“Behold the madness which the hedge funds and index funds have wrought!”

That is really all one needs to know to explain today’s price action across the entire gamut of commodities, gold included. I warned yesterday that the dipsticks that run these pestilential institutions will spin on a dime and do the exact opposite of what they did the day before whenever their little black boxes tell them to. The “strategy” of these ninnies consists of throwing money en masse into whatever markets their algorithms tell them to or withdrawing it all at once should the same computer command them to do so the very next day. This is what passes for trading nowadays. Let me let you in on an apparently little-known secret – this is not trading – trading is a skill that some of us have been plying for many, many years which consists of long, hard hours of research and analysis, meticulous planning and sound money management techniques. What we have today among the index funds is more closely akin to craps, which is better suited to Las Vegas or some other gambling casino.

What has set off this particular rash of idiocy is the rebalancing of the various commodity indices which have lowered the weightings of some commodities while raising the weightings of others. This has resulted in both front running ahead of the actual date that the new changes go into effect as well as some preliminary action by the funds. Again – no questions asked – no attempts to finesse a movement of positions – what we get is a big “KERPLUNK!” with enormous sums of money being shoved into markets or withdrawn from markets irrespective of the effects of such massive one-sided flows. There was once a time when large traders knew how to slowly and gradually move money into and out of markets in a manner which allowed them to position themselves somewhat furtively by making only minimal disruptions to prices. Those days are long gone since we now have the Pac-Man crowd and the Mortal Kombat generation who are manning the trading desks at these firms. Maybe they are looking for the combination of the right keys to press to produce a power move that will allow them to gobble up all the competition. Nothing else can explain this display of such ineptness and clumsiness. Personally, I am insulted to be grouped in the category of a trader if these people define what trading consists of.

Regardless, gold was beaten down as a result as were many other commodities which only yesterday were soaring upwards only to abruptly reverse course and puke out all of those gains. That is why I said you have to be careful trying to read too much into the price action of these markets right now because they are being governed by other factors than fundamentals. It is all a money flow game which is why scalping, or short term trading is about the only way to trade these things right now, at least until the fools running these hedge and index funds calm down a bit.

Let me make one further comment about the reduction in the gold weighting in some of these indices – Do any of you recall back in 2006 just prior to the midterm elections here in the US when Goldman Sachs inexplicably made a change in their commodity index and reduced the weighting of unleaded gasoline? That resulted in a huge sell off in that market which “fortuitously” knocked the price of gasoline lower right in front of the elections. Hmmm. Those who own the index can of course do whatever they want with it but I personally feel that this is another area where shenanigans are much too likely. Given the lack of ethics that mark out society, especially in our financial system (can anyone say Madoff), the cynic in me says that anything is possible nowadays and that there is far too much room for “politics” to influence the weightings assigned to various commodities in some of these indices. That is why I still prefer the old reliable CCI or the Continuous Commodity Index over these others. Unfortunately it seems like very few of the index funds use that particular index when assigning money to the various commodity markets.

There are various estimates out there about the amount of gold contracts that will need to be sold in order to bring the funds down to the respective weighting in gold so as to bring themselves into alignment with the new changes to a couple of the indices. I will not bore you with the details but suffice it to say, this is where the selling is coming from. It was also probably given a good kick lower by the appearance of more of the usual selling as gold neared the $880 resistance level. I will say one thing about all this – if you really know the fundamentals of a market and if those fundamentals are bullish, then you can take advantage of the short-sighted stupidity of the funds as their actions present opportunity for traders of convictions who are also well-capitalized. If they insist on indiscriminately throwing away everything of value even at prices below value, then use that to your advantage. The simple fact is that these bozos are here to stay so smart traders (you know – the ones who actually use their brain to trade) will adapt to their presence.

Technically, and take this with a grain of salt because of the reasons mentioned above concerning the index rebalancing, gold has stalled out at $880 and is probing for buying support. The last two days have seen that emerge below the $840 level. That will need to continue to prevent further technical damage to the market as it is now trading below the 10 day moving average (short term bearish) and is threatening to close below the 20 day moving average (again – short term bearish). It is still above the 40, 50 and 100 day moving averages so the longer term is friendly. The area near $830 is very important from a technical perspective as it must hold to prevent a break down due to fund liquidation which will occur should shorts be able to shove it below this level and hold it there as there are sell stops under that level. The onus is on the bulls to prove their mettle.

It did not help paper gold any that the mining shares seem to be confirming the bearish divergence that has been showing up among some of the technical indicators on the HUI and the XAU. The HUI needs to hold the 263-260 level on a closing basis to keep the chart from turning negative. The XAU needs to hold the 107 level to also keep things looking up for the bulls.

The commodity currencies were blasted today which is to be expected considering that most of the commodity world was also beaten with an ugly stick. We will want to watch the Aussie, Kiwi and Loonie to see how they act during this price dip. If they can garner enough fresh buying to push up through the 100 day moving average, then I will feel a lot better about a bottom in the entire commodity complex. Right now, things look iffy. Some individual markets have nice price charts forming for bullish moves while others are still suspect. By the way, palladium did manage a close over the $200 level although not in a fashion strong enough to yet make a believer out of me. It has a nice rounded bottom formation alongside of a larger double bottom potential but needs to get above the 100 day moving average or at least manage a stronger close over the $200 level. The reason I mention it is because it and platinum would seem to have some of the worst fundamentals going for them among the metals so if they can bottom, it will certainly not hurt the case for gold. I should mention there is some chatter than platinum has become too cheap in relation to gold – same goes for silver… that may bring on silver/gold and platinum/gold spreading.

The Dollar was weaker against just about all of the other majors with the exception of those commodity currencies. This was not yen carry trade unwinding that occurred today because while the yen was higher, so was the Euro, Swissie and Pound Sterling.

Crude oil has confirmed the resistance at $50 which I mentioned yesterday and looks to have stalled out for now. It looks like the funds were able to defend their short positions near the 40 and 50 day moving average. The next test will be to see if it can bounce off the confluence of the 10 and 20 day moving averages near the $42.50 level or whether the bears can push it down through those. Failure there and it should attempt a retest of the potential double bottom near the $35.50 level. A bounce from there will have some believing that a long term bottom has been put in.

Bonds showed further signs of weakness today but the downward collapse looks to have halted for now. We might very well get a bit of a more orderly market in the bonds with some good two-sided trading instead of the lop-sided one way trading in there that we have seen of late. After all, a 9 point vertical run up followed by a 9 point vertical meltdown does not exactly qualify for an “orderly” market.