Gary Tanashian's  Instablog

Last weekend it was noted in NFTRH that the HDGE actively managed bear fund has begun to rise despite a still buoyant broad US market. Aside from being a profit making vehicle when the market begins to correct, it is also another indicator that things are not well beneath the surface of the market. This fund shorts the scams and accounting tricksters, which are no longer going up as the market apparently refines (thins out) to quality. In other words, speculative juices may be drying up.

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HDGE w/ SPX, click for full view

I took a listen last week to the fund's manager and decided to start a position against longs. What I am going to do now is reduce or eliminate longs and sit on cash while very slowly trying to get short over the next month or two, depending on the market*. People interested in bear exposure might want to take a listen and see if the manager's strategy makes sense. I think something like this - if you trust the managers - is better than the leveraged bear ETFs.

* Just as speculated in a post yesterday, it appears da bull boyz is gonna try to ram da shortz dis morning using some kind of Auto sales hype. Topping is probably going to be a long and grinding process. Keep in mind how long it took for the obvious bullish trend to emerge from the actual bottom last spring.

Disclosure: I am long HDGE.

Hold your thumb and forefinger tip so close that you can barely see an light between them. The space is about as thin as the support line on the first chart and the bottoming pattern neckline on the second.

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GYX daily chart

The industrial metals (including 'Economic Doctor' copper) are on the verge of losing support and are a non-confirmation of any strong economic near-future. Yes of course, it is because of China's growth problems and other global issues. Will the US and newly inflationary Japan pick up the slack?

We have been noting economic strength in the US (sparked by the Semiconductor sector) but this will bear watching closely now for signs of deceleration. The industrial metals should be in higher demand if all is sustainably well.

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Au-GYX ratio daily chart

The Gold-GYX ratio made a hard bottom in February. The ratio will go much higher if the neckline at the 200 day simple moving average is exceeded.

Au rising vs. industrial metals (positively correlated to the economy) would go hand in hand with a renewed phase of economic contraction and the all-important 'real' price of gold would rise if this spreads out to other commodities.

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Au-CCI ratio, weekly chart

Of Course, on the big picture the real price of gold has been marching higher most dynamically since the crash of 2008. The last 1.5 years of indignity for the gold "community" has merely been a waiting game; a noisy and cacophonous waiting game.

When this last chart breaks down below the green moving average, the age of economic contraction and gold's real bull market is over. The thing is though, it has not even failed the blue moving average. This chart mocks global policy makers and their supposed economic remedies.

2013 could be a great year. Never has there been the potential for so many to be so off-sides in the financial markets. Right now gold bugs are being told they are off-sides as every week new negative reinforcement of their stance comes into play. But that is why we map out the things beneath the surface, like the HUI correlation to the US stock market and ratios like Au-CCI (or on the positive side, AMAT-SOX for example).

You either want to look right - in going with current trends - or you want to be right, in using tools (including your own b/s detector) to see the new trends. I hold several 'regular' stocks (less Apple, a trade that failed yesterday) that I like as I play uncommitted trend follower. But the real play is setting up and it is tied to economic contraction, which of course is and has been the trend most markedly since 2008. Gold vs. industrial metals is very close to a signal.

Biiwii.com, NFTRH, Twitter, Free eLetter

I would like to repeat the idea that it is best to subordinate yourself to markets at all times. To put your ego aside or at least check it daily to make sure it is not leading you astray. The gold bug ego for example, hardened by a solid decade-plus of relentless bull market is in my opinion too set in its ways on balance. That is because it is an ego that knows it is right.

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Au monthly chart, log scale

Using a log scale chart, which is better for illustrating trend lines, we see that gold is at critical lateral support zone. But there are two more lateral support zones roughly in line with the two major bull market trend lines.

It is difficult to imagine gold declining very hard from current levels, given the superior sentiment backdrop (pervasively over bearish by the usual contrary indicators), but the chart is always the chart and it should be respected by right minded people. Gold holds critical support at 1524 until it doesn't, see?

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HUI weekly chart, linear scale

Speaking of respect for charts, the sad journey of the HUI Gold Bugs index drives home the point. There were no predictions made in Biiwii land. There have only been probabilities based on status above support, below resistance, etc. In fact, I must once again own the fact that in 2010 into 2011 I had a measured target of 888. Nice one chart boy!

But the important thing is to keep respecting the charts no matter what they do, regardless of whether what they are doing is constructive to your favored plan or bias at any given time. HUI, in making a series of warnings (1, 2 & 3 on the chart) by violating support levels, has come to a very bearish state.

With the constructive sentiment backdrop and extreme over sold status, the index has been a candidate to at least put in a tradeable counter-trend bounce. But yesterday something happened that even put that prospect in jeopardy.

Since this area of the market is one that I remain engaged with fundamentally - the Cyprus hype only adds fuel to the bullish case for gold - my newsletter Notes From the Rabbit Hole will remain open to the bullish case at the drop of a hat. But we will surely not become victims if worst case scenarios come about in the interim.

That weekly chart of HUI especially, has most recently been a negative view since the index lost former support at 460 after making a 'W' bottom last summer. That means that Huey must now prove that it is not bearish (by recovering at least the lower of the 2 red dotted necklines) and not the other way around.

Some people dislike technical analysis because it can say some disturbing things that go against everything we think we know. And that is exactly why we need it. The current plan is to be ready for opportunity whenever it arrives on its own schedule.