All that glitters is not gold. At least not right now. The lease rate, or forward hedging has spiked dramatically higher in the last month. Whether this is the miners re-building their forward hedge books (selling gold futures in essence) at these lofty levels to lock in rates, governments unloading bullion for cash, or some silly excuse like hedge fund liquidations, something is changing in this landscape. Many folks have been obsessed about the LIBOR rates as a gauge of easing in the credit lines, and in that same vein, gold bugs need to keep an eye on this signal and look for a clear drop in lease rates before considering putting a single dime to work.

Why am I suspicious of this behavior in the markets? As conspiracy theorists love to point out, JP Morgan in effect controls the direction of this market, in the same way that Goldman Sachs effectively owns the oil market. Gold bugs know that the Indian wedding season is traditionally the season which exhibits a spike in demand. Heck, even JPM reminds us about this fact. So when does the spike in forward lease rates correspond to? Starting September 25, 2008, the rates went up five-fold, just as gold fans theorized that the yellow metal would explode to the upside due to the financial crisis and flight to safety. Nope.

Is the wolfewave on weekly still in play? We’ll see when the $650 level is retested. The only way a trigger will be pulled is if the gold lease rate indicates that the players see better days ahead signaled by a solid drop in lease rates. Give it another four weeks. Patience will be rewarded, and there is plenty of action elsewhere.

Bernake has finally fired up the helicopter and is raining dollars on the emerging markets.  Although the markets cheered the rate cut, for the average Joe-the-plumber American, this equates to giving the rest of world a fistfull of dollars.  Do you remember just a couple days ago when the media was in a frenzy over the appreciating yen, giddy about sub – $2 gas, and touting the great bargains littering the landscape?  “Sorry, only kidding” will most likely be the new message, because now everything is getting more expensive until the slide in greenback is halted.

I’ve superimposed the intraday chart in lower left to show that we are currently around the 2004 spike lows in the playbook.  It is progressing at a rate of 1 day on hourly chart = 1 year in playbook.  At the current rate, this swing trade will last another four days – if indeed this is a trend reversal, the retrace should end right in the 62%-78% levels around 77, with special attention to the 80.5 spike low price for support.

In the financial world, Black-Scholes has become the benchmark of how to quantify risk. This model is considered robust enough that the authors were given the 1997 Nobel Prize in Economics. Most importantly, it is used to price derivatives – both American and European put/call options. One significant limitation is that Black-Scholes cannot predict nor easily adjust to ‘non-normal variances’ in which markets swing wildly attempting to find a rational pricing. In other words, times when the shit hits the fan.

What we are witnessing is computers battling against oneanother at gigahertz speeds. In early 2000 I remarked that every third buy or sell was most likely traded against a computer. I wouldn’t be suprised if the ‘discretionary trade’ entered by a real human being nowadays accounts for perhaps 10% of the market volume, with programmatic triggers comprising the vast majority of the action. It is perhaps the only reason why the current moves we are witnessing are happing at such an accelerated pace. Those without the ability to react with sufficient speed to the changing winds are going to be whipped by this hurricane.

Rumor has it that Morgan Stanley, Goldman Sachs, and Société Générale got caught on the wrong side of a short squeeze. “There have been several ‘black swan’ events occurring in the markets, and there are concerns that they will lead to large losses,” said James Ellman, president of Seacliff Capital. All the companies deny any involvement nor exposure to this charmin(g) event.

Volkswagen has become the world’s largest company by market value, following the news that Porsche has bought up much of the float and taken a 74% stake in the company. And the short sellers thought RMBS in 2000 was a bucking bronco … beware of Herbie.

As far as the stock market, the lifts are quite impressive as shown below. Second largest percentage gain on the Dow Jones Industrials – bear market rallies are indeed a wonder to behold.

Markets have been moving lockstep with the Euro / Japanese Yen (EUR/JPY) cross. The media reaction to the yen’s appreciation has reached a crescendo, and the foreign markets are showing signals of government intervention as mentioned in previous post with a -4% route. Also significant is the lack of fx flows after the equity markets have closed.

Markets are anticipating fed fund rate to be slashed tomorrow, just as the dollar signals that trend started in March 2008 could go into a consolidation sequence – an intraday wolfewave pattern signal shows on 5min chart.

Here is the monthly chart of the US dollar. Superimposed upon the lower left is today’s intraday action as recorded on a 5min chart. One of the beauties of wave structures is the symmetry at key junctures – compare the 3 days of intraday data against the equivalent topping action which unfolded over almost 2 years of monthly swings.

Once again, I find myself drawn to the 1929 playbook. Although it was just the beginning of an extended downdraft, there were some vicious bear market rallies along the way. In the current financial meltdown, we also got the sharp two day rally, followed by retest of the lows. If we compare current technical levels to 1929, October 10 would be as waves (iii) and terminal wave (v – 3) should be imminent.

The banter about the Japanese yen strength has reached a crescendo, and it seems there is government intervention as we speak. The yen is off -1.1% overnight, and index futures have lifted a solid +3% already.

Has the S&p 500 completed the third wave lower? Although I have maintained a slightly different wave count, I am now satisfied that sub wave v / 3 has completed as the symmetrical triangle formed on daily. The structure was filled with several bull and bear flags (a-b-c retraces) and volatility one should expect from a wave 4 – SHARP. Could this be the perfect opportunity to expect a tradeable “V” spike to retest the 200 moving average as overhead resistance?

Equity markets have just closed (13:00 Pacific Standard Time = 16:00 Eastern), yet it is very interesting how the foreign exchange market immediately comes alive.  This ongoing money flow signature is just another dynamic of interrelated markets.

Could it be that the USD dollar / JPY yen is actually a 30 minute leading signal for the futures equtiy market?  Note the collapse in this cross just moments before markets close (12:30 PST = 15:30 EST).

This amount of movement would have required almost 3 weeks in 2007 foreign exchange markets.  Two hours with the current volatility as trillions of dollars move through hyperactive world markets to cover bets of unimaginable size.

[15:00] ES .. unable to hold above trendline off spike lows .. 2nd head’s up
[15:17] test of rising trendline as overhead resist here..  http://charts.dacharts.com/2008-10-27/Buff_67.png
[15:31] seems like a good level to grind out a right shoulder on intraday h&s
[15:34] no edge into close
[15:43] index futures coiled into symmetrical triangles .. constricting ranges
[15:48] ES 863 .. watch lower bounds for contination signal .. h&s right shoulder .. http://chart.nu/ES_intraday_20081027_tri.gif

[15:54] break of lower triangle bounds
[16:01] larger bear  pennant pattern measurement reached .. amazing speed
[16:02] h&s target tagged, also

Wolfewave setup as Dow approaches +200.

[13:36] ES 888 .. wolfewave structure on 5min
[13:39] http://chart.nu/ES_intraday_20081027_ww.gif

[14:23] http://chart.nu/ES_intraday_20081027_wwt.gif
[14:26] tight stops .. approaching measured move targets, also .. http://chart.nu/ES_intraday_20081027_mm.gif
[14:31] ES 872.5 .. wolfewave targets .. kick out
[14:41] ES .. completed pattern .. http://chart.nu/ES_intraday_20081027_ww_tgt.gif

I’ve had a lot of folks asking me “what is wrong with gold?” My response is that it is simply swimming against a tide of US dollar repatriation. In actuality, gold is doing quite well when measured against international currencies.

As far as technicals, the last update I posted was in March 2008 as the daily charts showed overlapping structure in a last grasp for the $1000 mark and measured move target. Seven months later, the same weekly time frame chart has a wolfewave structure in place after calling for a retrace back to 650-700. Shift into the lower time frame (daily) to trigger entries and patiently wait for a similar structure to evolve as the spike lows are retested, ideally right around $650 in the next four weeks.  On the other hand, the speed with which funds are moving in world markets may  suggest the pattern is complete – keep a close eye on the dollar for clues.

Gold trades inverse to the US dollar, which has seen nothing less of a meteoric rise in the past 3 months as fast money parks their short-term cash in treasury bills. This flight to safety is reflected in the wild gyrations of treasury yields. Keep the measured move of 88-91 on the radar to signal either exhaustion (a-b-c retrace) or extension (trend reversal).