The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, January 11, 2016.
So it looks like troubles in China (Yuan devaluation) are going to cause larger short-term corrections in existing intermediate (now long) term trends, however with the number of confident idiots still populating the precious metals space (it's become a speculative orgy = space), even if the broads have topped, at some point (after the spec gold COT shorts are burned off), they should still come crashing back down. Perhaps the term 'useful idiots' better describes paper market (ETF) precious metals speculators, because the bureaucracy's price managers can count them to come back every month for their usual beating. With options expiry (opex) this week (Friday), although further gains are possible in the interim, precious metals should remain contained given present true sentiment conditions.
On the other side of the equation, the 'rounding tops' in most major stocks averages (SPX etc.) are becoming a reality. All we need to see in order to make it official is for the tech / momo stocks discussed in our last commentary to break down against the broads and it's all over. And all we need for this to happen is for bearish broad market speculators to corresponding break down themselves, which would rob US price managers of any fuel to reinvigorate the perpetual short squeeze that has sponsored all rallies since bubble dynamics took over the markets back in the 90's. And of course this is exactly what happened last week, where after a surge in key ratios (SPX, SPY, OEX, NDX, MNX, QQQ) early in the week occurred (this is why you must check the ratios daily - see here), big losses where witnessed as dip buyers (call buyers) came into the market, sending open interest put / call ratios lower.
With opex this week, and the averages hitting important supports (SPX = 1900 +/-), a bounce should be expected, especially with earnings reports kicking off. If stocks do bounce early in the week, and the ratios don't rise, things could get ugly going into expiry on Friday. If on the other hand a 'rounding top' is tracing out, which is more likely, then stocks should finish stronger at opex. So the ratios are going to be everything this week, more important than earnings, China, you name it. Because sure enough, we had another bogus strong Employment Report (Bob's your uncle), and the metals got smacked back down - but this wasn't enough to buffalo the stock market traders because of the falling ratios. In fact, it worked against price managers this time because broad market speculators held back on buying puts.
So again, if prices do magically recover during the coming week because of these guys, use it as a selling opportunity, because the rounding top pattern looks like a real possibility now. Last week was the worst opening for stocks in history. If this doesn't bring put buyers on the broads back in to the market - Huston - the boys (and girls) in New York have a big problem. And remember, this is an election year, and that these speculators are for the most part idiots. This means that they may actually believe the Fed and friends have enough jam to manage prices higher no matter what, which would prevent them from buying puts on the broads. Now all we need to see is this brand of thinking applied to precious metal paper products and we would have a real rodeo (reversal) on our hands in this space too.
Even if not natural, you can bet the Boys From Brazil who live down at the bank in New York will be pushing for a reversal back up for stocks next week lest their paper empires come under jeopardy; so again, if this is the case early in the week with broad market put / call ratios still in the tank, use any strength to get out of the way if you have any such positions. Because depending on what happens, we could witness a five-wave impulse lower in the Dow / XAU Ratio, which would not be good for stock bulls. Of course it would not necessarily be good for precious metal stock bulls either, where because of paper market speculator betting practices, prices remain weak too for a while longer, just not as weak as the broads. Long time subscribers would know this kind of weakness in precious metals is liquidity / margin selling related, which has a tendency to last approximately six-months once the broads top.
If this turns out to be the case, and putting the top in stocks at the beginning of November (because of the rounding top), this gives us an April / May target window for a bottom in precious metals shares, which just so happens to be one of those times of the year known for such occurrences. This would mean bullish paper market(s) precious metal speculators had exhausted themselves, again, based on the false belief US price managers have it all under control (meaning precious metals, stocks, etc.) running into election time - hope springs eternal with the naïve. Or, maybe it's because they finally buy into the 'deflation story' if stocks crash hard enough - who knows? We of course don't care what these people are thinking, as long as they start betting the right way(s), which is down for precious metals and up for stocks.
And again, upon checking the ratios this morning (see here), they continue to trend lower with prices, implying any manufactured gains in stock futures off a Yuan intervention should prove temporal. What's more, this indicates that given we had the worst first week for stocks in history to start the year, bearish broad market speculators are finally broken. That being said, it would be shocking if stocks were not jammed higher at some point this week, or next, so it would be quite surprising if support at 1875 on the SPX gives out before such an occurrence takes prices back up into the 1950 area at a minimum. But that's what makes crashes occur, because that's exactly what most speculators are thinking obviously, so expect surprise.
I think that's the best sentiment to leave things on this morning, except to say the put / call ratio for GLD (see attached above) is also bouncing with prices, showing it might actually be washed out. All we need now is for the other measures in the precious metals space to start doing the same, and you might have a lasting reversal in precious metals as well. It's too early to say for sure, but it's a start - so our hope springs eternal in this regard.
So heads up - big changes in speculator betting practices are occurring. Liquidity risk in precious metal shares is still high as the ratios are still depressed, but that could change - so we are watching.
See you soon.