PM Daily Market Commentary - 2/3/2015

davefairtex
By davefairtex on Wed, Feb 4, 2015 - 2:04am

Gold dropped -13.80 to 1260.60 on heavy volume; silver rose +0.09 to 17.30 on moderately heavy volume.  Gold tried to rally in the London session, failed, and then sold off all the way through the morning in NY, eventually bouncing off the 200 MA and recovering slightly into the close.  Silver's pattern was similar, except its rally was higher, and the sell-off lighter.

My sense is, silver is now doing better than gold because of the rallies in copper, oil, and the commodity index overall.

The USD dropped hard today, losing -1.07 and falling to 93.75, slicing through its EMA-9 for the first time in six weeks.  That's because the Euro rallied, moving up +1.23% to 114.79.  Why the big rally?  Well apart from the dramatically oversold Euro/overbought USD which was due for a correction, news flow suggests that the Syriza gang have dropped their demand for debt writeoffs and are now willing to accept something less - which I believe will materially approximate a write-off, but avoids having that unpleasant label.

Judging from the market's recent reactions, it looks like it was discounting a real possibility that Syriza would unilaterally default on the Greek debt.  With that now apparently off the table, all that fear is unwinding somewhat, visible in the big drop in the buck today.

If Germany agrees to the plan and things stop here, the Euro will probably recover, and gold and the buck will probably continue to correct.  Do I imagine things will be that easy?  Probably not.

Mining shares sold off, with GDX down -2.58% on moderate volume while GDXJ dropped -2.61% on moderately heavy volume.  The correction in gold is dragging on the miners, although the senior miners remain well within their consolidation range.  The GDX:$GOLD ratio still looks reasonably bullish, while GDXJ:GDX ratio is bouncing along all time lows, which is quite bearish.

SPX continued its rally from yesterday, rising +29.18 to 2050.03, confounding my expectations for a drop.  I had expected SPX would fall if the dollar dropped, but clearly it did not.  SPX closed above its 50 MA, but remains within its recent consolidation range.  VIX fell -2.10 to 17.33.  The energy sector led the market higher on the day, up +2.74%.

Long bond ETF TLT sold off hard, dropping -2.12% and closing below its EMA-9 for the first time in six weeks.  TLT may be correcting now after a long run higher.  When the USD corrects the money must come from somewhere, and apparently the long bond is the place for now.  JNK broke higher today, up +0.49%, rising above its recent consolidation range.  Looks like the market thinks it might be safe to get back into the junk bond water again.

The commodity index ($CRB) staged a massive rally today gaining +3.17% and closing well above that EMA-9, heading towards the falling 50 MA.  Agriculture, energy, and Industrial metals all rallied strongly today with energy leading the way - up a massive +5.69%.

Zooming out to the weekly chart, we can see that the CRB index printed a bullish reversal/hammer candle last week, followed by a confirmation rally this week.  This is a classic reversal pattern, and given the length of the downtrend that came before it, the last two weeks may mark the low in the commodity/deflation pattern.  If true, this should help silver.

WTIC rallied for a third straight day, climbing +1.74 [+3.49%] to 51.57.  The move today came on massive volume - the highest volume in the past four months.  All those new shorts who were sure oil was going into the 30s are now getting squeezed.  It is dangerous to be on the same side of the boat with everyone else.  Tomorrow we have the Petroleum Status report at 1030 EST, which usually moves the oil market.

Among all the happy oil news, the rally today in WTIC actually hit 54.24 at one point, but retreated substantially into the close, printing an almost-inverted-hammer candle on massive volume.  This bearish candle may mark the top in oil for now, although it does look like the oil market is looking for a reason to rally.

To me the technical picture is one of a nascent correction in the buck and the long bond, alongside short-covering rallies in commodities, energy, and the Euro, with US equities still unsure about direction.  For now, the safe haven trade is coming off somewhat - Syriza is now seen as being reasonable; perhaps the Eurozone won't break up, nobody else will ask for debt-and-austerity relief, and maybe all the bad news will simply stop.

Either that, or this is just a correction in a much longer trend, which will reassert itself once Germany considers its options and finally says NEIN! to all this talk of Greek Smart Debt Engineering.  Or possibly, Italy will ask to join Greece in a wider debt conference.

We're in a newflow-driven market.  Anything could happen in the short term.  Ultimately, that pile of debt is the Sword of Damocles hanging over the head of the Eurozone, and at some point it will break loose and have to be dealt with.  We've now seen how the market reacts; gold, the dollar, and the US long bond gets a bid whenever the Eurozone debt issue re-assserts itself.  That's good to know.

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