Itz Week End Review 5-22-11

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Despite the three weeks of declines the S&P500 is only down about 30 points from its high close at 1363.61 on April 29th. There were no economic reports making waves on Friday. The Regional Employment report showed payroll employment rose in 42 states in April. There were significant increases in employment in 19 states.

The markets are watching developements in Europe and the action of the Euro. Fitch cut Greek debt three notches to B+ with a negative outlook. S&P currently has a B rating and Moody's a B1 grade. It is becoming increasingly apparent that Greece is either going to default on its debt or the debt will have to be restructured. Once it happens to Greece it will set a precedent for Ireland, Portugal, Spain, etc. This is weighing on the Euro and by default pushing the dollar higher. A higher dollar pressures commodities and equities.

Looks like a broken record again, but another extremely volatile market in commodities and stocks this week. Seems like either traders were putting on risk or taking it off, depending on their mood of either buying or selling. But we ended on a very strong note, particularly gold, it put in a gold showing especially on Friday. Silver not too bad it managed to close above $35, but just just looking at gold's price action was very impressive. Gold managed to claw itself back up above the psychological $1500 level. Although its still in its trading range, it has managed to close above some key technical levels and put in an bias towards the bullish side. 

Now as for silver, although not as strong as gold, it did find buying around $32.50/$33 level as mentioned last week on ITZ. For the last two-weeks silver under $34 brings in some buying, even on a spike down there, it didn't stay there for long. Silver is still in a range and it hasn't broken out it continues to trade with in a consolidation range $33 to $36. If gold continues to put on the current strength that it has of late, then  that's definitely going to have a favorable influence on silver.

The pressure on silver has been the risk adverse trade. As traders come out of these trades and into the relative safety of bonds and the 'relative safety' of the U.S. dollar. Silver tends to come under a bit of more pressure then gold does, mostly because it is viewed as a speculative trade than gold because it's a safe haven play.

The fact that it got above $35 an ounce is good, but if gold continues to show the same strength as it did last week into the upcoming week, then ITZ believes it can pull silver back up over $36.

Interesting this week, Silver and the Commitment of Traders Report, COT, we did a considerable change in the internal composition of the silver market and over the last month month and a half. The speculative long side of the market has come down a great deal. Its down at a relative low level currently, there been a good clean out of the froth lately.

But what really is of importance on the commercial side of the market , where we see the dominant short players on. They have the lowest net short position in the silver market since Mat of 2009. That's significant!  The reason it is key is impart due to where silver is trading currently, silver is trading at $35 and these guys are at levels back 2 years ago! 

Bottom line is that we've had a really good bleed down in that commercial short position and yet silver is poised comfortably above the $32/$33 level. And not only that,  swap dealers that tend to be permanent shorts...they're net long for the first time since December of last year. So we've had a fairly descent shake up in the silver market and a lot of changes internally.  

The margin requirements have strongly reduce quite a bit of the speculative shorts out of the market  that have covered. But the fact you have had this going on and that silver has been holding on to that $33/$34 level is significant.

Historically in a bleed down to this extent as in 2008 you could see markets absolutely get annihilated. Sure now you had silver trading near $50, but look where it is now?

If there's going to be a lot more selling in this market, I don't see it going from the speculative wash out. I mean you've see so many specs pushed out... from the long side from the market, you're going to have actually need some one come in an actively short this market. Which doesn't seem to likely unless we have some massive rally in the dollar.

Once these funds finish being washed out, which they maybe... you really don't have the downside momentum to carry silver down below $30.

On the gold side of COT you just don't have the break down at least not to the extent you had in silver. It has been very firm, recently reversing at $1460 level. There are a lot of buyers, the market is saying right now that the specs are buyers under $1500 down around $1480.

Look at gold price in euros, is close to making new highs, so gold is not breaking down. Mainly due to the sovereign debt problems in the Euro zone. Investors in Europe are frightened and as long as the Europe price gold remains firm, its going to be hard to bring down the U.S. gold price. Look at Friday's move in the dollar, it kept trending higher as did the price of gold, why...because it is viewed as a safe haven. Investors just don't trust the Euro or the Dollar and continue to buy gold.

Bottom line, silver continues to be range bound, $32.50/$33 bottom and $36 topside. If we trade above $36 and close above it, we have the potential to make a run towards $37.50.  Then if silver can close above $37.50 it's heading to $40. Silver needs to close above $40 to resume a solid up trend.

As for gold's chart, it looks much better than silver's with the break above $1500, it has the potential to target $1520/$1525 level. Now if gold can close above $1530, not on a spike, but a close most likely it has a very good chance at $1550.

 If you see this coming week Euro gold & British Pound gold take out its all-time highs, there's no way that they will be able to hold down U.S. dollar based gold below $1530.

As for the oil sector WTI crude futures expired at the close on Friday and that helped push the price of crude to $96 at the open of regular trading but prices returned to $100 by the close. Now that the futures expiration games are history for another month we should see prices stabilize around that $100 level before edging up as the summer progresses and hurricane season begins producing weekly storms.

The clock continues to tick closer... there are five weeks before the end of QE2, but QE1 is still alive. The Fed will continue to buy treasuries with the money they receive for the matured QE1 assets. Eventually they will have to end that process as well. Some analysts believe interest rates will remain low for an extended period of time despite QE2 coming to an end. The economy is not moving fast enough to support higher rates.  The Fed's dual mandate includes low unemployment. In theory the Fed should not raise rates or do anything restrictive until the unemployment rate, currently 9.0% declines to below 7.0%.

 That is not going to happen for a long time. Get used to that extended period language.

So, are we going to be in a week-by-week market trade? Looking at the charts it appears as if investors are betting on the 'Sell In May' adage as they look to be heading lower. At some point there will be a catalyst that will spark  corrective sell off. 

The S&P from the start of May has been in a down channel with lower highs and lower lows.  Watch the 100-ma around 1313 as key support. Itz expects a choppy market with a bias towards the downside. Looking ahead, we have the G8 upcoming meeting, expect President Obama to talk up the dollar. Also the Iranian president, Mahmoud Ahmadineja, is expected to lead next month’s OPEC conference in Vienna as he presses for higher oil prices to aid Iran's struggling economy. Itz suggests using put to protect portfolio's and building cash to buy on a correction.

ITZ CHARTS 

ITZ WEEKLY VIDEOS

Mark Mobius, Executive Chairman of Templeton Emerging Markets Group, joined CNBC to discuss the euro zone debt crisis and commodities.



Keith Neumeyer, First Majestic Silver president & CEO, sheds insight on why his company's stock is down.



The dollar will ultimately fall against the euro because U.S. problems are worse than Europe's," says Peter Schiff, Euro Pacific Capital.



John Kilduff, Again Capital with details on what's fueling higher oil prices today



A look at where crude and commodity prices are headed, with Michael Dudas, Jefferies & Co. and Carl Larry, Blue Ocean Brokerage.



The rise in gas prices is a burden on consumers and Saudi Arabia will do its best to stabilize the oil market, says Saudi Arabia Prince Alwaleed Bin Talal al Saud, Kingdom Holding Company chairman