activity on the daily harts in the red zones. It seems the current activity is the most severe of all of the former levels while would make sense considering gold's valuation now.

While this is a tricky subject and there are many markets not represented in our charts and many markets that will be shutting down, causing a scenario unlike any we have seen in the past, my gut feeling is still that GLD will see a pullback to the 150-day moving average. It may be at that time that hedge funds and other speculators forced out of the OTC markets (which in itself could move gold lower), may look to the 150 sma as an opportunity to get back in to their gold positions they were forced out of by the Dodd/Frank legislation.

Feel free to send me your thoughts on the subject. We may see a great opportunity with a great historical track record present itself.