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Aaron Basile
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Contrarian Investor, Commodities Speculator, Technical Trader.
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Aaron Basile
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  • Failed Confirmation In Equities, Gold & Silver Weekly Trends

    I did a video before the close on some of the action from Friday’s trading but tonight I will follow up on that analysis and update a few new items that have developed since the close on Friday. As shown in the video analysis on Friday, the markets had above average volume in the morning session during the gap down off of the dismal jobs number, but immediately after a 200 MA pierce on the 10 minute chart, a buy program pushed the market higher and volume soon dried up which lifted equities into the closing bell. My interpretation of this is that since most of the Wall Street financiers tend to take it easy on Fridays, (which is partly why Friday’s are historically known as positive days due to less volume) the large bank and HF’s were just waiting to hear the jobs number so that they could trade based on it, and then proceed to stay out of the market for the rest of the day.

    Simply put, Friday’s action was nothing but profit taking. I think we’ll see some more downside early next week but remember that it is an options week so expect violent swings. We are still very overbought at the moment and usually the institutions take the market in the opposite direction that the market is headed in going into options ex.

    On Friday the managed money took profits off of the jobs number and then largely stayed out of the market for the rest of the session. The reason why I believe we’ll see some more selling next week is because of options expiration which usually includes high volatility and high volume that generally favors the downside. We’re also overbought going into the expiration which could take for some very wild swings in both directions. More importantly, I think we’ll see more downside because we’ve only had a one day pullback. If you are up 7-8% in less than 2 full weeks, the jobs number just becomes an excuse to take profits off of the table, but you wouldn’t try to buy back those stocks you were up on if they had only pulled back .5 – 1%. You would most likely wait for them to come back in at least 3-4% for a 50% retrace before trying to buy the dip.

    Additionally, as you can see on the chart above, the SPX failed to confirm above the critical 1345 level on a closing basis. A failed confirmation means that it needs to come back in again before it can retest this pivot.

    The failed confirmation also extends to the weekly chart. Yes, it did confirm above the 20 MA, but whenever you have two levels that are that close to each other, you should always consider the farthest level as the most important one. So, in this case, 1345 is more major and the 20 MA is minor.

    The Q’s also could not confirm above a major resistance and the level on this chart is even bigger than the one on the SPX. We’ve now hit a quad top (triple top on the weekly) with Friday’s close because the Q’s failed to close above Thursday’s closing price. The $59 level on the QQQ has not once been confirmed above since we initially tagged it in February. A retrace this week should take it to $58 at the least.

    Adding more pressure to the market will be Italy, which appears to be the next pig nation to begin making headlines. Some European officials called for a $2T aid package which is double the size that the original plan was supposed to be and the EU has now called for an “emergency” meeting to discuss the unsustainable debt levels and perhaps how to attempt to contain the contagion. In short, pressure on the Euro, means a stronger dollar and a weaker equity market.

    The Euro is near the lower end of a symmetrical wedge with support at $141 and a tight resistance level of $143. Any move this week should be decisive because the trading range is so tight, a breakdown and confirmation below $141 would send the SPX lower while a gap above $143 would continue to hold the current situation steady.

    Moving on to gold, there has been a lot of noise this past week surrounding a possible breakout in the PM’s. I touched on this Friday but I do not believe that this is the case. Gold is still extended from the 3 year trendline on the weekly chart and has not completed the current down cycle. I’m actually somewhat surprised that gold has rallied over the last week considering the lack of news out of Europe, but nonetheless it is where it is. I think the absolute lowest it gets is $1450 and it will do that within the next month. I think it’s likely that Gold will rise to somewhere just below $1700 (possibly $1675-$1690) before ending the year around $1650 give or take.

    I haven’t looked at the weekly chart for silver on a long term basis for a while but I really love this topside trendline that extends back to early 2009. With the recent surge, it is likely silver tests and fails a break of the 20 MA on the weekly though it is possible it gets as high as $38 in the process. It will then continue the leg down into the lower trendline and make a long term bottom. Speculation past this is too far ahead to make any guesses as silver trades much less like clockwork than gold does but as of right now silver is predictable enough to trade, and for the long term investors, to buy during the dips.

    A week or two ago I said that TLT would be a buy for a move up above $98 if it had a pullback. Granted, the move down was sharp and I did not expect it to move so violently, but I did nail the bottom in this to the exact day and it is now 3% off of the lows after recently piercing the 200 MA. Treasuries recovering could spell headwinds for equities and TLT also negated a possible bear flag on the daily chart. It is now back above the 50 MA with Friday’s high volume surge and can confirm with another positive close tomorrow.


    TLT had a sharp decline on the weekly chart as well but it also failed to confirm below the 50 MA as well as $95.20 which has been a master level for the last 3 years. So that’s two rejected pierces of major support levels on TLT with Friday’s move.

    As you can see, the story this week has been all about confirmation and particularly, the lack of it. which is why I still favor the downside going into next week. The market defied taking the stairs up and the elevator down by instead doing the opposite, but now it is time for a bit of rebalancing. Certainly it’s possible that the market can still move higher after coming in first, but I would be amazed if the SPX managed to get back to 1370 this week and the Q’s to broke above $59.21 given the current overbought status, the rally in treasuries, and the pressure on the Euro.

    Jul 10 11:16 PM | Link | Comment!
  • Japan Gets Desperate, Attempts Damage Control On REM Supply Constraints

    A recent discovery in the Pacific could solve the world’s REM supply problem that has been centered by the export-slashing that the Chinese have done over the last couple of years. Japanese researchers say that they have enough REM in newly found deposits in the Pacific to satisfy 1/5 of the world’s demand in just one square kilometer of the deposits.

    “The deposits have a heavy concentration of rare earths. Just one square kilometre (0.4 square mile) of deposits will be able to provide one-fifth of the current global annual consumption,” said Yasuhiro Kato, an associate professor of earth science at the University of Tokyo.

    The discovery was made by a team led by Kato and including researchers from the Japan Agency for Marine-Earth Science and Technology.

    They found the minerals in sea mud extracted from depths of 3,500 to 6,000 metres (11,500-20,000 ft) below the ocean surface at 78 locations. One-third of the sites yielded rich contents of rare earths and the metal yttrium, Kato said in a telephone interview.

    The deposits are in international waters in an area stretching east and west of Hawaii, as well as east of Tahiti in French Polynesia, he said.

    He estimated rare earths contained in the deposits amounted to 80 to 100 billion tonnes, compared to global reserves currently confirmed by the U.S. Geological Survey of just 110 million tonnes that have been found mainly in China, Russia and other former Soviet countries, and the United States.

    Details of the discovery were published on Monday in the online version of British journal Nature Geoscience.

    The level of uranium and thorium — radioactive ingredients that are usually contained in such deposits that can pose environmental hazards — was found to be one-fifth of those in deposits on land, Kato said.

    “Using diluted acid, the process is fast, and within a few hours we can extract 80-90 percent of rare earths from the mud.”

    See, everything is okay? Well, let’s consider the source. Japan is the country that is effected most by the tightened supply as the demand for hybrid cars and cutting edge consumer technology is becoming more and more dependent on REO’s and REM’s. Japan’s economy is dependant on being able to export these goods to other countries and the recent supply constraint has made heavy dents in their export trade. They have begun projects that involve R&D of REE deposits in countries with a high geo-political risk such as Mongolia which is a sign of how truly desperate they are.

    But let’s take a look at these findings which Gareth Hatch of Technology Metals Research, LLC has already done for us.

    There were a number of reports over the weekend, about a group of Japanese researchers who say that they have found significant quantities of rare-earth elements (REEs) at multiple sites on the seabed of the Pacific Ocean. In a paper published in Nature Geoscience on July 3, 2011, lead author Yasushiro Kato and his colleagues shared the extensive work that was undertaken, to obtain and to analyze 2,037 samples from 78 different sites across the Pacific Ocean.

    Reuters, the BBC, Nikkei and others reported that there is an estimated 100 billion tonnes of rare earths in these deposits. Which is rather interesting, because the scientists themselves made no such claim in their paper…

    What they do report, are two regions of the sea bed with so-called REE-rich muds:
    ■one in the eastern South Pacific containing 0.1-0.22% total REEs (including 0.02-0.04% heavy REEs), in layers 10 to 40 meters thick;
    ■one in the central North Pacific, containing 0.04-0.1% total REEs (including 0.007-0.02% heavy REEs), in layers 30 to greater than 70 meters thick.

    The authors compare these muds to the ion-absorption-type clays found in China, which are presently the world’s primary source of heavy REEs. They comment that the mud in the eastern South Pacific has heavy REE content that is “nearly twice as abundant as in the Chinese deposits“. Of course, those Chinese deposits are not sitting under “great water depths (mostly 4,000-5,000 meters)” and below the surface of the sea floor. It is because they are readily accessible and processable, that the Chinese ion-absorption deposits are exploited, despite their very low concentrations of REEs (heavy or otherwise).

    Doing a couple of rough calculations, the authors estimate that a 10 meter-thick bed of mud in the eastern South Pacific, with an area of 1 square kilometer, could yield approximately 9,000 tonnes of rare earths. They also estimate that a 70 meter-thick bed of mud in the central North Pacific, with an area of 1 square kilometer, could yield approximately 25,000 tonnes of rare earths. These numbers are not too shabby (if we again forget about the 2.5-3 miles of water sat above them, and their remote location from any significant land masses). As I’ve said elsewhere, I can’t see these deposits ever being commercially exploited, but the empirical work done by the Japanese researchers which is presented in this paper, is impressive.

    What the authors do NOT estimate, is a size of the total mineral resource, and wisely so. While they mention that the thick distributions of mud at numerous sites might mean that the REEs on the sea floor “could exceed the world’s current land reserves of [110 million tonnes]“, they acknowledge the considerable challenges and significant variability present on the seafloor, and thus state that “resource estimates for large regions cannot be made until more detailed data are available for areas lacking cores.”

    Perhaps the lead author later just threw out a wild-ass, ridiculous guess at the size of the deposits, in response to a reporter’s question. But if he did not, and if the scientists themselves are not making the claim that there are “an estimated 100 billion tonnes of rare-earth deposits”, as reported by Reuters, Nikkei, and the BBC – just who IS making this claim? Who has inserted these comments into this story, and fed them to the mainstream media, and why might they have done that? Can we find clues in the current pricing turmoil, worries about supply from China, and the increasing politicization of the rare-earths story?

    So while the “estimates” are impressive, they might not even be close to the numbers stated in the Reuters article above. Additionally most of the deposits that were discovered are in locations that are largely inaccessible, at least within the near future anyway.

    Let’s go back to the original article-

    The team found that sites close to Hawaii and Tahiti were especially rich in rare earths, he said.

    He gave no estimate of when extraction of the materials from the seabed might start.

    Really? Maybe that’s because a project that size will take a minimum of 5 years to commence, and that is assuming that the government somehow rams through all permits and provides tens of millions in grants.

    Realistically, this project will not commence for another 7 years. Some rare earth skeptics have said in the past that rare earths are not all that rare, citing the vast deposits in China, Africa, and Russia. However, this argument has been defeated many times over as the physical supply has never been the issue. It is beyond well known that there are deposits rich with HREE and thorium, but the accessibility and production timelines are not satisfactory enough to commence by the time supply will really be an issue, which by some estimates will be as soon as late 2012. Two companies outside of China will be into production by early 2013, they are Molycorp (NYSE:MCP) and Great Western Minerals (OTCQX:GWMGF).

    Regarding this particular deposit in the Pacific, one person in the comments section of the Gareth Hatch response, brought up the best counter to this discovery,

    “Not wanting to answer for Gareth, but take a look at Nautilus Minerals (TSX, AIM: NUS) As far as I am aware this company is the furthest along when it comes to development of deep-sea mining, and they still have a long way to go yet”.

    Nautilus submitted a mining lease to the government of New Guinea in Q3 2008, and received approval for the lease just five months ago (January 17th, 2011). They are still in the process of getting the build program approved by their BOD and by conservative estimates, the project will not be producing until 30 months after approval. In other words Nautilus, which is the farthest ahead in deepwater REM mining, won’t even be into production until early 2014 assuming that their build program is approved tomorrow, when in actuality it could take months or even years for that to happen.

    Additionally, I would be skeptical of any Japanese company that gains the rights to begin exploration and development of this project, or I should say I’m skeptical of any Japanese company having success at anything given their country’s stagnantly declining labor force and staggering debt to GDP which now exceeds 230%. It is also now politically unpopular for Japanese politicians to be in favor of anything nuclear, and naturally, thorium is found at REM deposits and according to the Reuters article, this deposit contains a significant amount.. Though thorium is many times safer than uranium, this fact is misunderstood by politicians and the public and as a result of Fukushima, there will be an increasing amount of pressure to further regulate nuclear power which will create regulatory hurdles that will result in massive headaches for anyone looking to produce in the sector.

    Now, will there still be a knee-jerk reaction to this story? Most likely. But the important points to remember are that this deposit’s resources, while potentially impressive in nature, are not going to be online anywhere close to the time that supplies of REM’s will have dried up. The bottom line is that this story smells a lot like damage control from a cornered and desperate government that is trying to keep their heads above water.

    Jul 04 2:01 PM | Link | Comment!
  • Markets Extend Rally Into Holiday Weekend

    The banks were essentially bailed out again as the IMF deal ensured that many of the CDO’s would remain solvent for the time being however Greece will ultimately default which will be followed in the future by Portugal, Spain, and Ireland etc. The market liked the news and the ISM manufacturing number that came out yesterday morning which helped the S&P gain 5.5% last week. I did speculate that the market would rally this week but I assumed that 1320 would have been the absolute highest we would be able to move based on the already large move early in the week which should have priced in the IMF/Greece deal and the ISM manufacturing number. Nonetheless, the market bought the news and continued higher. This may be due to the last of the POMO money that had been saved for the end of the month to prevent a drop before the holiday weekend, but it is pointless to speculate and the smart strategy here is to have caution and respect the trend.

    The S&P is 4% above its 20 MA and over 5% away from it’s 200 MA which just 5 days ago it was trading beneath the 20, and just pennies above the 200. I went short on Thursday and the only reason I am remaining short is because this market is extremely overextended. The market confirmed above the 50 MA but that level is less relevant because whenever you have two levels, you should always look for the first to give, and the second to be resistance.

    You can see that we have broken the upper trendline that goes back to the beginning of May which is the second of the two levels and the market can confirm the break with another positive close Monday though I would be absolutely floored if we had another move like this next week, especially without consolidating beforehand.

    Another reason why I think the market will pullback next week is because the UUP held the $21.20 pivot even as the market ran higher. This is a bit of a divergence from normal market activity and is also another reasons why I’m advocating extreme caution. The chart could be building up a bear flag if the UUP stays below the 20 and 50 MA’s and the target for such a pattern would be all the way back to $21 even.

    I think that we are in for a wild second half of 2011 and the volatility in currencies like this that makes it necessary to reiterate the importance of only staying in trades for short periods of time. The dollar has the fundamentals to be trading much, much higher right now, but thanks to market manipulation by China, the Fed, and GS, the dollar remains under pressure. This is why it’s especially important now to remember that our job is not to get caught up in the why so much as the what and trade based on what the chart tells you. The biggest mistake you can make right now is trying to force your views onto your trades instead of simply trading what you see.

    The best strategy is to remain short term and play individual stocks that are near key levels. In this situation, I prefer small and mid caps as opposed to etf’s and large caps as they are less effected by large swings in the market.

    Moving on to TLT, the Treasury auction should have been no surprise and though I thought that it would have been priced in sooner, it certainly appears priced in now as there is a beautiful bottoming tail on the daily chart for Thursday’s action. Friday’s action followed through with a failure to close below the previous low and additionally, lacked volume. I think that an aggressive trader can safely buy TLT for a move up to $95 in the short term with a stop loss at $92.90, or a closing candle below $93.14.

    I know some of you are in this trade with me and I was only out of the money for a day on ZSL and as I said, as long as SLV stays below the 20 MA, the short was still in play and as you can see the bear flag played out perfectly and ZSL is now in the money. My target for ZSL is the same, $23 should be resistance but I’ll be unloading around $22.75-$22.90 to protect gains.

    Now, something interesting has developed in the SLV chart and that is the controlled, step by step breakdown in price activity. This is now the 4th bear pennant that has played out on this chart since the initial selloff in April and this is significant because there is now a possibility that $30.50 is no longer major support. Remember, anytime you go straight into a level, there is a higher chance of a pullback in the trend when that level is reached as opposed to if the stock consolidates on its way into that level. If SLV continues to meander lower instead of simply dropping down, then we must look at lower levels of support to buy this at again.

    This development does not change my exit for ZSL because I won’t risk giving up sizable gains back to the market. At the very most, I may take half off of my position and trail my stop to guarantee a profit, but I absolutely will not forfeit gains by not making an attempt to protect my position. Now, that said, this might not change my exit for ZSL, but it certainly will change my potential entry of AGQ to play silver from the long side if and when it bottoms out. This trade is going to depend on many circumstances and I will provide a more detailed analysis on when and how to enter at a later date but for now, I am holding ZSL and the trade is going as planned so I’m not trying to get too far ahead of myself.

    Once again, keep it short term, don’t eat up the headline news, and protect your portfolio at all costs! Do not give back gains to this volatile market because it will take you for everything you have. Be sure to have a good 4th of July weekend and I will see you all next Tuesday for the shortened trading week.

    Jul 02 9:04 PM | Link | Comment!
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