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Morning Cup of Jo: Texas Tea, U.S. Dollar and Gold


...investors who are looking for a quick pop in equities driven by political ambition should be looking to see what Congress is going to propose.


"The worst bankrupt in the world is the man who has lost his enthusiam. Let a man lose everthing else in the world but his enthusiam and he will come through again to success."
-H.W. Arnold

Key Points:

  • "Lame Duck"
  • Oil shorts getting squeezed
  • $50 per barrel looks to be holding point
  • Gold's technical position
  • Seek and you shall find
  • Volatility from commodities spilling over into the "Four Sisters"

Market Commentary

Good morning. I trust everyone watched President Bush's 7th delivery of the State of the Union last night with bated breath. Considering his public approval, or should I say disapproval, is the second lowest of any sitting second term president, I'm sure many Americans were tappin' the clicker to find the latest Seinfeld re-runs. With President Bush wallowing around 35%, only to be stifled by President Nixon just as the Watergate scandal became public, many on Wall Street and Pennsylvania Avenue are chirping the words "Lame Duck."

I bring this up to simply point out the movements in the market yesterday based on potential ethanol commentary in last evening's speech. In my humble opinion, investors who are looking for a quick pop in equities driven by political ambition should be looking to see what Congress is going to propose. After all, they are in control. Or better yet, look at the U.S. Energy Secretary, Mr. Bodman, which I'll address in a minute.

With "Texas Tea" being the hot topic of the New Year we thought it apropos to start with that thought today. Back on September 7th 2006 I published a 'Jo' which detailed the LT trend in the ominous Black Gold and stated…

"LSC (light sweet crude) has come down to converging horizontal support and its LT upward trend ($67-$68) – which coincides with the 200-DMA ... Breaking this could be good for the overall economy but the important determinant will be market direction." (Point A in the chart below.)

Not soon after the Texas Tea spilled over right down to the next support at $57.50. (Point B)

Since the break of the second support at the beginning of the year all the shorts jumped on, while the longs tried to find an exit not engrossed in fire. This brought the slippery black commodity right down to the next support level around $49-$50. (Point C) With the massive amount of increased selling volume it left the question of whether or not the next level would even hold.

Now, getting back to Mr. Bodman; mid afternoon yesterday he announced an increase of the Strategic Petroleum Reserve of 11 million barrels. Oil was already up just over a $1.00 on the day and immediately spiked an additional $1.25 on the news and had the shorts 'filling their shorts' per se. The session closed at $55 per barrel. This was the biggest one day gain since September of 2005. Hence, the horizontal support of "around" $50 per barrel looks to be a holding point, for now. However, if this does breach this level the next technical stopping point could be the mega long term horizontal floors & ceilings dating back to 1990 at $40 per barrel. (Point D)

The recent action in LSC exemplifies the discussion in the last 'Jo' and the comments made in Friday's Week in Review regarding the continued volatility and constant whipsaws the markets are now tuned to sounding out. Putting that aside, I wanted to turn your attention to some potentially more positive areas of technical action.

Sticking with the commodity theme there is some interesting technical underpinnings beginning to shine on the gold market. However, before venturing into the commodity, it's important we look at the U.S. Dollar and remember what happened on November 27th of last year. On that particular morning, just after the holiday session, industrial orders were released which showed a massive 8.2% decline. Following, Helicopter Ben admitted not knowing how bad the housing market really is and stated, "Any significant effect on consumer spending arising from further weakness in housing would have important implications for the economy." All of this was combined with multiple other factors such as shipping tonnage down just about 2%, the third monthly fall in housing prices and a sharp decline in consumer confidence. The point of all this is that it sent the almighty greenback to a 15-year low. Not long after "Mother" Merrill came out and stated the fall was "borderline recessionary."

I bring this up not because of a direct correlation between the U.S. dollar and the price of gold, but rather with a weakening dollar, assets have a tendency to shift into the precious metal market. The debate on why could go on for pages, so I'll just leave it at that and move onto the technical condition of gold.

Last May gold topped out just above $700 an ounce and was followed by a precipitous 20% drop. Remembering back, it's when many gold followers were clamoring about $1200 an ounce, not dissimilar to the clamoring heard about $100 + per barrel for LSC when it was at $75 just before it topped. Nonetheless, over the last eight months gold has been developing an extremely attractive Head & Shoulders base with a confirming stochastic divergence (SD) in the latest shoulder. Yesterday gold climbed right to its neckline resistance. Combining that with the 50-DMA crossing upward through the 200-DMA back in mid December and a lot more liquidity available in the commodity arena… well, you get the point.

As for its relation to the dollar, if there is continued slippage and it maintains the current technical trend, which has been in place since November of 2005, this can only add buying incentive to the precious metal markets.

The AMEX Gold Bugs Index (HUI) and the PHLX Gold/Silver Index (XAU) are not in as fine technical shape as of yet but there are some decent setups with good underlying fundamentals if one was to search.

Before closing we wanted to make one last comment on the markets' volatility. Since our last report the Nasdaq 100 (NDX) and the Dow Jones Industrials (DJIA) both overcame their short term resistance points posted on our Eye on the Ball section above. However, with the downtrodden of Apple (AAPL) and Lam Research (LRCX) the NDX has retraced back into its base. These downfalls have brought up a few ST warning signs for the markets. One in particular was a little disheartening as we saw over 350 companies on Thursday of last week breaking their respective 50-DMA's. This was an unusually high number for the overall market. Nonetheless, all the "Sisters" continue to hold the ST support levels and until broken the technical probabilities are in the hands of the Bulls.

Stay tuned and good luck!

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