Alternate Consideration for the Euro

One always has to be flexible when trading. I was expecting with the break on the dollar we would see a more aggressive follow through. I reduced some of my earlier positions long dollar and short the euro for a modest gain but will still hold the remaining for the long term. There is still the possibility that we are in the early part of an uptrend. Personally I think we are perhaps just going to be flagging higher before we make a lower high and ultimately breakdown. Long term I remain bearish on the Euro, but long term can be a bit longer than anyone would like to see.

I shifted some capital into the beaten down YEN for a speculative play. I’ve been just using options on currency ETFs for now.

More on the Yen play later.

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The last market to break above it’s very long term resistance on a trend channel was gold and it went parabolic. Before that it was maybe banks and real estate, but ultimately the big one was tech/biotech/the nasdaq.

A break above say 16,000 in the dow basically could either put dow into a secular bull or perhaps even “parabolic territory”. I just don’t see dow going parabolic. Basically, if the DOW went parabolic it isn’t exactly like we are talking “growth” names here. It is the DOW and it’s pushing the ranges where it might start moving like the tech bubble here. If it does, I will start to actually believe the crazy people talking about hyperinflation because that becomes at least a possibility with those types of moves. Otherwise, it could just be capital everywhere around the world fleeing bonds, gold and all assets to get into stocks probably the most likely.  Even so, the idea of the market going parabolic to new extreme highs over the next few years just doesn’t seem right to me. Such a large percentage of the world’s capital is held in the US already that expecting a repeat of the 1980-2000 style run for any other reason seems somewhat farfetched, but not as much as hyperinflation in an economy that is the world reserve currency.

So as the title suggests, at some point, something has to give.

Now we have to try to identify WHEN and what price.

I believe we are in a broadening pattern on the very long term chart. I still remain open to the possibility of a long term secular bull market, and it’s possible a breakout would be all that is. However, if it happens I just think we still will make a higher low before we just go ripping through resistance.

Finding a reference point for markets making all time highs is not easy at all time highs so I had to go to the 20 year chart.

The only other way I could come up with a reference point was the dow to yen chart, which shows we still have not hit all time highs priced in YEN.  So it’s possible the capital shifts have reached it’s extremes once we touch the previous high level of 2007.

There are plenty of instances when market was in a sideways range for quite some time before it made the major secular bull run type of move.
1)early 1900s Before roaring 1920s bull market.
2)1931-1950 before the 1950-1965 Bull Market
3)1965-mid 1980s before the 1980s and 1990s run interupted by the 1987 crash.
4)(late 1990s) 2000-???

I think it’s a bit premature to start calling for a secular bull run although I will absolutely not dismiss that possibility.

Unfortunately what is concerning is that this pattern is not the same as the others, rather than ascending lows, we see lower lows. A broadening formation (we also still have an outside chance to form a long continuation diamond bottom or a diamond top) typically is a reversal pattern at least on the daily and weekly charts. If the market is fractal than even though we really have no history of such a pattern, it should still have relevance. However, it’s still possible for there to be broadening formation breakouts. Nevertheless, at least a pull back to 14500 after perhaps a run to 15800 is a strong possibility. If we are to go higher, the capital is going to have to come from the bond holders and from Europe.

Just working a bit on historical moves a bit. In historical context just how “frothy” is this rally at this point? And just how much of a pull back would be “normal”. In every instance of the sideways move there were very large moves higher AND lower within the consolidation.

The following are roughly the peak to trough declines rounded to nearest 5%
1901-1904 45% decline in dow.
1906-1907 50% decline in dow.
1909-1914 50% decline in dow.
1916-1917 40% decline in dow.
1919-1921 40% decline in dow.

*1929-1932 90% decline in the dow.*
1937-1942 50% decline.
1966-1970 40% decline.
1973-1974 45% decline.

**1976-1982 Stagflation… Inflation adjusted decline?
1987-1987 40% decline.

2000-2002 40% decline.
2007-2009 55% decline.

*Around the 1929 crash the dollar rose trough to peak by around 50%. I look at it as a 50% move on top of a 50% rise in the dollar rather than a 90% move.

In terms of actual rallies there are two options. ONE is that we are entering a secular bull market, and the other that we are just nearing a top of a CYCLE. If it is a CYCLE top I think we see a “typical” 40% decline or so. Given the pattern it could be over 50% like 2008. But how much higher do we go before a pull back in that case? How much higher do we go if we enter a secular bull?

We are currently up 135% from the trough. Leading up until the following peaks there were bigger rallies. 1906, 1987, 1929,1937,1966,2000. That’s it.

In other words, leading to the 1906 peak and 1937 peak were the only non secular bull market runs of this magnitude. Moves 100% but under 135% are the following starting with the least leading up to the peak 1932(minor peak from absolute bottom),1916,1946.

There are 6 other rallies in the 50-100% range that I recorded.

 

 

Secular bull markets As such in that sense the decline could be relatively “normal” at 50%

A secular Bull emerged from 1920-1929, OR Even 1908-1929

1920 low-1929 peak=64 to 358 =460% return  1908-1929 peak= 53 to 358 575% return

A secular bull emerged from 1942 into 1966 OR 1932-1966

1942 low to 1966 peak 92 to 1001.10 =990% return 1932 low – 1966 peak = 40.6 to 1001.10=2365% return

A secular bull emerged from 1982-2000 OR 1974-2000 Or 1974-1987

1982 low -2000 peak=1425% return. 1974 low – 2000 peak=1960% return. 1974 low – 1987 peak= 380% return

From “breakout” point (This has YET to happen)

1924-1929 104 to 386.1  A 271.25% Gain

1951-1966 235 to 1001.1 A 326% Gain

1983 to 2000 1100 to 11750.25 A 968.20% Gain

(ALTERNATE: 1983 to 1987 1100 to 2746.70 A 149.70% Gain)

(1995 to 2000 4000 to 11750.25 A 193.76% Gain)

Finally, we can look at Bull Market cycles within the sideways consolidation type of moves between the major secular bull markets.

1930	52%
1972	66%
1919	68%
1976	80%
1909	90%
2007	97%
1932	100%
1916	107%
1946	130%
1906	141%
1937	294%
1987	150%
2013	135%

I put the current 2013 amount from trough at the bottom as it has yet to establish a peak and the 1987 amount separately as it is more of a secular run before a crash which continued and kind of in it’s own category.

For the time being I am not convinced one way or another whether this is a major secular run just in it’s infant stages, or a sideways consolidation in it’s “mature” phases.

Until we clearly break the broadening pattern, I am starting to get increasingly cautious heading near the edges of the aforementioned pattern.

As mentioned before, I am getting bullish the dollar as a hedge to allow me to stay long. However, I am inclined to even start to reduce my long exposure more aggressively and/or go out and get some shorts and bearish bets should we cross into the 15500-16000 range. If we trade down it could be a vicious downtrend possibly even a 60-65% decline to new lower lows.

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I am long the Dollar, via some Jan 2014 calls and I view it as more than just a hedge.

First of all, it’s mispriced. Value 0.40, price .36 (mid) That provides an 11.11% premium to it’s calculated value.

Secondly, the technical picture is bullish long term. Ascending triangle with declining volume profile above. Looks good on a monthly and weekly chart.

Thirdly, this is confirmed by the Bearish Euro and Currency Appears to be Shifting.

Also, by buying lots of time value (something I don’t always like to do), I protect myself if I am wrong. Although you typically are better off betting on a short term swing for a maximum percentage gain if you are right, if it goes against you it hurts you. When the option is made up of all time value and you have more time value than you need, if it goes against you the majority of the position is intact providing a huge margin of safety, something that I like a lot more when I am producing a longer term “hedge” play since I also am paying less PER month of “insurance”. By managing Theta like this I can still sell or roll the option in a few months with minimal loss. I still think the potential to gain is very high but it’s a longer term pattern anyways and something I am looking more at as protection that allows me to stay aggressively long in other names without being significantly at risk. I still end up preserving some capital should everything go wrong and somehow markets decline while the dollar tanks because there will still be people willing to pay for the “potential” of the dollar going higher as long as there is still a decent chunk of time left on it.

Finally and perhaps most importantly, I believe we are headed into a period of time like the early 80s marked by declining commodity prices, rising dollar, and rising stock prices. (I think commodities MAY be the exception at some point but think the metals for example have yet to bottom)

I don’t think you realize what a tremendous opportunity this could be. You can effectively look at it as a hedge that has a strong possibility of doing well. It’s entirely possible that the dollar goes higher WHILE the market goes higher. If I am wrong, then it still has a strong possibility that it protects you from the downswings and hedges you from market panics as we enter the volatile and dangerous period in May and through October Period where historically market has been flat to down and highly volatile. If my timing is wrong I provided you with a contract that has plenty of time left on it to allow you to do something with it (roll it, sell a shorter term contract against it, or sell and still preserve some value)

I just don’t think anything is going to replace the dollar anytime soon. The Euro is structurally flawed and the Yen has too much government restriction/interference and is determined to inflate. The Cyprus event not only exposed the dangers of a currency with inflationary checks (which made it deflationary), but also is likely to scare capital in the Euro if there is even the suggestion or rumor that the governments are having troubles.

Just like in the US when depression happened because The US was in a gold standard, Gold could not easily and freely go up in price so everything else had to go down in price. The Euro has an inflationary check and inability to inflate easily as they did not create as elastic of money supply like the US. As a result since they can’t as easily print, they previously had to hike rates to attract capital since the money supply was somewhat fixed. and since there was no central euro bond individual countries came up short which resulted in eventual bailout from other members of the euro anyways, and with individual country bonds you could still pile on and effectively get short the countries “currency” anyways through trading the individual bonds.
Well we all know the problems that this has caused. First of all, politicians got elected by promising things, delivering and not creating plans to financing it (kicking the can)… But this is not the dollar and the currency doesn’t function the same way. You can use austerity and higher taxes to attempt to raise capital when you are short on it, you can attempt to decrease payments by forcing bond holders into taking a haircut (but which may cause trust issues in the bonds and currency in the future), or you can even go crazy and rob the depositors like Cyprus event. You can also go to other countries and get a bailout. But all of this action is mostly deflationary except the bailouts and deflationary type of action has slowed growth and cause the debt to go up which makes even Germany at high debt to GDP levels. The ironic consequences of the euro’s action is likely going to be a loss of confidence anyways as capital is going to flea into markets and into the dollar. But the euro has to inflate, they have no other choice as the deflationary spiral as a result of their inelastic money supply isn’t working. And when it comes down to it I believe that is what they will do.

But this brings us back to the dollar. The dollar’s demand has been absorbed globally. Hence low interest rates have failed to really create a lot of inflation, particularly in commodities and the fed is probably freaking out. All the low interest rates have done is create larger and larger “short” positions in the dollar around the world as people borrow money betting on inflation or borrow money at a low interest rate and lend it out at a higher one still creating the same effect of someone betting on inflation one way or another.
The low interest rates aren’t good for savers, retirees and pension holders and the fed needs to dump their bonds at some point as well. I don’t think the policies will continue and feel there is a shift taking place. I don’t think the dollar can be tied down much longer nor can the interest rates.

But what happens when you hike the interest rates? There’s a belief that the markets crash and demand for real estate drops. Historically that doesn’t appear to be true as bull markets correlate with rising interest rates. Partly that is because it means their is a demand for cash because businesses are actually growing and borrowing money to grow. Nevertheless, it could be problematic as the banks likely aren’t going to be as willing to borrow money at low interest rates and speculate in the market. The demand for cash continues and people perhaps start saving and paying down their debts. On the other hand, people believing that interest rates would keep going down may actually rush out to buy a home or refinance while they can. People like low interest rates, but only when they start rising do people fear that they will really start going higher and so they rush out and buy only AFTER interest rates begin rising. In theory they borrow more at 3% than at 4%, but not if they think it goes to 2.8% the next week.
It will be a very strange market that seems to violate the classic economic textbooks and that’s mostly because the textbooks aren’t based upon globally interwoven economies. As a result I believe there is a tremendous opportunity.

Both being long the dollar and being stocks may produce winning positions while also protecting you from panics in the market. If that happens, people also flood into cash.

The ability to bet heavily on the dollar with option positions provides the ability to stay aggressively long the markets in individual names with great setups. Meanwhile if you want another way to reduce correlation, to stay long the market with less worry about what happens, you can learn to get good at picking individual biotech names. Of course it’s not without risk. You could see a dollar down, market down scenario I suppose but I’m willing to bet you that doesn’t happen.

Long UUP Jan 23 Calls (and previously long Jan 22 Calls))

Also Long the Option Addict and IBankCoin

 

 

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The dollar on a weekly chart is in an ascending triangle and may breakout at some point. It is at a good spot above considerable support. The euro on the other hand is making a head and shoulders while the Yen remains in freefall mode starting another major leg down.

Looks as if the dollar is bullish from technical perspective. And that gives me a bit of caution on the market. Meanwhile a lot of individual stocks are still looking bullish.

The conclusion? As you take profits from winning gains in stocks, consider using the dollar to hedge. I have been doing so and now with today’s move it seems as if it may pay off.

p.s. Also be aware that the FXE (euro) is about to make a deathcross with further declines (10 week MA below 40 week MA).

Full disclosure: I am currently long the dollar and short the euro at the time of creating this post.

With gold likely staying put for awhile, I believe the best way to hedge is now by short dollar, or long euro. UUP calls and FXE puts is one way you can do it. I am looking for a move over the next few weeks. After that we may see if it’s just a quick breakdown or only the beginning.

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Okay, with the “I Told You So’s” out of the way, it’s time to take a longer term look at $GOLD and explain some things so you might learn. Maybe you didn’t see this coming and weren’t prepared for the possibility, it’s okay. Experience can be gained so you can understand better next time.

Gold Monthly chart below.

Looks like we are simply correcting to the longer term trend. The 1250 area is about where we broke out of the price channel and went parabolic to the upside. Then we went into bear market territory from there. Formed a double top after over a year of no real progress and now we have broken down. Longer term trend remains intact on a monthly chart. However, we could pull back below 1000 at some point in the future and really flush everyone out claiming “broken trend” before it reverses.

The volume profile tells you where transactions take place. The price of ANYTHING is ONLY when the demands/requests of a buyer and seller meet. The high volume spikes occurring during certain prices is a sign that lots of buyers and sellers met there, and therefore, there is a market at those levels. Minimal volume areas or “volume pockets” mean there is not much of a market there, and prices likely will gravitate to an area where maximum transaction can take place. Should there be more buying demand than selling demand, the price will generally quickly gravitate to the next highest major “market-zone” If there are more selling demand than buying demand, the price will generally quickly gravitate to the next lowest major “market zone”.

That’s not to say transaction might not pick up somewhere near the area and that past buyers or sellers might quickly adjust NEAR that area, however in general it is simply fundamentals of supply and demand that drive price. Observation of past “markets” may not always tell you the future, but it provides a good understanding of what is likely in order to manage and understand the risks.

This is just one tool to add to the toolbook to determine when the given market is a “buy the dip” type of market or “sell the breakdown”.

I correctly identified that gold was a sell the breakdown market, and avoid buying the dip as it had no legs to stand on below it’s support level around the 1520-1570 range. This is not an “I told you so” but a “how I told you” for those wishing to learn that my call was not “magic”. Of course, if I sold you on that idea, it might be better marketing for some $2000 subscription or whatever, but I am not here to sell you anything.

You can see from the channel down support why I don’t have a problem with anyone buying the dip here. Channel trendline support in oversold conditions. I may speculate from time to time with some capital, but I prefer to wait until the longer term trend or longer term support indicates action before making any major changes.

Personally I have no plans to add a long term position in gold until we go below 1250, or unless some other setup occurs that convinces me otherwise.

I’m more interested in WHY this gold flushout is occurring now and what that means for everything else. This kind of forced liquidation can spillover into other markets. I think the Fly made a great point there and we certainly see at a minimum at least that occurring today.

The margin liquidation and forced selling in any market can cause a demand for cash. That demand may have to be met by raising cash from other markets. The other markets that are sold may trigger further downside pressure. Eventually there is an excess amount of cash on the side and those waiting to buy the blood strike with force, then the money on the side can then chase higher. When that happens though is anyone’s guess.

I also think that gold is not about inflation, but about currency alternatives free from government mismanagement of the money supply. When government’s ability to raise revenue and pay the bond holders, and/or fears of them inflating the currency (a side effect of gold going up with inflation not inflation being the cause), gold is the alternative.

A shift away from gold may be a signal that confidence is returning either into the Euro (I doubt it) or the Dollar (more likely) or some other government currency. Whatever caused smart money to move out of currency and into gold has moved into whatever currency they think is the strongest going forward. I suspect that is very bullish for the dollar. That probably goes well with a volatile market and/or a market decline as well.

These are likely to be very trying times ahead for people with a position (so everyone) as we can see early warnings of high volatility and major capital shifts. Bitcoins was just a microcosm of the overall market sentiment shifting. Then Gold followed. Gold is a major market. It isn’t anywhere near the debt markets, but what is? Anyways, It should be a wakeup call to those that think the stock market can’t do the same thing.

Having multiple asset classes and extra cash with a few short term speculative positions as well as long term positions is a great way to diversify over multiple timeframes and multiple asset classes. Someone long gold from $800 who holds through the storm and rides this all out and doesn’t sell may eventually in a few years come away very well just as the person who speculates and grabs some puts. Both may be right even if at a given moment the positions may be opposed. This is just one way to protect yourself even though at times you may have multiple long positions. But if you protect yourself right, you profit.

 

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In my Post I warned you of Gold’s demise that is happening.

Quote:”…which is why we must watch the 1520 level or so in gold, if that gives way, there is a lot of danger below.”

The warning was a warning of a lack of support. Meaning if it fell, we would go down quickly. But even I was surprised by how quickly it occurred.

Fortunate are those who heeded my warnings.

Well, I also warned about 2 levels of support below that it would test quickly. Both of them had a lot of high volume in those areas making them a prime candidate for support/resistance zones.

The first being somewhere around the 1400 area. Yes, we are there. Stay tuned, this may hold. However, if it does not, we do have another volume pocket/GAP to the next level

The next is $1200. I expect this to hold. Finally just above $950, should this be gold Armageddon.

Gold is a market like many other commodities. Forced liquidation can happen.

If you have puts I hope you would take profits sometime today. But I think this is good news for the gold market long term. The weak longs must be shook out for bull market to resume. Sometimes that shakeout must be very violent such as the ’87 crash being the most extreme example.

No I am not some hypocrite like I was long Bitcoins and now I am saying face after a 75% decline by saying it’s a “shakeout for crybabies” like the Norm McDonald sounding character, Max(imum) “boom boom” Keiser. I am not a permabull or bear in anything. Markets always rotate and never go straight up forever. I got this exactly right. The structural damage is indeed severe, but right now I look at this as nothing more than a panic. While bitcoins will be shut down by the government someday, and gold can be seized by the government (along with your Cyprus bank accounts), Gold at least represents an international medium of exchange that can be used. If the government mismanages the money supply, globally currencies may shift. The fundamentals behind gold are no different. Nor were they when gold declined from 1980 until 2000 by something like 90% adjusted for inflation. In my view, you must understand where money is moving and WHETHER OR NOT THERE ARE/WILL BE BUYERS at a given level to be able to accurately measure risk and reward.

I am not trying to call the bottom right here, but I applaud the people bold enough to step in and do so. It certainly is a very oversold market right now. There is certainly support around these levels as well, it’s the levels below I am concerned about.

Right now the risks are pretty neutral in terms of about a $200 volume pocket upwards and downwards. The momentum is down but we are oversold. However, as we decline as I write, that is becoming more favorable to the upside. If you want to tell me you can predict where it goes next be my guest.

I personally sold the last of my GLD puts here with /GC at 1365. Good luck to those who still have a position either way.

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This post was started yesterday but I didn’t get a chance to finish it, so sorry if the charts took place before todays drop in gold.

We have ourselves a golden cross on the dollar after a triangle breakout. A handle or bull flag may be forming. Grab some on weakness over the next few weeks.

The Gold Markets are on the verge of a serious long term breakdown. Currently, gold is hanging on for it’s life.

Huge volume pocket below.

The thing about Cyprus is that banking and tourism are huge drivers of growth in any country. When governments start resorting to draconian measures such as confiscation of wealth do not be surprised to see civil unrest, and when that happens no more tourism. Then they come out saying “it(Cyprus) is an isolated event” as if they are concerned about confidence and believe it may not be an isolated event.

Nevertheless for the time being the Euro looks to be oversold. We could bounce at or near support, form a head and shoulders and then breakdown.

The Euro is not exactly looking terrible, but it’s not looking great either. Wait awhile for a bounce then maybe consider a short.

Ultimately with the $GOLD markets on edge of a breakdown and with Euro not looking great and Dollar looking bullish, I want to be long the dollar. If we get a relief from oversold conditions in the euro I may even want to be long the dollar against the euro. If we peak above the recent trendline in the euro I will not get bullish, but

But if you had lots of cash and it took a long time to accumulate a position, would you store it in a place where it has recently taken deposits from the people, where tourism and banking savings are likely to decline and when there’s a perfectly acceptable alternative in the US dollar? I believe the euro is fundamentally flawed as a currency.

1)No central euro bond, individual country bonds.

2)civil disorder likely on the horizon

3)Tourism in Europe likely dropping

4)Crime to result also dropping tourism more)

5)Gold as an alternative to holding your money in Euros isn’t working either.

I am not going to short the euro based upon an idea when it is oversold, but long live the dollar.

1)Long the dollar

2)Short the Euro

3)Short Gold

Eventually long the YEN may make sense, but not there yet either.

The gold markets simply are too small to support the kind of money in the dollar. tens of billions of dollars in the gold markets is nothing compared to tens of trillions in the dollar.

Long live the dollar!

 

 

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Gold has been “toppy” for some time. It has been in a sideways to downward correction since the 2011 highs. The first and last stages of a decline are typically the most dramatic. Nevertheless, we have a breakdown and now are making what appears to be a bear flag.

But it’s a double bottom, in the making, you say? Perhaps, but support still has to hold for that to be the case, and resistance still has to give way to break higher. Certainly that can happen, but I am not betting on it.

If we break lower, look out below. It would be a breakdown of a descending triangle that started on April 2011 Without a lot of buyers in the area we could fall to the first level of support. If the buyers don’t step in because the momentum continues, the next level of support for the yellow metal is 1200.

see the warning signs of gold.

Of course, we could break higher, which is why we must watch the 1520 level or so in gold, if that gives way, there is a lot of danger below.

On a side note, the gold story doesn’t really tread water. The gold bulls chant about fiat money, not considering the fact that fiat money has existed for a very long time, and in many cases did not hyper inflate for hundreds, or even thousands of years. The radio stations and TV and such promoting gold has gotten old.

Gold you dig out of the ground so you can bury it in a ground or bank vault and watch it sit there. Then what? Then you hope that hyperinflation happens, even though, you really don’t…. and if it does, all you really do it maintain value. Historically equities do best in hyperinflation anyways priced in the local currency. So this talk about dow/gold returning to 1 has been incredibly premature. Gold serves as a transitory currency, when people lose faith in multiple currencies and have no where else to go they might buy gold. When central banks hedge they may buy gold. When sovereign debt collapses, they might buy gold. But when everyone runs out and bus gold because that’s what some guy on TV said, and everyone rushes out to buy, prices get too far inflated. Like any market, the weak longs must be shook off, and the shorts must first be drawn in, so they can be squeezed out later. In the meantime, the dollar has been strong. Large players have been selling gold and the miners have dramatically underperformed.

Hey, if you want to hold the yellow metal, I have no problem with that, just don’t aggressively buy for a long term hold here, and make sure the position you do have you plan to hold. Gold could go to 1200, or lower in a relatively short amount of time here. That does not mean it will, but the price pressure to the downside does not need to be strong to go significantly lower. On the other hand, to go significantly higher, we do need a lot of volume and buying power.

So the reward favors the downside and risk is to the upside.

So for now, we decline most likely. In the meantime the market has been red hot. It may burn out sometime soon, providing a dip buy opportunity, but until then remain patient and stay away from Gold like it’s radioactive waste.

 

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I saved the world… It was scheduled to end today… But I saved you all. You’re welcome.

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It’s easy to go 100% long and buy up everything in site in moments like this. Even if dow is going to 16k, it won’t do so in a straight line. Do not force the issue, you grind away and you do not try to make a killing with a single trade, in a single day but you continue to grind. Sure you can have a portion of capital used for swinging for the fences, I certainly do, but don’t make it your core strategy.

There is a saying… “If you weren’t at the wedding, don’t show up for the funeral” If you didn’t see this long-shot rally coming, what makes you think you seeing the market shooting to infinity in one fell swoop will also be correct? I am not saying I’m not bullish right now. It is taking a tremendous amount of discipline to void getting excessively long. Everyone is piling in.

Everyone wants to believe that gold will go higher… but it already has shot straight up. Here’s a question… Will QE3 cause more buyers? Is the reaction to this move and current price something that has not priced in QE3 already? How much higher until it is priced in? I do not know the answer to that, but it’s a much more intelligent way to think about it then to assume because there is QE, gold will always go higher just for the sake of doing so.

You gotta have enough guidelines to stick to a system habitually, rather than throwing caution in the wind impulsively at all time highs during the moments where everyone is euphoric over free money. This certainly may not end just yet, and there may be more free money to come, but it certainly has the risk of ending badly. Everyone could visibly see all the risks in 2008 and 2009 and 2010. Few could see the rewards to come. Now everyone is claiming the fed is a built in put for the market. Perhaps, but what about the risks of things that remain unaccounted for, the things no one expects to happen, the crash no one will be ready for? Cash is necessary, even if you fear it will inflate into oblivion… Even during great bull markets there are volatile times, the volatility appears to get more and more “smoothed” out as the market rockets higher by 3 times the amount of move as the downswing, but I assure you, the people felt it. I am not saying hyperinflation is coming, but that volatility even in the best case scenario for those long, will still be felt. The difficulty of the trading environment may not be seen yet, but I assure you it is still there. No one likes a boy crying wolf at a party and suggesting things may not be great, but do not think that just because it hasn’t happened yet means that it can’t.

I did something unconventional… I put in a low put order after getting long several names and I was long others but had a portion of cash on the sidelines that I put to work, The low bid on the gold put filled, I really didn’t think it would unless gold was much closer to 1800, but some sucker panic sold the put and he feared that he would have an unhedged position forced into being short gold as it shot to the moon. I did not expect the trade to have worked so well… so far anyways… I was expecting the position to kind of get run over for awhile, but protect me in case everyone started selling the news of QE soon. We are getting into the time when the “sell in may” crowd will be coming back in just a couple months. But there is an election around the corner and the market is sky high. We have not witnessed the turbulence that we saw in 2008 or 2000 yet and perhaps we won’t… but using this market euphoria to take some profits and wait for a pullback to get back in certainly seems more “normal” What would you do in this situation if you knew of no news? What is the tape telling you? Do not be distracted by news to the point where you ignore signals. The bullish percentage index in NYSE is not quite overbought and is still rising, which favors a bull market. The momentum is currently upward, but overbought signals exist.

Everything that has happened today is no doubt bullish, but if that has largely been priced in by the run up, can the market sustain itself beyond the rate that the fed is attempting to support it? I have my doubts. After all, last time RSI was this overbought was around April before a 7 point gradual correction. The time before was 2011. We did go higher for a few months but then crashed over 15% from the initial overbought signal. Before that? 2010 before the Flash Crash. However, the momentum turning also occurred before the majority of these declines which has not happened yet. We still may have our pre-election crash after all, or it may be delayed just long enough… we shall see. Think about this… Once Ben’s job is secure for 4 more years, is he still going to continue pulling out these stops? What will support the market then? Will the hope that he will do anything to keep markets going up still be there? At what point do investors realize this and start reducing positions to price in the “built in put” expiring? Whatever premium Bernanke’s desire to keep his job and keep 0bama in office by keeping stock market strong, that premium will decline, much like a regular put as expiration date approaches… That is my concern going forward. And if the market crashes, 0bama is unlikely to win, so if a decline happens, people will be fearful of Romney eliminating the one guy that kept markets propped up at this level. Not that Romney is bearish for markets long term, but it certainly screws with people’s preconceived notion that because markets are high, Obama, will win, and if Obama wins, the market remains at these levels, there is no garden variety correction and shift of capital into different areas and out of others, and no rotation… Perhaps Obama is extremely likely to win based on strong correlation of the stock market, but if the stock market starts to decline a little, by that same metric a Romney victory becomes less out of the question which means there may need to be a shift in allocation of capital, that realization in itself may be enough to get others to start to concern themselves over their positions and they may want to hedge in the event of Romney Victory and uncertainty over who will win which may mean more cash, which in turn may bring more people concerned over it. Then the high frequency tradetards come in, and the technicals start turning momentum, the concerns over the “bernanke put” reaching expiration date becomes an increasingly apparent issue. If no one expects a crash or at least only a very silent minority, the conditions are more vulnerable to it based on a few small changes and shifts that pick up speed like an avalanche.

There is plenty of trickery left in the bag, but the contingency plans have to be in place.Once that correction takes place and the premium is taken out, then we can build support and continue rallying strong again but I certainly expect some turbulence at some point! Perhaps right around October and into November. As much as Bernanke has intentions to bolster market, the market has pricing mechanism to take that into consideration. Of course, the price is generally the most recent transaction and if the majority is only willing to buy much lower, but has already sold and unwilling to short, the market will continue higher, running on the fumes of a select few until those few run out.

Nevertheless, it is entirely possible to over-think things. Keep track of your indicators, continue trading your plan, and don’t let anything else distract you from what the market is telling you. , this post is to come up with a theoretical condition for a crash just to make you check your assumptions of stock market to infinity at the door. Stick to your indicators and realize that even if macro and headline data is right, it can still be wrong if it has been priced in…. And you can do the work trying to determine if it’s priced in yourself, or you can watch your signals and technicals and rely on others that perhaps do, and begin to act accordingly before everyone else follows.

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