By Dan Norcini
The reflation trade was back on in a big way today as both the commodity world and the equity world witnessed sizeable money flows coming their way. The Dollar's weak display was enough to send the algorithms wildly to the buy side once again as the war between the inflationists and the deflationists saw the deflation camp in all out retreat during this particular skirmish. Copper, crude oil, soybeans and even lumber were all stronger today.

Bellwether copper had a huge day as it surged into a band of strong resistance near the 40 and 50 day moving averages before sellers showed up. A push through these levels that can be maintained for one full session should see copper having a shot at making a run back to near $3.40 again. That is hardly the substance that deflation is built of. Again, as always, we will be monitoring this market to gauge how sentiment is shaping up in the above-stated war.

Gold responded accordingly as it knifed through resistance centered near the $1,105 region before gathering momentum which carried it just shy of horizontal resistance near $1,124- $1,127. It managed to poke its head through the downsloping trendline drawn off its all time high but just barely. Additional upside strength tomorrow will go a long way in buttressing the bullish technical case.

The Dollar continues to be of concern, lob-sidedly loaded with as many stale long positions as it is, plus the fact that momentum oscillators are now showing serious bearish divergences. In my view, it is a technical train wreck just waiting to occur but so far the Dollar bulls have not yet been able to be dislodged from behind their parapets. That will take a smashing break through the 79 level to do so and is where the bears are hoping to push the greenback. So far they have not succeeded but the chart tells the ferocity of the battle to do so. Stay tuned on this one.

While the HUI is stronger today, the mining shares continue to underperform bullion as the hedge funds employ their ratio spread trades once again. In order for the HUI to accelerate higher and attempt to catch back up to gold bullion, it will have to push through 427 and maintain those gains for a session or preferably two. One cannot underestimate the size of the spread trades that the hedge funds are employing among the miners. Keep in mind however that gold companies still make money by digging gold out of the ground and selling it, notwithstanding the tactics of the hedge funds. The higher the price of bullion and the more valuable the product that they produce becomes the more their revenues will increase. Even hedge funds cannot long ignore such simple facts.

I do wish to point out that the 10 day moving average of the HUI has now decidedly turned up and is quite close to generating a bullish upside crossover of the 20 day. With short term technical indicators in a bullish posture, the tendency should be for dips to be bought. Initial chart support is last Thursday low near 388 – 390 with very strong support having been formed near the 365- 370 region.

Strangely enough, bonds are higher today. Go figure – I suspect is has something to do with the Treasury International Capital Flows data. Even though that is dated, it confirms the suspicions of many of us that the supply problems associated with the gargantuan US fiscal deficits are first and foremost on the minds of bond traders, at least for today, and that safe haven associations or lack thereof, are taking a back seat to those concerns.

Courtesy: www.jsmineset.com