PM Daily Market Commentary - 7/20/2015

davefairtex
By davefairtex on Mon, Jul 20, 2015 - 8:37pm

Wow, what a bad day for gold.  It fell -35.60 [-3.14%] on massive volume, with most of the damage happening during the Asia trading session.  Silver was pounded lower too, but it lost a much more modest -0.17 [-1.15%] on very heavy volume.  This wasn't about the buck, or about commodities.  Those things shape the trend; today's move was about a trading gambit pure and simple - and it worked.

At 09:29 China Standard Time a huge number of contracts was unloaded onto the market; one article I read suggests the assault happened on the Shanghai Gold Exchange first, and then COMEX responded.  My charts only display a one-minute resolution, so I can't tell if it was SGE-driven or COMEX-driven.  Regardless, the short assault snapped gold instantly through support and drove it down to 1080 in one minute.  It was a $50 loss, clearly an engineered move designed to run the stops below 1130.  The resulting rebound managed to regain 50% of the losses, but the rebound faded by the end of day in NY.  Bottom line: not enough traders wanted to buy the dip.

The RSI-7 for gold is now hovering around 8, which signals a strongly oversold market.  The COT report shows a relatively low number of commercial shorts.  I believe the gold market is ripe for a rebound, but so far, that's only potential.  We have to see the buyers appear first; I'm not talking about coin buyers, I am talking about big money buyers at COMEX.

During the time of gold's great pounding, silver made a new low as well, but then silver buyers appeared, pushing silver back up into the green.  However that rally didn't hold through the close; still, silver looks a whole lot better than gold at this point.  Today's drop was relatively mild compared to gold's pounding.  The gold/silver ratio fell by -1.54 points today, a massive move.

Miner losses were catastrophic today, with GDX dropping -10.64% on 6 times normal volume.  Superlatives fail me, I've not seen losses this big in the mining shares ever.  Its total and complete capitulation in the miners, everything is being sold.  Usually this happens at or near the lows, but before I buy, I want to see a reversal pattern show up.  GDXJ was down -11.47%, underperforming the seniors for a change, also on the highest volume in years.    Juniors made new lows too.

If you ever wanted to know what "capitulation" means, just look at the following chart.  This is a chart-example of traders panic selling out of a particular ETF - regardless of price.  Sell.  Sell!  SELL!!!

It is also the kind of thing you see just before the low.  Tomorrow, maybe next day.  Once we see the reversal.

Platinum: down -1.39%, palladium down -1.41%; both metals made new cycle lows again. Copper fell too, down -0.88% - in line with silver's drop.

The dollar rose +0.17 to 98.16, continuing its breakout from yesterday.  The unstoppable dollar is continuing to cause problems for the commodity group - but the dollar rally is more like a slow and steady wearing down of prices.  Today's hit to gold was something else entirely.  Part of the problem could have been the chart pattern in Europe: today, gold broke down below the 200 MA, when measured in Euros.  Breaking US and European support on the same day is sort of a double-whammy - two sets of stops get run, double the selling, double the panic.

Not much happened in US equities - SPX rose +1.64 to 2128.28, popping briefly above the previous high but then falling back, printing a doji on the day.  Is the US market rally fading here a bit?  Perhaps we will see a correction before we get those new highs I'm expecting.  VIX rose +0.30 to 12.25.

Bond ETF TLT fell -0.42%, retreating a bit after four decent rally days.  Bonds have been trading in a range near the lows; they have yet to break higher, and yet to drop.  Currently they still seem weak.

The CRB (commodity index) was pummeled today, dropping -1.26%, making a new low, and appearing to be headed for a retest of the multi-year low which is only 2% further down.  Its not just PM getting hit.

WTIC (oil) fell also, dropping -0.54 [-1.06%] to 50.24, the lowest close since early April.  This triggered heavy selling in the oil E&P equities - not like gold miners, mind you, but they still suffered hefty losses on the day.

Wheat: -3.92%, Corn: -3.36%, soybeans: -0.64%.  This gives you a sense, lest you feel gold is the only thing dropping today.

The Swing Low

So, if you've gotten this far, you know it was a bad day.  On days like today, a reasonable question is, when should we buy?  Is now the time?  What process might we use to decide?

One process is just picking a day and saying "boy, XXX sure looks cheap, I think I should buy now!"  Yesterday could well have been such a day for the mining shares - lowest prices in ages, a great deal to be sure.  But of course, you would have suffered through today, when your newly-bought miners drop by 12%.  So that strategy seems...sub-optimal.

Another process is waiting for a "reversal pattern" to appear.  The concept is, before buying, you wait for the market to show momentum has changed direction.  I.e. you wait for the knife to stop falling before you try catching it.

How does this work?  One simple method waiting for a swing low: a two-day chart pattern where the closing price of today is higher than the high of yesterday.  Its not particularly complicated.  Last time that happened in GDX was back on July 6th, 11 trading days ago.  On that day, the swing low didn't result in a trend reversal - so not every swing low ends up yielding an actual change in direction.  Its like counting cards at the casino: no guarantee of a win, but your odds improve quite a bit if you do it.  Waiting for the swing low would have stopped you from buying for the past 11 days.  That seems pretty good.  At the very least, it would have saved you from today's disaster.

Some swing lows can be more signficant than others - it depends on context.  After a very long decline (like we're seeing in GDX, and gold), when the RSI is in single digits, AND when we're seeing extraordinary, capitulation-level volumes (i.e. GDX, GDXJ, and gold itself), then a swing low is very significant.  I hate to say its a sure thing, but under today's circumstances, a swing low is a very powerful signal.  Without high volume, without other signs of capitulation, the swing lows are more iffy.

I like to say, "wait for the buyers to show up."  The chart evidence for buyers showing up is a swing low: a two-day chart pattern where the second day's close is higher than the first day's high.

When one happens, I'll be sure to let you know.  Hopefully I'll see it intraday, and I'll make a post.  "If we close at this price level, it will mark a swing low."  And that will be a buy signal, especially after all this crazy volume that screams capitulation.

I think one will come soon.  I can't say when, but that's what I'm waiting for.  I'm waiting for those (COMEX, and GDX) buyers to show up...

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3 Comments

Nate's picture
Nate
Status: Platinum Member (Offline)
Joined: May 5 2009
Posts: 573
Thanks, Dave

Dave,

We appreciate all the time and effort you are putting into the Daily Market Commentary.  Thank you for your efforts and please continue with your excellent work.

Nate

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5067
first hour

So I should have mentioned that, after a major move like we saw yesterday, retail buyers (like you and me) see the lower prices, and rush out to buy.  This will cause a big spike up in the morning, as retail buys the dip.

However, once that first hour is over, then we get to see where things really go.  Is the big money loading up, or selling the rally?  This morning, GDX was up over 5%, and that rally peaked out at 10:26 EST, right at the end of the first hour of trading.  It has faded a bit since then.

This is why we wait for the close.  The last half-hour of trading is when the big money decides to either buy and take whatever-it-is home for the evening, or to sell.  Today, I can't tell you if they will buy or sell.  I have no crystal ball - I watch right along with everyone else.

Many times I have been tricked into buying during that first hour.  Sometimes its the right thing to do, such as when you see a major break above resistance, but in todays circumstance, when the market hasn't yet proven it wants to reverse course, its a bit dangerous, as that first hour rally often fades and by end of day, perhaps even turns red.

I believe the PM market will turn, and soon.  We have a great buying opportunity in the very near future.  Capitulation is exactly what we want to see to set up the low, and we definitely saw capitulation yesterday.  But we need to wait for the market to show us that it is ready to reverse.  That could be today, or tomorrow, or the next, but I believe it is not far away.

 

janb's picture
janb
Status: Bronze Member (Offline)
Joined: Mar 11 2008
Posts: 61
first hour and swing low

Hi Dave,  Thanks so much for sharing your insights.  You are so very helpful.  Many thanks,  Jan

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