Oil futures trade at $70 as I write. As the price of crude crashed lower last year, volatility (insurance, derivatives) in the underlying contracts increased in price. Inverse movement that can be played either way, or hedged and levered.

Crude Oil Volatility / Crude Oil

Today’s trading was a flight away from risk–risk off. US equities were weak with the S&P 500 (SPX) off 2.82%, the Dow Jones (INDU) Industrial Average down 2.51% and the tech heavy Nasdaq Composite (COMPQ) down 2.5%. The Volatility Index traded higher by 24% at 30.71. On the Nasdaq, there were 4.2 decliners for every advancer. On the NYSE, 6.5 decliners for every advancer. Volume was heavy all around.

S&P 500 - Daily

Volatility Index (VIX) - Daily

The US Dollar index closed higher by .62% at 76.39, Ten year Treasury futures traded higher by to close at 118 19/32 or up .76%, IEF closed at $91.99.

IEF - iShares 7-10 Year Treasury

Below are a few of the intraday charts.

US Dollar Index - 15 Minute

Crude Oil - 15 Minute

ES S&P Electronic Mini

Citigroup: He Said, She Said

I couldn’t help but reach for puts in Citigroup (C) today. Analyst Mike Mayo was quoted as saying that Citigroup will write down $10 billion of deferred tax assets, representing 10% of Citigroup’s tangible equity. Citigroup quickly responded they had no idea how the analyst was making those calculations. No matter if Citigroup learns how to calculate or not, their common stock is likely heading south of $1 within the next 6 months to year. I am short the big C–the former largest bank in the world.

Citigroup - Daily

The Shimmer of Gold and Silver

Yesterday, I noted that my stance had changed on the precious metals. I am positioned to take advantage of a move higher in gold and silver.

Gold was weak at the equity open this morning, but strengthened throughout the day to close near unchanged. This is evidence of the strength in gold to come. I am long select gold miners and maintain my stop below yesterday’s low. Credit default swaps on Japanese sovereign debt are rising, and the Yen is outperforming against the US Dollar versus other major currencies including the Euro (FXY), the British Pound (FXB) and the Aussie Dollar (AUD).

The charts below show this outperformance graphically. It is my view that this relationship will eventually lead to US Dollar weakness, and therefore strength in gold.

Gold - Daily

FXY - Japanese Yen

FXE - Euro

FXB - British Pound

FXA - Australian Dollar

Next week, same time, same place. And the beat goes on.

Meanwhile, back at the office, my online presence continues to be in it’s infancy. That said, the plans that are in the works have some of my collaborators collaborators–and everyone in between–smiling real big. We are all on the same page. This whole thing is one huge party. Most importantly, as my voice grows louder, the parties will become grander on a logarithmic scale. I hope you’ll be there.

It has been a while since I rapped out a market rap. Let’s start with the big picture weekly and zoom in to the shorter term daily chart of the S&P 500.

The weekly chart indicates that the downtrend in stocks is still in effect–the S&P is still within the normal range of a pullback within an overall downtrend.

S&P 500 - Weekly

Switching to the daily chart, we see a nice looking uptrend. This means that the big money is still to the downside, but on a shorter timeframe–daily as opposed to weekly–you cannot be short. Don’t short into buying; short into selling. (It works both ways: don’t buy into selling; buy into buying). How? Wait for signs of distribution and then go short.

S&P 500 - Daily

A great example was when I positioned short in July. The market showed distribution–an increase in the selling that overwhelmed the orderly buying. I shorted stocks and I lost money. What happened? I was dead wrong. In my younger days, I’d have taken a 20 mile run and said things to myself like, “How dumb can a man get and still go on living?” That was before I knew the game as well as I do now. Though I was wrong, I limited my losses.

This is not archery, it is more like baseball. Frequency of being right is not as important as the magnitude of the gains when you are right. I don’t always get it right, but when I do, I have magnitude on my side. That’s what works for me, but remember, as Mark Twain said “there is more than one way to skin a cat.” The best thing a trader can do for him or herself is not attempt to do what works for someone else, but to do what works for him/her. As part of my vision, I hope my writing helps you develop what works for you.

Zooming into the intraday charts, we started to see some sign of distribution in the last 45 minutes of the equity session. While the jury is still out as to the exact catalyst for the late day sell-off, the general consensus is that it was the downgrade of Wells Fargo (WFC) that came over the wire. One day does not make a market, but when the selling starts, it will first appear on the intraday charts. Today could have been it. Stay tuned.

S&P E-mini - 15 Minute

Last night X and I had a call about global oil demand and game theory. I have known X since we were very very young. He usually knows what I am thinking. “You’re waiting for signs of distribution to get short again, aren’t you?”

“You bet I am.” I responded.

“The big money is in the big swing. The path of least resistance in the big swing is still down. What the catalyst for the inevitable sell-off is, I don’t know. However, I have done this long enough to know that the rubber band can only be stretched so far. Eventually, it breaks–which really hurts–or it snaps back inward and finds a new equilibrium.”

And the beat goes on.

Meanwhile, back at the office, Gold hit an all time high today and the S&P 500 closed +14.26 points or 1.37% at 1054.72.

The gold market is going to offer an obscene amount of trading opportunities, both long and short, in the years to come. The breakout today is big news.

Gold - Weekly Chart

Now, the big bad question is what to do from here. It has been my viewpoint that gold is vulnerable to a violent sell off–if there is a sudden risk aversion rotation into the US Dollar. Last night, there were rumors that oil traders would abandon the US dollar and attempt to denominate oil against a basket of currencies. These rumors make the rounds now and again, and they are always funny. Oil is not going to trade against anything else anytime soon. After all, if you were an oil trader, what would you like the contracts settled in? I prefer my oil settlements in dollars (just fine thanks). That said, not everyone thinks like I do. The rumors of oil re-denomination, a 25 bps rate hike in Australia and weakness in the greenback all pointed to the the new high in gold today.

I remain sidelined in the yellow metal for the moment, and it feels lonely. The move in gold is starting to be about momentum and trading the technicals–an endeavor which I have a decent track record.

The next chart speaks to the conspiracy theory of the day. Rumors of a derivative loss at Goldman Sachs (GS) between 9:30 and 10:00 AM PST. These rumors come up from time to time. I discussed my thoughts on Goldie in a prior post. I’ll leave them at that. Before you dismiss the Goldman oil rumors straight away, check out the price action. They traded in lockstep throughout the equity session. Conspiratorial as these rumors may be, the charts sure move together.

Goldman Sachs Vs. Oil

After the bell today, a slew of oil numbers were released. They all seemed inline except the distillate numbers, which were -2.9 million versus a flat estimate. Oil traded a tad firmer on the news.

Tomorrow before the bell we’ll see numbers out of Monsanto (MON) and Costco (COST). After the bell Alcoa (AA).

I am off to dinner with a vice cop turned lawyer turned trader. Reinvention is the mother of innovation. And the beat goes on.

President Barack Obama’s press conference and subsequent Q&A from the G20 summit in Pittsburgh have elicited strong reactions from east to west and beyond. It is my opinion that Iran’s twist of fate lies with Israel. For more background, I recommend this article from the Wall Street Journal:

Conflict is inevitable unless the West moves quickly to stop a nuclear Tehran.

Due to fundamental and technical factors, crude oil is poised to move lower. If middle east geopolitical concerns escalate, the rotation into the dollar (risk aversion) will have profound affects on the price of oil, as it is dollar denominated. The move lower will gain velocity if the dollar makes a sudden move higher. Traders going long oil as a hedge against geopolitical concerns may be surprised at how quickly the price of oil crashes, as a result of dollar strength — supply disruption or not.



Peace