PM Daily Market Commentary - 10/8/2014

By davefairtex on Wed, Oct 8, 2014 - 9:37pm

Gold closed up +13.20 to 1221.90 on very heavy volume, while silver was up +0.20 to 17.37 on moderately heavy volume.  PM was generally positive in London, but sold off unpleasantly after the NY open, and things looked a bit grim up until the FOMC minutes release at 1400 EDT.  Right at that moment, both gold and silver took off, stopping out a bunch of shorts and rallying into the close.

At long last, gold has rallied through its EMA-9 on good volume, and looks to have put in a reversal after many, many failed rallies.  Partially becaue gold has dropped for so long, the odds favor this being an actual reversal rather than just a headfake.  After a long drop and a test of the previous (1179) low, all the sellers have sold, which is when a reversal becomes more likely.  Technically, its all systems go.

The FOMC minutes were seen by the market as dovish, with talk of "low inflation for an extended period of time."  This caused the USD to plummet right at 1400 EDT, with the dollar eventually dropping -0.40 to close at 85.36.  This move dropped the buck cleanly through its EMA-9.  I believe it is the top we have been waiting for.  The buck is dreadfully overbought, and it appears it just needed some sort of catalyst to cause it to reverse, and the FOMC minutes release was that catalyst.  Its no accident that gold busted through its EMA-9 to the upside on the same day that the dollar broke its EMA-9 to the downside.

As badly as they have performed in recent days, mining shares went absolutely nuts today, with GDX up +7.44% on absurdly high volume, while GDXJ was up +9.61% also on absurdly high volume.  Mining shares had sold off off for most of the day prior to the minutes release, but right at 1400 EDT when the buck plunged and PM jumped higher, mining shares started to rise - and they more or less didn't stop until the close. 

Whenever price moves and volume are this massive at the end of a long decline, it is most likely a short-covering rally.  In other words, we probably cannot expect the rest of the days to be like this.  Still, it was fun to see after all those months of gloom, and the reaction of the miners to the buck's drop was slow enough so that normal human traders were able to see the buck crater, and still have plenty of time to react and buy mining shares before prices had risen too dramatically.

It wasn't only the miners that liked the FOMC minutes - SPX was up +33.79 to 1968.90 on some heavy volume as well.  SPX made a new cycle low early in the morning session, and so the steady but relentless move higher starting at 1400 EDT resulted in a large trading range today.  The VIX was impressed too, and dropped -2.09 to close at 15.11, losing 1/3 of its recent rally in just two hours.  While momentum appears to be to the upside after today, SPX remains below its 50 day MA.  It has had difficulty rising above the 50 in recent days, which is a logical place for the shorts to re-engage.  This suggests that SPX is not out of the woods just yet.

Long term treasuries (TLT) were mostly flat, closing up +0.03% making a new cycle high, but not by much.  Shorter-dated bonds did better, with IEF (10 year treasuries) up +0.35%.  How can bonds rally along with equities, on a day with the dropping dollar?  Money is probably emerging from bank accounts and money markets, buying shorter term debt.

Commodities as a group rose modestly, closing up +0.12%.   Even so, WTIC made a new low, closing down -0.72 to 87.71, and Brent made a new low as well, dropping -0.73 to 91.38.  I'd be happer if oil would rally.  A constantly falling oil price doesn't make me feel so enthusiastic about silver - and that's probably why silver didn't perform all that well today even with the fall in the buck.  As a further sign of this, the gold/silver ratio dropped only very modestly, down -0.03 to 70.35.

At long last, the buck looks to have topped out and reversed.  This outcome is not a sure thing, and like all trades might well go south, driven by economic or geopolitical news that emerges tomorrow.  But trading is not about certainties, it is about odds, and my feeling is, the odds favor a reversal in the buck at this time, given how overextended it is.  When everyone is on one side of the boat long the dollar and short the euro, there are not many left to push prices higher and at some point, the rally just runs out of steam.

However rather than relying on some set of articles or commentators to tell us when this is likely to happen, we let the market do the talking, because sometimes trends run for far longer than we expect.  I certainly didn't expect $17 silver or $1200 gold, or the buck to run up 12 weeks straight without a correction.  But as we have hopefully learned, cheap can always get cheaper - right up until things reverse.  Using TA to spot "a reasonably likely reversal point" is the name of the game.  This lets you buy in at the point of close-to-maximum cheapness, while allowing the trend to run its course.  Or so the theory goes anyway.

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