PM Daily Market Commentary - 6/19/2014

davefairtex
By davefairtex on Fri, Jun 20, 2014 - 12:08am

Gold closed up +42.80 [+3.35%] to 1320.50 on massive volume; silver was up +0.85 [+4.27%] to 20.75 on massive volume as well.  PM traded sideways with a slight upward bias until about 0815 EDT, at which point gold spiked higher by about $5 and silver, perhaps $0.10.  This pushed gold over the high set a few days back, and it pushed silver over its own much more serious previous high set six weeks ago.  After that, there was just no looking back; we saw a steady flow of cup & handle breakouts intraday as prices moved past resistance points and the shorts were progressively squeezed into covering level by level.

To me this was simply a story of traders who "bought the breakout" meeting a large amount of short covering.  Moves based on news tend to be very large spikes that happen instantaneously intraday.  This didn't look like that.  A $5 spike in gold that starts a slow but very steady move that ends up $42 looks nothing like a news event that suddenly changes everyone's idea about whether or not to be in gold - where the price changes $20 from one moment to the next.

Take silver.  Notice how close we were to the 20 price level at the start of trading today.  That just happened to be the previous high - and when a previous high is broken, that technically invalidates a downtrend, which can cause a big change in sentiment for all the disciplined shorts.  So today marked the end of the downtrend in silver; this caused new longs to come in, and shorts to bail out.  To me its just that simple.

How did this come about?  The breakout move today was set up by the nearly three weeks of steady buying that preceded it, dating back to the lows at 18.75.  Look at the move off 1875.  Since that time, there was only one day that silver went down.  Someone was steadily accumulating COMEX silver contracts over the past 3 weeks, and so the price rose literally every single day.  It was slow, but very steady.  Volume was good too - average daily volume was better during this period than in the previous several months.  Not by a lot, but enough to be noticeable.  These are the bits of evidence that taken together, signal accumulation by a big player.

My sense: when silver failed to move through 18.75 and set new lows, the game was afoot.  The historical levels of Managed Money short positions (43k short contracts just last week) that were betting on a massive payday on a break lower through silver 18, and they basically refused to close out during this three-week rally.  They provided the fuel for today's big move.  Amusingly, these guys are often wrong at both highs and lows.  Looks like they did it again.

I know some people imagine that there will now be "a large gold smash as the central planners react to the natural animal spirits in the PM market."  I agree, to some extent - as to the effect, but not the cause.  A short-covering move that goes vertical typically ends in a retracement.  Once the shorts are taken out up to a certain price level, the short covering game is over for the moment, and new buyers have to appear that want to buy at this new, higher price level in order to push things higher.  Those new longs will eventually dry up.  And once the "easy money" from covering is gone, and it is clear that there aren't enough new longs jumping in to push price higher, price drops as the swing traders that bought at 18.75 finally decide to ring the cash register on their considerable profits.  Price then will drop to find a new equilibrium level and - once it finds support - will most likely start moving higher once again.

This dynamic happens in every market, not just PM.

The buck dropped -0.12 to 80.40, dropping modestly below its 20 EMA, but printing a hammer candle that suggests a possible reversal from its its recent weakness.  Its hard to know - the buck has been a bit of an enigma lately.  Certainly it wasn't the cause of any of today's fun, but it is still a useful indicator as to where money might be flowing.  A dropping dollar means money is leaving the US.

Miners gapped up and moved higher all day long, closing at the highs of the day.  GDX was up +5.37% on the highest volume in six months, while GDXJ was up +7.06% on extremely high volume as well.  Miners are starting to go vertical but not quite as badly as silver - these vertical moves typically mark the ends rather than the beginnings of multi-week price moves.  If you are feeling strongly that you've missed out and you want to go long - worry not.  Wait for the price to peak, drop back, find its footing and then buy.  That's a lower risk entry than buying tomorrow.  More likely than not, Financial Entertainment TV (always behind the curve) will be chattering tonight about how fantastically gold did today on their always-informative octo-box displays, the newly-motivated public will jump in and buy in near the end of the move, and they'll get sheared.

Its not a guaranteed outcome - but it has happened so many times I don't bother watching anymore.

SPX made a new all time high again today, closing up +3 to 1959.  The equity market basically just tracked sideways with a very slight upward bias all day.  VIX remained below 11 at 10.62.

Bonds fell through their 50 MA today with some force; TLT traded sideways until 1000 EDT, after which it more or less fell off a cliff, closing down -1.28%.  While TLT is through its 50 MA, it remains just barely above support.  It hasn't broken down yet - but it is very close to doing so.

Similar story in oil from yesterday repeats today: brent crude +0.80 on strong volume, closing at 115.06.  WTIC (US Crude) up +0.03 to 106.07.  Brent continues to diverge, and is marching steadily higher towards resistance at 117.50.  If it cracks that level, then its 127.50 which will be the next level to watch.  My interpretation: traders are clearly getting more worried about the international situation.

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