Intra-day: August 19, 2011

UPDATE:  4:15 PM

SPX ended at the lows of the day, a good sign for the bears.  However, there’s a little divergence set up on the short term charts, so we might see a little bounce in the immediate future.  I would imagine we at least fulfill the H&S; pattern (to 1114) first.

UPDATE:  3:08 PM

The H&S; pattern is battling a potential falling wedge and OPEX for control of the close.  Should be interesting.

UPDATE:  2:40 PM

SPX is working its way toward completing a small bullish butterfly.  While I wouldn’t expect much of a reversal here, it might be good for identifying the next intra-day bounce.  The 1.27 Fib is at 1124 and the 1.618 is at 1115.93 — very close to the H&S; target mentioned below.

UPDATE:  12:50 PM

SPX just completed a little H&S; pattern on the 5 minute chart.  Potential is to 1114.


Good morning, all.  Gold just extended to the 3.618 Fib level on the bearish Butterfly pattern we’ve been watching.  At the risk of crying wolf, maybe this is the magic number.

Just a reminder… the butterfly pattern is normally very powerful, producing strong reversals at the D point.  But, as we’ve seen, identifying that D point can be frustrating.  The rules state that it must be at an extreme Fibonacci number, but this has taken “extreme” to a whole new level.

While we’re waiting for the market to reach its target, I thought I’d do a little exploration on gold margin increases.  There were six increases in 2009 – 2011.   They’re marked on the chart below with yellow asterisks; the four decreases are marked in purple.  The equivalent SPX dates are also marked.  

I’m looking for patterns in how and when margin requirements are changed, and whether such changes are related to activities in the stock market.  Several of the increases follow run-ups in price, but there are several rapid price increases with no corresponding margin increase, the most notable being in early 2009.  There have also been several cuts at a time when prices seemed on the rise. 

One interesting observation is the way stock market declines seem to follow gold margin decreases.  It happened three out of four times since January 2009.  I suppose it’s possible that CME anticipated stock market weakness, and lowered margin requirements to permit accumulation of positions in advance; but, no one’s that good at predicting the stock market.

CME states that initial and maintenance margin rates are based primarily on volatility — the goal being to prevent member firms from collapsing and endangering the exchange.  Margin decreases would therefore be instituted during periods of perceived and expected low volatility (not the same as price decreases.)

Expectations of low gold volatility would likely exist during times of expected stock market and USD stability and/or low inflation.    Let’s take a look at the dollar versus gold.

It seems that gold margin increases often follow major bottoms in the dollar.  Given that the dollar and stocks are increasingly negatively correlated, this could be pretty useful information for stock investors.

Since gold’s rise has been both parabolic and volatile of late, it’s not hard to imagine another margin increase is on the way.  Might this mean both the dollar bottom and stock market top are in?


Intra-day: August 19, 2011 — 6 Comments

  1. Pretty crazy, huh? I'd say they're pretty screwed. Probably lead to a "run on the bank", meaning prices will skyrocket.

    BUT… I don't think the CME will let it happen. Remember silver a few months ago, with all the talk about JPM's short? Maybe I'm too cynical, but I think the biggest reason CME put through all those margin increases was save JPM's bacon.

    Plus, at some point TPTB want to stop the growing exchange of cash for gold. It undermines their only weapon — the printing press. I wouldn't be surprised to see more margin increases in the coming week.

  2. Hey Pebble. I think a whole new dynamic has entered the picture with Hugo Chavez demanding the return of all his physical gold. 99 tons from the Bank of England should be no problem… they'll deliver. Bank of Nova Scotia is "good as gold"… they'll deliver. But Hugo the Hero is also demanding his 10.4 million ounces from JPM and apparently that's all they have on hand. And they've probably loaded it out a hundred times over by now. Needless to say, they're up shit creek big time. Based on that alone, I don't expect any pullback in gold for quite a while. I know we're looking at a parabolic here… but JPM is just getting started. They must be sweating bullets and that doesn't break my heart one bit.

  3. I think the timing for the low next week should be around Aug 25-26, to be followed by a relief rally to around Sep 4.