DAN NORCINI EXPLAINS WHAT'S HAPPENING 6/15/09

Gold and Dollar Market Summary Posted: Jun 15 2009 By: Dan Norcini Post Edited: June 15, 2009 at 5:36 pm Filed under: Trader Dan Norcini Dear CIGAs, The raging Dollar provided the impetus for a wholesale algorithm-generated disposal sale across the entire commodity complex in today’s session. One of the concerns I have voiced as recently as last week has been the fact that price is no longer being set for many commodities in the arena between end users and producers but rather from the trading desks of the hedge funds. Of course speculators always have a role to play when considering the price discovery mechanism, but not to the point where they come to dominate even the commercial entities who actually create the true market in any particular good. I know I will get emails on this from the economics degree holders but I am one who simply happens to believe that hedge funds have way too much money to throw into and out of the commodity markets, based on their size, and that their buying and selling is producing distorted price signals in more than a few markets. Simply put – they are too large. That being said, back when I began trading, those who were the best traders were the ones who studied supply/demand situation for the markets that they operated in and had a sense of where “value” was to be found in regards to price. Technical analysis was then used as a guide to direct them into and out of their trades based on their overall analysis of any particular market. Today’s markets, in my opinion, no longer operate in the same fashion as they did back when this sort of strategy was the way used to approach them if you wanted to be successful. With the big funds relying completely on chart patterns, oscillators, retracement levels, momentum breakouts and failures, etc. fundamental analysis is pretty much passé these days. Still, I still prefer to “dance with the one that brung ya” to quote an old aphorism around here and that implies having a general understanding of the fundamentals affecting the market in which you prefer to operate. Without that, you are in direct competition with quant funds and other large players whose entire operation will be moved down the street if it means that their computer can generate its buy or sell order and get it into the exchange in 1/10 of a second faster. In other words, you are in a race in which you cannot win unless you have the knowledge and experience to recognize when these players have pushed price way out of any reasonable boundary or region of “value”. That is what gives you the confidence to buy or to sell in the face of wild and violent price moves created by this plague of wild-eyed gamblers. It is amazing to me to see so many traders sending various chart patterns with lines and diagonals and scribbles marked all over them who, for example, do not even know how corn pollinates, at what temps wheat freezes, or what a soybean looks like, and yet they are absolutely confident of their view of the market based on what the mysterious lines have told them. Please do not misunderstand, I am a firm believer in TA, but not without a fundamental knowledge of the market in which you trade. That sort of things take years, and I do mean years, of exposure to an individual market whereas a couple of books on TA and everyone is now an expert ready to take on the hedge funds with their newfound wisdom. It is my opinion that such a thing is a recipe for certain ruin as a trader. Why is that – because it provides you without the least bit of conviction and without conviction, you simply become tossed about by every wind of price direction change. Learn to use Technical Analysis (TA) (trend lines, fibonacci retracement lines, etc)to assist you in cutting losses or taking profits but do not allow it to formulate your understanding of the true supply and demand situation in a market. It no longer functions in such a manner in today’s hedge fund dominated market. Those guys create price, not the true demand/supply of the market. That is the reason why whenever we see a pop in the US Dollar, all hell breaks loose in the commodity markets. They get sold off no matter what is taking place in regards to their various supply/demand picture. That’s because NO ONE has the foggiest idea of what the “value” of that individual commodity should be. Fear or Greed then takes hold and will form your opinion! Hedge fund selling overwhelms everything in front of them because no one is willing to stand in front of those guys to buy if the market is falling or sell if the market is rising as the Dollar moves lower, out of fear of getting their trading accounts wiped out. Used to be that the commercial entities would step in front of the funds and sell scale up or buy scale down – even the commercials are no longer able to do this in the same degree that they once did, mainly because they run the risk of having their legitimate hedges blow up in their face, saddling their companies with untold losses and breaking their firms financially. That is why we see such violent moves up and down – this fear of the funds creates huge air pockets both above and below the market and price drops off an abyss before a decent sized bid can be discovered or a decent sized offer at other times. ( I might add here the one exception to this is in the gold market where the friends of the federal government, the bullion banks, step in front of and in large size of any and all buying originating from the funds). I have written all this just to warn you to be very careful out there when attempting to trade these markets. They are becoming extremely dangerous. If you must, then trade much smaller in size. If not, you will be wiped out if you make a mistake and happen to get on the wrong side of these mindless hedge funds. “When in doubt – Get Out” is still a wise adage to trade by. When it comes to gold, it will reverse course when the Dollar runs out of upside steam. Keep an eye on crude oil for some sort of hint when that will occur. Crude is trading more as a currency than a commodity