Morning Thoughts 1/3

Good Morning Traders,

And Happy New Year! Some interesting things happening this morning:

First of all, realize that volatility cratered in the last weeks of 2010, but this is nothing out of the ordinary. The circled area above shows our indicator that looks at each day’s price change as a standard deviation of the last 20 days. As you can see, not much happening there. Two things to think about today: big moves come out of these areas of volatility compression, but many of your volatility and volume based indicators will be skewed for the first trading days of 2011.

There is a tremendous seasonal tendency for today to close up from the previous day’s close. Pretty much every equity market around the world is showing strong moves up this morning (with the exception of Australia -0.5%, Japan -0.4%, the UK -1.0% and Ireland at -0.5%). However, we may be fulfilling expectation from the seasonal bias on the open today (currently futures are maked up 10 handles), so do not assume that this means that today will trend up. “Gap and crap”, gapping up and then going flat for the rest of the day, is also a possibility today.

If we continue to be strong, look for strength in Basic Materials, Energy and Industrials. Specifically, POT PBR and AGU (or MON) might be worth your time.

One of the major structural points in the market is the divergence between Gold and Silver. Silver has clearly been the leader for the past 2 months, and closed 2010 at new highs. Gold did not, closing well under the 52 week high. This should be on every trader’s radar screen today as there are two ways this situation could resolve — the leader can pull the laggard up, or Silver can fail with a 2B at the highs. Either way, the metals themselves could be in play today. I would not expect clean carryover to individual metals and mining issues in all scenarios, so focus your first attention on the metals.

Lastly, the USD is sitting on fairly important support. As I have said for weeks, my sense is that this support is somewhat unlikely to hold, but it probably does not make sense to anticipate this trade. Rather, set alerts for key price levels (can use UUP or even FXE as the EUR is approximately 60% of the Dollar Index basket) and think about how a significant move in the Dollar might impact commodities and equities.