Below is our updated chart of gold priced in other currencies.  Clearly, today’s move up in gold is reflected best as US Dollar weakness.  We still have yet to see last Thursday’s high taken out in the other currencies.  This may help explain the correlation breakdown with equities and Treasuries.  Equities may be benefitting short term from a devaluation in the Dollar, while Treasuries continue to advance on the strength of this week’s auctions.  History has demonstrated, however, that this correlation breakdown is likely only temporary and that there will be a rebalancing next week.

11:02 am EDT:  Consumer Sentiment came in a bit above expectations, and the ES was only able to exceed the zone we were willing to short (from our morning report) by a tick (high 1048.25).  As always, we give price a point above or below a given level and want to see a quick rejection.  The rejection was quick only after the minor 10:00 am report 5 minutes later–so not a perfect setup.  Though the short worked out modestly well if it were taken, the ES is building value around highs again, and could be setting up for a surge higher.  Above highs, and we may still short the 1052.00 to 1054.25 area, but need to see it quickly rejected.  We will likely not fade long weakness today.  Treasury Budget is at 2:00 pm and is not expected to move the markets.  If it does, though, we won’t get in the way.  The leaders are still behaving strangely, even more so than earlier this morning.  Trade cautiously.

The Precise Take – Correlations gone awry; strength in equities and Treasuries

Leaders Analysis:  We posited midday yesterday that scenario 2 from yesterday’s report was taking hold.  Reprinted, they are:

1)     The majority of the leaders are correct and equities will correct today.   This means we either have a perfect double top at 1038.75, or we will get an extension beyond the highs, which will be reversed late day.

2)     The majority of the leaders are correct, but will tread water while equities head higher and eventually reverse next week.

3)     The majority of the leaders are incorrect and equities will continue to post new material highs with the leaders reversing into next week (gold higher, Treasuries and the Dollar lower).

With the successful 30 Year auction yesterday, Treasuries soared higher (and yields lower).  However, equities advanced simultaneously, with the S&P 500 advancing over 1%.  We don’t expect long term correlations to hold every minute of every day, but it is rare when a negative correlation becomes positive with material moves in both securities. 

So, we are getting conflicting readings from our leaders.  The strongest movers have been 30 Year T-Bond futures (up) and the EuroYen forex cross (down), which both suggest aversion to risk, and would further suggest topping in equities very soon.  However, gold is up over 1,000 overnight (not as strong a move as the aforementioned, but material), which confirms equities strength, along with lower lows in the US Dollar.  Given our hypothesis that (1) next week’s Treasury permanent open market operations proceeds (likely marking the end of quantitative easing) could  be channeled as never before into ramping equities, and (2) shorts will suffer as greatly as possible before the next true correction, 1053.50 and 1066.00 are still viable targets in the ES.  Looking to next week’s calendar, we could see a spike high on next Wednesday’s CPI or Thursday’s Housing Starts that marks the next interim top.  The only thing that would negate this scenario today is a large directional day down.  Today is an Agency POMO day, so be on the lookout for the possibility of a bullish final 45 minutes of trading.

Trading Today:  We are still basis September for today, and will switch to the December contract Monday.  We are outright intraday bullish over the daily R1’s at 1048.00 and intraday bearish below the daily pivots at 1037.75.  If Consumer Sentiment is in line with expectations and the ES has respected this range, we are willing to…

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