Leaders Analysis:   Gold has advanced with equities overnight on the Alcoa earnings surprise.  As we wrote yesterday (free registration), we don’t like to chase gold, but it will likely advance strongly as long as equities do the same.  However, strength in 30 Year T-Bonds and the Yen, especially in the EuroYen cross (still hugging the 200 day moving average), continues to refuse to confirm the moves in equities and gold.  They may simply be lagging, waiting to see if the S&P 500 can break through its September’s closing highs.

Medium Term Analysis:  As we have been writing, it is best not to get too aggressive with shorts while the Fed liquidity spigots are on, even with dismal fundamentals, such as yesterday’s Consumer Credit report.  Having said that, the longs have been put through some pain as well.  Such is the volatility we expect in October as a result of the distortions and strong contraction in money supply.  The ES is close to, but has not yet cleared the 1067 resistance level (two week’s prior point of control), which is the last major holdout to new highs.  Longs will want to have cleared it and made new highs prior to next Wednesday’s Retail Sales report, which is likely to be dismal.  With a three day weekend ahead, all the better if the shorts are scared out entirely by Friday. 

Trading Today:  As we write, the ES is attempting to break through the lower boundary of strong resistance from 1065.75 to 1068.00 on a bullish Jobless Claims report.  If it cannot break through pre-market, we would still be buyers at the 1059.75 to 1060.75 daily R2’s support area.  Longs will want the daily R1’s at 1056.50 to 1057.00 to provide support to continue the rally this week (we would still consider buying here as well, though not as aggressively); however, only a close below…

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…there is a slight seasonal negative at work here until the end of October:

Traders should recall that the second week of October 2008 began a painful slide after a strong September.  The forced deleveraging from all instruments on margin call mania exacerbated the move last year, to be sure.  But it seems prudent to wait for a move back to the 1025 to 1031 area (basis Dec 09 contract), which is the 61.8% to 50% retracement box from the breakout of last week’s highs at the 1011 area.   Gold could even retrace to the 1010 (61.8% off 985.50 low) with the medium term bullish trend in tact.

In our opinion, better to be careful and potentially miss a move than to get caught up in the euphoria of a market that has burned many short term leveraged traders.

Leaders Analysis:   As we updated yesterday (free registration), gold’s strength has been confirmed in other currencies, including the CAD and AUD, despite the Australian central bank’s tightening announcement yesterday.  We are still seeing Yen strength, with the USDYen and EuroYen in danger of breaching strong support.  For equities to continue the rally, we would like to see a definitive move away from support in the Yen crosses.  Perhaps the global risk/carry trade is being delevered from the Yen and primarily into the USD, but we see no inherent strength in the Yen or BOJ tightening ahead that would cause this.

Trading Today:  Yesterday’s rally traded into last week’s market profile value area and sold off sharply, only to see an impressive late day rally to recover much of the early gains.  We would be buyers down to the combined session pivot at 1047.00.  There is still the risk of selloff, so we would…

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Gold has broken out strongly with the Dec 09 contract piercing the 1040 level.  Though the USD is down materially today, we are still seeing the gold move confirmed in all the major currencies, including the AUD, which is impressive in light of its monetary tightening actions this morning.  30 Year T-Bond futures have finally traded below the critical 122 level again.  Only the EuroYen forex cross refuses to behave and confirm the other moves, however, we will give it a day to catch up before drawing any further conclusions.

Update 1:27 pm EDT: Corrected “Gold in Euros” to “Gold in Yen”, above.  Gold in Euros is below its Sep 3 09 high.

Leaders & Medium Term Analysis: Gold shot up to 1023.30 overnight (basis Dec 09) on continued US Dollar weakness, which also has helped fuel the continued surge in equities.  As we have been writing, we have a very good probability of a top either today or tomorrow, but need to see confirmation with a close below 1030 in the ES by tomorrow.  Overnight, the ES has maintained strength by yesterday’s highs, but 30 Year T-Bond futures are up slightly and the EuroYen forex cross down materially, which are both non-confirmations for equities and gold strength.  The ideal top will by a spike up in equities on one of the pre-market reports this morning with a distribution day that closes below 1030.  Alternatively, tomorrow’s two 8:30 am reports could be the bearish catalyst.  If this scenario does not play out, there is very little overhead resistance above 1066.00 until we get to the 50% retracement of the entire down move at 1126.25, with other Fibonacci resistance at 1144.75 and 1160.75.

Treasury Analysis:  Tomorrow, Treasury will announce next week’s auction schedule.  Last month, the continued upward trend in auction amounts was halted, and we expect this month to be on par with to slightly less than last month.  We do not expect the same nervousness in the bond markets that we had in previous months as recent long term auctions have gone well and yields are testing support rather than on the verge of breaking through upside resistance.  If we do get the reversal in equities this week, the 30 Year should be finally able to break through its resistance (and yields through support) and we would likely see a short covering rally up to at least the 124-125 level.

Trading Today:  As we write, the markets have reacted tepidly to CPI and the Current Account reports at 8:30 am, and there are still TIC and Industrial Production before the market opens.  We are willing to cautiously buy strength between 1042.50 to 1046.00, but become intraday bearish below, mindful of the strong possibility of a longer term correction.  Therefore, we will not…

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Leaders Analysis:  Markets had priced in strong demand at yesterday’s 10 Year auction and equities closed strongly.  30 Year T-Bond futures made a hammer bottom on the daily chart, spiking nearly to the 61.8% support.  Gold continues to back off from the 1000 level and the US Dollar index is respecting trendline support.  Nearly all the market leaders are pointing to lower equities; however, equities refuse so far to obey.  The lone dissenter among the leaders (or at least neutral) is the EuroYen forex cross, which is at its 50 day moving average, but is not yet showing reversal signs to confirm the other leaders.  The two most likely possibilities 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).

1 is the most likely, but 2 is gaining ground quickly.  Everyone seems to expect a September correction, which we believe will come, but will likely cause considerable pain to the shorts before occurring.  Currently, we don’t believe the shorts have hurt enough and believe an extension to the next upside target of 1053.50 (a major 50% retracement on the continuous futures chart for the ES) would be sufficient to cause this.  Today is a full news day and a 20 point extension upwards is at least conceivable. 

Trading Today:  As we write, the ES is advancing on the 8:30 am Int’l Trade and Jobless Claims reports.  Overnight, yesterday’s highest point of control in confluence with the combined session pivot point served as support, and longs will need to keep price above this low of 1028.75 to get another extension.  We will not fade short any strength until late afternoon, if at all, as it is dangerous to…

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Treasury & Overall Analysis:  Yesterday’s 3 Year auction went well, with markets relatively unimpressed, either looking ahead to the 10 Year today and 30 Year tomorrow, or already pricing in strong demand.  A poor auction today (1:00 pm) could boost equities; however a good to great auction will likely not be a market mover again.  30 Year T-Bond futures hit the 50% retracement from August lows overnight and, therefore, have entered the zone in which we would expect to see a potential reversal in both equities and Treasuries, should one occur.  This zone extends from 118 6/32 to 117 4/32.  After watching yesterday’s price action and taking into consideration tomorrow’s heavy economic calendar, the time horizon for a potential reversal is extended to tomorrow.  Should it not come, we would expect to see a test of the next upside price target in the ES of 1053.50 into next week, where there is a much greater chance of reversal after having squeezed out the new shorts.  This target could also possibly be reached today or tomorrow, but that is unlikely.

Gold:  Gold has not yet confirmed the breakout when priced in other currencies, with yesterday being a down day in all but gold in the USD.

Trading Today:  As we write, the ES has broken yesterday’s combined session range to the upside, as well as day-session-only R1.  Key in early trading after the open will be to watch yesterday’s market profile point of control in confluence with long term point of control at 1024.50 to 1024.75.  The ES has committed to building strength at higher value levels, and a failure to make new highs and drop below 1024.50 is…

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Treasury Analysis:  Today is the first of three major auctions this week for Treasury securities—today is the 3 Year, tomorrow the 10 Year and Thursday the 30 Year.  The 30 Year T-Bond future backed off its major resistance are Friday on the equities advance, nearly reaching the 50% retracement support at 118 7/32 from the August interim low.  As equities are now testing highs, key will be to watch the 30 Year’s reaction this week to the various auctions with 117 4/32 to 118 7/32 containing the Fibonacci box from August lows and VWAP anchored from the June 11 09 low of the year.  If we do get reversals this week in equities (down) and Treasuries (up), it will most likely be from this support area by early tomorrow (though possibly after the 10 Year auction at 1:00 pm tomorrow).  We expect Treasury auctions to be the biggest news items of the week and they should be watched closely.

Gold:  Gold futures broke through 1000 overnight (high of 1009.40 basis Dec 09), but we would like to see confirmation with gold priced in Australian and Canadian Dollars break through swing high resistance from late June to mid-July 09.  Until that happens, we consider the rally based on Dollar weakness, and not yet sufficiently broad based to signal a strong move up.

POMO:  Today is the only day on which the Federal Reserve Bank of New York will conduct permanent open market operations for Treasury securities this week (though it will likely announce another Agency POMO), and the Treasury program is expected to end with next week’s two POMO days (Sep 16 & 17).  The program was prolonged to end in October 09, but will likely reach the $300 B cap in next week’s auctions.  In the unlikely event that the program dollar cap is increased, expect violent moves in both Treasuries and equities.  Both have benefited from the program—Treasuries because POMO supports demand and equities because the proceeds appear to have been channeled into the stock market.  However, the markets may call Bernanke’s bluff and any prediction on an eventual reactionary move is extremely speculative.  Though the day trading POMO pattern of paint-the-tape closes had subsided, it was resurrected with last Thursday’s strong close (it was a POMO day for Agency securities).  The Treasury POMO program could end with a bang rather than a whimper into next week, with every last leveraged dollar from the proceeds squeezed into equities, so just a word of caution to the shorts.

Trading Today:  While we are not surprised to see the ES up again at the highest market profile value area (primarily because of gold strength and the correlation we noted last week), the rally was not on what we would consider a clean NFP reversal.  Rather the move began a bit high (10 points off the lows) to consider the NFP pattern to have held.   Back to market profile, if the ES continues to accept value above 1019-1020, there is a good chance we will see new highs.  If current highs are to be respected, the ES should reject this area by early tomorrow.  We are willing to go long in an early retracement into the daily gap/pivot area of 1019.00 to 1021.75, but become intraday bearish below.  Despite this, we will likely avoid…

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NEW YORK, Sept 2 (Reuters) – The CME Group will not list additional futures contract months for the New York Harbor No. 2 Heating Oil Futures contract beyond the August 2012 contract due to proposed sulfur-content specification changes.

“The proposed legislation, currently pending in New Jersey and New York State, intends to reduce the sulfur level in heating oil,” CME Group, which owns the New York Mercantile Exchange, said on its website.

“The existing New York Harbor No. 2 Heating Oil Futures and corresponding Option contracts, listed below, will continue to be listed for trading through August 2012.”

We have not been able to confirm the rumors that the CFTC will lock out speculators, though they have certainly made overtures to that effect before, and the belief in the rumor would be justified.

Once again, we repost our three scenarios and revise the conclusion slightly:

1)  Recent correlations hold and gold is simply forecasting another inflation-led [stock] rally that will begin in the next few days (meaning yesterday’s correction is not the bearish bellwether everyone thinks it is), or

2) Recent correlations hold and the move today in gold is a bull trap that will be reversed in the next few days, or

3) Recent correlations have broken and gold is decoupling from other markets, including equities.  Because correlation-changing paradigm shifts are rare, this is the least likely scenario; however, should it end up being the case, the significance is tremendous.  A break above 1,000 on a declining stock market would be definitive evidence for this scenario.

As to 3, because the move in gold may be a result of large investment funds looking for the most liquid commodity play that is the least likely to be subject to overt government interference, a breakdown in the correlation between equities and gold is no longer remote, and it would be possible for gold to advance, equities to decline, and the US Dollar and bonds to rally.

To confirm that gold is advancing on its own merits and not the result solely of US Dollar weakness, we want to see eventual confirmation of an up move in gold priced in other currencies.  Below shows gold priced in the Canadian Dollar (CAD), Australian Dollar (AUD), Japanese Yen (JPY), and the Euro (EUR).  When gold began its last advance in November 2008, it was confirmed by higher lows in the commodity currencies of the CAD and AUD, as well as the EUR (even though there were lower lows in the JPY and USD gold).  Eventually, there were higher lows in the JPY and USD gold at the beginning of December 2008.  Accordingly, for the gold bull case, early confirmation would be to see current lows in AUD, CAD and EUR gold respected on the first pullback, especially in the former two as they are commodity currencies.

* Thanks to the members of the Value in Time group for their comments and postings on this issue.