Silver closed 12 cents up on the day. Open 11.99, low 11.81, high/close 12.11.
Silver closed higher after an earlier drop down to 11.81(which is the top of a support region that has now held 3 seperate times.) We have now been trading almost 4 weeks between 11.70 and 12.65. That is an extremely small range considering that silver commonly moves 30 cents in a day. As of this writing, silver has already gone up another 10 cents to 12.21.
Today was a big day in financial news. Consumer Confidence report came out today and was the worst number since last september.
Then there were two Fed related news items-a release of the FOMC minutes from the last meeting, and a speech by Dallas Fed President Richard Fischer. Both the minutes and the speech were viewed as dovish-neither seemed overly concerned with inflation. This resulted in a sharp upward spike in almost everything traded-Bonds, Energies, Precious Metals, Equities.
The S&P stopped at the 1207.75 resistance point. Bonds fully retraced their sell-off and made a new five-month high at 110-09. Silver and gold both bounced off of support levels to come back dramatically in the last two hours of trading. And even the energies managed a little come back for the last hour of trading.
How would I trade from here?
Silver is still the least clear of the markets to me. I think it could easily trade up to 13 dollars from here, but the price action lacks vigor to my mind. I would like to see at least one more week of distribution before I would go long. If it does break past 12.65 I think that it would be a weak and ineffectual move. Same goes for Gold. If the XAU breaks above 151 I will have another look but until then I am on the sidelines.
I still think that bonds have a significant resistance (110-12) directly above their current levels so I think this is a great short opportunity for bonds. Today's close was VERY strong though and so I would put my stop directly at 110-13.
Equities are in much the same situation as bonds. They are close to breaking out-but their momentum indicators are overbought, and they have significant resistance to get through. If you are long equities from the end of last week I would take your profit and maybe even put a short on with a tight stop.
Finally, I think it is worth taking a look at Gasoline(HU.) It is trading at $1.78 which is at a very low premium to Crude Oil. Shorting 1 contract of Crude Oil and Buying 1 contract of Gasoline might be a good play. However, since I think that a recession is coming, I would prefer to wait for a better pure buying opportunity. At some point people will relax about fossil fuels, the price will drop signifcantly, and set up a good opportunity to load the truck!
The stock market is funny-it just loves it when people are worried. It is rationale to "love" other people being worried. It is analogous to traders who short Natural Gas when a hurricane is headed toward the Gulf of Mexico. The idea is that the fear(represented by longs) is worse than the actual event-and most of the time in Natural Gas this is true. One can see an example of this concept by looking at the price of NG over the past week. Wednesday through Friday last week, when Ernesto looked like it might hit the Gulf as a hurricane, NG prices went nuts. Over the weekend, Ernesto turned to the East and by this morning NG had lost 15 percent from its intraday Friday high! This trading practice is like selling health insurance-people are willing to insure a potential disaster to get the premium out of the market over and over.
So the equity market rallying on Fed worry is totally understandable. Additionally the Fed has control over money supply and has a presence on the Plunge Protection Team. All of these factors should help the stock market rally when the fed is worried. However, the worry that is coming out of the Fed and that everybody feels represents a real problem. This real problem has its roots in the high price of fossil fuels and the large amount of subprime mortgage debt which has been create in the past 3 years. These are real problems, and have NOT been fully factored into the market yet. The Fundamental problem is that the consumer has no way to increase her spending at this moment. Let me repeat that. As we stand right now, there is no avenue through which the consumer can increase his consumption. And since the economy is so dependent on the consumer, that means we will have a recession. The writing is on the wall.
The Silver Lining is that the economy will shake out a lot of its bad debt and readjust itself more realistically to current conditions.