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Does News Really Drive The Markets?

12/01/09 08:39:42 AM
by Donald W. Pendergast, Jr.

At first glance, the news of Dubai's default woes appears to have been the cause of Friday's big intraday plunge in the gold market. Or was this just a simple catalyst, one that triggered a price decline that was already baked into the technical and fundamental cake?

Security:   GC, GLD, SI, SLV
Position:   N/A

Regular subscribers to Advantage may already be familiar with my recent article, one in which I attempted to build a logical case for strong multi-time frame resistance in the gold market at a price of about $1,200 per ounce. Other astute technicians were also making similar projections, based on a variety of Fibonacci and time/price studies. On Wednesday, November 25, 2009, cash gold closed near $1,190 per ounce (with February gold actually closing right near $1,198 per ounce). The Thursday price action in gold was timid, but during the overnight session in the wee hours of Friday, November 27, 2009, news of the Dubai default began to sweep across world markets of every kind -- silver lost nearly $1 an ounce in a few hours and February gold plunged from $1,193 all the way to $1,134 in the same length of time (Figure 1). Global stock indexes fared little better, although most markets did regain a large percentage of the initial intraday losses by Friday's closing bell. So, does little old Dubai really matter all the much in the overall scope of global financial affairs to warrant such a selloff, or was the real cause for the plunge due to something far more powerful?

FIGURE 1: FEBRUARY GOLD, FIVE-MINUTE. News catalysts aside, take a look at this well-formed Gartley sell setup on the five-minute chart of February gold; in most cases, a setup like this warrants a target price of 62% of the C-D swing, or about $1.162.
Graphic provided by: Prophet Financial, Inc.
Graphic provided by: ThinkorSwim.
Although I'm not a major Elliot wave devotee, certain aspects of R.N. Elliott's unique approach to the financial markets are without peer, particularly when applied to the commodity markets. R.N. Elliott and Robert Prechter proving that bull runs in the various commodity markets are frequently marked by extended fifth waves (driven by fear) and that bull runs in stocks/stock indexes are more likely to experience extended third waves (driven by greed) has helped many market participants to better understand the peculiar natures of the individual markets that they follow. In a similar vein, Prechter has also demonstrated time after time that news events (in most cases) are merely a precipitating factor that initiate market moves that were destined to happen anyway.

Take the case with gold. Figure 1 made a convincing case that gold was likely to at least pause if not outright correct once it approached the $1,200 per ounce level, and if it hadn't have been bad news coming out of Dubai, then the decline in gold might have coincided with any number of other global news events. Long-term market participants have probably witnessed dozens of similar unexpected market moves like this one, with most of them being blamed on a particular news event.

Of course, there have been some exceptions to this observation -- a case in point would be the terrible happenings on September 11, 2001 -- in that case, the linkage between the news and the actual market crash was clear and undeniable. However, for more ordinary surprise moves, if you look closely enough, you'll probably find ample technical and/or fundamental evidence that will suggest that the market in question was already destined for a sizable move up or down anyway.

On the fundamental side of the gold equation, commercial interests were already holding exceedingly large short positions in the gold market, which was yet another clue that gold was going to take a tumble if and when it met up with strong technical resistance — which it did on both the weekly and monthly time frames — at a price of about $1,200.

No question about it, news matters. However, as traders, we need to be far more focused on the key technical and fundamental/seasonal forces that drive the stocks and futures markets that we trade and invest in, realizing that any number of precipitating news events can set off a market decline or rally that was already waiting to happen, based on dynamics that had very little, if anything to due with the assumed catalyst that caused the market move.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
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