“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput






Saturday, December 29, 2012

HUI Weekly Chart

The mining sector, as evidenced by the HUI has not been a happy place for bulls since late this summer. The selling has been a combination of both frustrated and disenchanted longs bailing out in addition to some opportunistic shorting.



While the broader stock market has fared well since the beginning of the year, it too began fading about the same time as did the overall mining sector. However, it still techically remains in an uptrend as long as it holds above the 1350-1340 level unlike the mining shares which have completely broken down falling through one support level after another.



The performance of the mining shares against the broader market can be seen by examining the following ratio chart comparing the HUI to the level of the S&P 500. Notice that even though the S&P was also working lower since late this past summer, it has outperformed the mining sector by a considerable amount. In hindsight, shorter-term oriented traders/investors would have been better advised to have bought into the stock rally and left their gold shares for another day. There is a reason that the motto: "You cannot fight the Fed" has some credence. Whether or not one agrees with this idiocy known as Quantitative Easing, the fact is that the market loves it, particularly the financial stocks.



About the best that can currently be said about the mining shares is that that are not further breaking down against the broader stock market. The low in the ratio seems to attract buying. Translation - at some point, perhaps we are there - in relation to the broader market, the gold shares are simply too cheap.

That being said, the problem with the mining sector, right now, is that big money is simply not interested in owning them. Value based buyers are but those are insufficient in size to drive them higher in price. Besides, value based buyers are never the ones who drive prices higher. That would be a contradiction in terms. Value based buyers PUT FLOORS UNDER MARKETS. Momentum based buyers drive them higher.

What is missing in the mining sector is the MOMENTUM BASED buyers. Right now, the momentum based buyers are busy chasing higher returns in other sectors of the market. To bring them into the miners one needs to see a TECHNICAL CHART SIGNAL and currently that is missing. For a bare minimum - the HUI needs to clear and CLOSE ABOVE 440. That will signal a very short term bottom is in. To do more than just meander sideways above support however, it will need to push past 455 which will spark some short covering and further fresh buying that will set up a TEST of 465. If and when this index clears that level, then, you will begin to see some more serious buying occur.




I am not in the business of making predictions for as a trader I do not have that luxury. I have to read what the current sentiment in the market is if I hope to profit and thereby trade accordingly. While 2013 might be a banner year for the mining sector (and I hope that it is), the current chart picture is not especially encouraging.

Remember, as a trader or even an investor, you are not going to profit UNLESS AND UNTIL many more traders/investors come around to your way of thinking. Without their money coming into a stock/commodity, it will go nowhere. Once it does, and the chart action confirms that your view/opinion of the market is becoming more widespread, then and only then can you be considered to have made a GOOD CHOICE. If you buy a stock that sits at the same level for months on end or even years on end you might eventually be proven to have made a correct choice but think about the lost opportunity cost of having tied up so much of your valuable investment capital that could otherwise be working for you elsewhere.

This is the reason that doing a regular analysis of your portfolio (WEEKLY) is so critical. If a technical chart is breaking down, get out of that stock unless you are content on sitting through corrections in price that may last for a long time. Do not forget, if you are constantly monitoring a portfolio or position on a regular basis, you can ALWAYS GET RIGHT BACK IN if the technical posture changes for the better.

I personally am not a big fan of Jesse Livermore because I believe he would have starved to death in today's markets. That the markets have changed tremendously since his day is an understatement of near cosmic proportions. Livermore, who by the way ended up taking his own life - an abject failure in my defintion of a successful man - should have learned to cut his losses instead of "sitting tight". How in the hell does anyone know in advance what sort of events can transpire that can completely wreck one's trading account? Yes, long term fundamentals will eventually win out but at what incredible cost to one's investment or trading account.

Also, Livermore never had to contend with trading against computer algorithms. Those mindless machines, which control most of the world's trading capital nowadays, could care less about the long term view. They are going to buy or sell depending on the current price signal, not on what any of us might think is going to happen 6 months out from now.

The good thing however is that the same technical price signals that trigger those nasty algorithms can be seen on the price charts and if we learn to properly interpret them, allow us to position ourselves to let the machines work in our favor.

In closing here, I want to emphasize the fact that I am talking as a trader and as someone dealing with paper markets. When it comes to PHYSICAL BUYERS OF METALS, if you do have a long term view of the consequences of nearly unlimited money printing by so many of the Western world power Central Banks, then you can also use the algorithm based selling of these paper markets to acquire the ACTUAL METAL during episodes of price weakness. Buy them when they are cheap; do not chase them when they are higher. Remember, this pertains only to the actual metal; not to positions being taken in the Comex futures market. If you choose to willy-nilly buy into the futures markets WITHOUT a technical price signal confirming that, just understand that you are an accident waiting to happen. Trade smartly and do not end up as road pizza on the floor of the pit.


17 comments:

  1. I think this is one of the best articles i have read from you ever.

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  2. Dan, this correction was man made. The bullion banks clearly painted the charts. Your technical analysis is based on a full blown price manipulation in the market at a time when some of the most important central banks in the world are adopting QE to infinity. The attempt and the objective of the market manipulators are clear. However, this manipulation can only be short live. The physical market will prevail over the paper market and the true fundamentals of QE to infinity will soon snap back into play. In this particular context, I think that this quote from Jesse Livermore is quite right:

    “I’ve known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine – that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.”

    The robber barons are shaking the weak hands out of their position so they can buy them at a heavy discount.

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    1. Dan can one make the case for the HUI/GDX forming a falling wedge using the Oct high coupled with the recently broken downtrend fro 640? Bulls also still have downside protection with the uptrend from 102008 that was also supported on 5/2012 and 7/2012. It's currently sitting there now...

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    2. Eric;

      I will ask you a simple question - who made more money this year - someone who put $1,000,000 into gold shares or someone who put the same amount into the S&P 500?

      Trading is about making money not about arguing what SHOULD happen.

      I agree that at some point all the unlimited QE is going to goose the gold price considerably higher. The problem as a trader is that while you wait for "at some point", you lose opportunities elsewhere.

      Those of us who make our living IN THE MARKET, have to be realistic and play the hand dealt us. We do not have the luxury of waiting for "what might be".

      Yes, the manipulators are at work but so what? The chart patterns reflect that and can be traded accordingly.

      By the way, I see that quote from Livermore all the time. This guy scored big when he hit a trade right but he also managed to lose all of his money due to poor trading discipline not cutting his losses when he should of and not adding to an already losing trade.

      As I have previously stated, the man took his own life and therefore is not someone whom I would ever view as a role model for a trader or anyone else for that matter.

      The mark of a successful trader is that he or she learns from their mistakes and learns to respect the power of the market and the leveraged trade and never become so overconfident that he believes he or she is correct no matter what the voice of the market is saying.

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  3. Great blog -

    Dan - dont you think where we are at a time where intervention by the fed only bought us time. I would not be chasing anything higher here. durable goods orders are rolling over while S&P grinds higher. i think you fall into a trap here. fundamentals are going to have to prevail if what i think is a new recession. or you short this markets many sectors like high yield bonds etc.

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  4. What is most fascinating to me is you are saying that fundamentals plays only a slight part in pricing. for instance if you are a sugar producer in another country your prices are dictated by algorithms not fundamentals. right?

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  5. Improvise, adapt, overcome...

    What Dan is saying is that trading implies action and dynamics not static accumulation and algorithms who play the game are "dumb" and are predictable to certain extent and this is to be exploited both in paper trading (which is rather risky business nowadays and odds favor the casino not customer) and physical accumulation (don't simply buy an oz per week/month/whatever but rather welcome gifts like this december did and januar might give to buy as much as you can afford) with little timing will yield superb y2y results...

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  6. Dan : "just understand that you are an accident waiting to happen.".

    Why?
    More precisely, if you are ok with buying 50.000 $ of physical gold, why not put in on a futures account and buy 100.000 $ of gold with a leverage of 2?

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    1. Hubert;

      The leverage in the futures market is enormously large. One contract of the full sized gold contract is 100 ounces. A $10 move in gold therefore is $1,000. Try putting 20 or 30 of those on at a time and you can see how quickly losses will mount if you are wrong as to the timing.

      It is one thing to buy physical gold and have the price drop another $20 - $30 an ounce after you have bought your 10 - 20 ounces or whatever. It is another to have 20 contracts and to have the price drop by that same $20 - $30 dollars an ounce.

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    2. Dear Dan,
      Thanks for your clarification.
      I was really taking into account the case when one has like 80.000 $ and choses to be long gold with one single future contract, which, in terms of variations, is like owning 1650 * 100 = 165.000 $ of gold, so leverage about 2.

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  7. gr8 insight! playing devil's advocate, here's the investment thesis for the miners: the mining stocks as a group are at one of their cheapest levels of valuation relative to their ore reserves of the last two decades. this provides a margin of safety for an investor taking a (unleveraged) position in the shares. if the bull market in the metals continues, valuations of the mining stocks can be expected to experience mean reversion, maybe not in the time frame of a trader, but certainly within a reasonable time horizon for an investor. the investment return from such a mean reversion has a high potential to amply reward the investor in the shares for the opportunity cost incurred by holding the shares at these levels (again with the implicit assumption that the pm bull market continues).

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  8. I agree with Power Corrupts. There is very limited downside in the miners right now, unless, of course the whole market collapses similar to the 10/2008-3/2009 when the large investment banks became a leading beneficiary and enforcer to the Federal Government's financial repression policies while the Central Banks just started warming up a grand experiment which continues today. As you point out Dan, these entities are still in charge, and as Mark points out, doing a masterful job at continuing the slaughter of savers, small business, and the currently retired and those nearing retirement. The media will soon be focused on the enormous unserviceable debt growing another $1.1 Trillion this year. Balanced budgets are now extinct. Tax reciepts will not rise after this newly pronounced theft of from Caesar. Opportunities will continue to decrease, large business will grow only at the expense of those starved for capital. Less innovation and larger obese and more corrupt government will continue to savagely beat down any chance of growth. In these times I still believe that gold in the ground will at some point be able to shake off all the media and bank manipulation. The hui to gold ratio cannot stay in this "chained cellar" forever. It begs to see the light.

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  9. Dan great piece but I have a question. What if an interested group was naked short selling all the gold and silver shares possible in an attempt to keep the HUI low and out of a range where buying would occur? I know you don't believe in the conspiracy theories floating around but one would have to be blind to not notice that the metals are being shorted to death by big money.

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    1. twippers;

      I do agree with the idea that there is a price suppression scheme involving the feds and the bullion banks but once they get those algorithms to start selling, they use that selling to buy back their shorts. In other words, the hedge funds are now selling with the bigger shorts covering.

      What is needed, from a technical perspective on the charts, is a SIGNAL that the selling pressure is easing off and that the shares are basing. We are getting valued based buying right now but need momentum based buying to start any sort of sustained trend higher.

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  10. Dan,

    Did you hear, "NO CUTS IN THE CONTINUE PROFLIGATE, OBESE, INEFFICIENT, CRAPPY US GOVT". Next up supposedly our debt ceiling increases will be met with INCREASED TAXES!!! That is right, more taxes and inflation (dollar,yen,euro, devaluation) and higher unemployment for all. Merry Christmas and a PROPAGANDA NEW YEAR!

    When will everyone finally break and not only MARCH ON WASHINGTON, but bring the GALLOWS with us!
    Who in America runs their budgets this way? Whoops I forgot this Administration does not have a budget.

    THIS IS KILLING ME TO WATCH. When will those we elected do what they are elected to do. Make hard choices. Well Gold and Mining stocks finally did awaken to what our government is doing. That is increasing an already complete and utterly out of control spending problem. ROME, here we come.

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  11. the market will eventually force hard choices.

    expecting elected officials to turn off the koolaid is unrealistic.

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