I’ve lost the illusion of sensing I can see good opportunities on the grain markets.  And, the softs seem a wee bit off kilter for my tastes.  So, I’m pairing my focus at the start of this week to metals, currencies, and indices.

Options traders remember we have expiration coming on Friday!  The next expiration will be December expiration at which point the smarter trading community will already be taking position for the new year’s trend.  It’s not too early to start thinking about 2010.  This markets may be able to run higher, but, not forever.

While I’m on the subject of options, keep in mind what sort of traders will be rewarded this expiration.  Let’s just assume our more sophisticated traders are using rather dumb market neutral strategies.  Let’s assume the more naive players have a directional bias.  So, roughly speaking the majority of “smart” trades would have gone on around October 16th.  Let’s assume sometime around 10-15 days into the trades, IF AND ONLY IF, they were profitable, they would have taken them off.  Otherwise, smart money would be looking for those markets to be within a similar price range as we close out those contracts which will expire this week.  At which point those markets will be free to explore new ranges in ways they haven’t previously been able too.  One market near and dear to my heart is the metals market.  If this logic pans out, I could see perhaps one more sucker’s rally before a decent breather.  Time will tell.

General outlook:

As always, this is purely an empirical and a theoretical exercise.  Trading is extremely risky.  If you were to trade, you should only ever do so with money you can afford to lose.  Be well, be safe, and be warm.

• The price of gold can come down really fast.  If you haven’t been long gold past a top before, you are naive.  This is a speculative market.  It’s a small market.  And, when it is time for it to take a break, watch out.  I remember being with a bunch of trader’s in Vegas during a metals run a few years back.  Sometime during day two of our stay the market turned over.  It ruined the visit for a number of new friends.  In short, don’t fall asleep at the wheel.  Just like any other market, this one is prone to sharp corrections.
• We’ve come a long ways.  We are up about 30% since April.
• I’m seeing signs of technical divergence surfacing on the price charts.  I’d go into more detail.  But, in this case, the technique I’m using is not published.  It’s not one I came up with.  But, it’s really not mine to share presently.

I’ll I want to say is be very weary of your long positions.

Even better than some general advice, let’s take a look at some recent history so you can get a feeling for 4th quarter gold prices:

Gold at the end of 2004:

Gold at the end of 2005:

Gold at the end of 2006:

Gold at the end of 2007:

Well, that’s 4 out of 5.  In 2008, gold had started a significant pullback earlier.  It was not up to it’s usual self.  Needless to say, this year’s market is set up for an opportunity here.  But, I am definitely not encouraging anyone to be shorting gold at these levels.  Just because the opportunity may be there, it may not be the smartest trade.

Last week should not be taken lightly.  A 5% sell off on US equities is not a trivial affair.  If we can take off up to another 10% in the next two weeks, I will be relieved and strangely bullish.  On the other hand, if we take out the highs, I will very quickly be on guard for significant crash symptoms ahead.

What do I expect this week ahead?  I expect over the course of this week and possibly part of next week to put in some short term bottoms on equities and a number of other commodities.  But, more important than expectations are what you are prepared to handle.

Keep in mind 2 of the 4 indications of a very large market top being put in have occurred.  The first being we have extreme correlation.  Not only do we have more markets intensely correlated than is systemically healthy; but, many of them are starting to get to extreme levels.  It’s pretty much the world against the dollar and bonds.  If the dollar and bonds go down, stocks, grains, oil, metals, other currencies, other commodities, go up and vice versa.  The second key ingredient to a major market top is extreme volatility.  We are seeing VIX over 30, 5% weeks, breaking of major support and resistance in a wide range of markets.  You should be on alert!

If you followed my commentary last week, I wrote:

Favorite set-ups on the horizon: Very interested in an opportunity to short metals on the immediate horizon.

Silver opened the week at 1771 and closed down at 1630, falling 8% for the week.  So, if you didn’t catch my post on Wednesday before the GDP announcement to take profit, you got another break on Friday.  Of course, if you have more contracts out there, leave some for the longer run.  I read about Joe Ross calling Gold at 400.  Why not leave a little on for the bigger play.

Meanwhile what other opportunities lie ahead for this week?

I’m starting my week looking at possible short in Cotton, Oil, and Sugar below current prices.  Only below current prices.  I’d love to be long bonds.  But, I just don’t have the appetite for that much exposure at the start of the week.  So, as much as I may believe in the trade, I’ll hold off on that one.

General outlook:

We are officially on red alert.  Be prepared to sustain this pace right up until Thanksgiving and beyond.  It is very unclear as to exactly how the story will unfold in the immediate future.  But, this is a great time to pay attention.  With both Fed announcement and Jobs reports, this is likely to be a high impact week.  Be safe.  Be conservative.  And above and beyond all, be prepared.

With the markets generally accepted as being overvalued and the economy widely accepted as being in the toilet, it’s hard to feel too bullish about price action going into the last week of the month.

What topics and themes are likely to emerge?  Let’s work backwards from next week.  Next week will end with the G20 meetings kicking off, unemployment rate / non-farm payroll, AND and FOMC statement…. not to mention some manufacturing numbers and some pending home sale data.  So, next week is a rocking news week in the financial markets.  We are about to commence “the week before next week.”  This week includes:

• Tuesday’s Consumer Confidence report
• Wednesday’s New Home Sales and Durable Goods Orders
• Also noteworthy on Wednesday is New Zealand’s rate statement

In term’s of the general market outlooks… my bias’ going into the start of the week are:

Favorite set-ups on the horizon:

• Very interested in an opportunity to short metals on the immediate horizon
• Possibility of a short Aussie near-term
• longer term horizon looking at a possibility to short some sugar next month
• An opportunity to buy some indices next month

General observation about markets, cycles, and timing:

As bleak as the current state of the economy and globe may be: as bad as housing may be, as bad as emerging markets may be, as bad as finance industry may be, and as bad as things may be for the US consumer, I would not be shocked if price bubbles continue to melt up significantly before they prices are annihilated again.  It’s well past time many traders expected prices to be heading south.  But, as markets tend to humble their participants, it would not surprise me if they have a few more surprises in store.  I’m just not seeing the technical signs in the market that things are too overdone.  But, the very first technical sign of systemic imbalance is in place: grossly correlated overvaluation across a broad set of asset classes.  But, that’s about it… some meltdown’s come unannounced, but, most don’t.  So, as always, precede with extreme caution.  Keep your powder dry.  Only fire when you must.  And, all the traders I have the pleasure of knowing good trading this week.

At the top of my list…

• consider being short JY
• GC rolling over…
• long DX…
• KC and CT are getting up there…
• EU may be ready to roll
• what’s up with NG… sure would be nice to be in that long

NOTE: Questions on gold… who is in this?  Records show it’s all the small players.  So, does that mean it’s time to get out?  Very curious isn’t it.

What can you do? Let’s start with what you can’t do. You can’t change your mind every session. It’s an expensive habit. I’ve tried it before. I’m in these positions based on principle. Those principles are rooted in a plan of action. I will follow the plan to it’s very likely somewhat painful outcome. So be it. If the markets have taught me one thing, they’ve taught me not to spend too much time trying to monkey around. If you have a call, make it, and follow it to it’s end.

It’s great to really get into the markets, into a particular opportunity. You get to know a particular indicator inside and out. You know every major wiggle or waggle of an oscillator and how the market is likely to respond under such a circumstance. But, if you are not feeling profoundly connected with a serious exit strategy at hand, you best run for cover or just stay the course.

On another subject, here is an shot of an interesting market:

Copper has had a tremendous recovery. (Much like sugar.) I don’t think copper is over. But, this is one I have my eye on going into the fall. If you don’t see what I see, I’m looking for opportunities on the short side for this one.