PM Daily Market Commentary - 2/16/2016

davefairtex
By davefairtex on Wed, Feb 17, 2016 - 3:32am

Gold fell sharply on Monday while the US was celebrating President's day, dropping -37.60 to 1200.90 on extremely heavy volume.  Silver fell too, losing -0.57 [-3.36%] to 15.26 also on extremely heavy volume.  Both metals made their lows at or near their previous consolidation levels.

The long-awaited (by me, at least) correction in gold has finally arrived.  In my experience vertical price moves almost always end in this way.   One member asked (rhetorically) "do you have the <guts> to buy at gold 1240?"  No, I did not; I "lost my nerve" and sold.  As it turns out, trading is not about a test of intestinal fortitude, its about playing the percentages as coldly and unemotionally as possible.

Do I have the guts to buy now, after the retracement?  We've had a trend change - gold blew through its previous high - so yes!  Buy the dip!

But when?

We need to see signs of support, meaning, the downside velocity has to slow down, and price has to start moving sideways, and then, back up again.  Where might this happen?  The various support levels I see are the previous high at 1191, the 9 EMA, and the 200 MA, with the 200 probably being the strongest level.  But price may not make it that far down - it all depends on just how bullish the other traders are.  If they are eager to jump in, then we could be at support right now, but we'll only know after the support is demonstrated by buyers who start pushing prices first sideways, and then back up again.

When to buy the dip is more art than science, and it will also depend on other factors too - the dollar, SPX, oil prices, and the general sense of "risk on" that attracts money to other areas.  I'm always happier after retracements, because then we get to see just how bullish the other traders really are.  It becomes much less about short covering, and more about when the big money decides to jump in long.

Silver retraced back to its 200 MA, which also happens to be the previous consolidation area too.  This is a logical first point of support for silver, where the new shorts would ring the register and the dip-buyers might be expected to show up if they are particularly bullish.  If silver can remain above this price level, that's a sign of strength.  I think its more likely we'll see a drop down to the previous breakout area at 14.60, but I'm willing to be pleasantly surprised.  Silver, unlike gold, printed a swing high today, and that is a danger sign.

The way the miners closed on Friday looked bullish, but - miners follow gold, and so when gold corrected, miners fell even more.  GDX dropped -8.65% on extremely heavy volume, printing a swing high on the day; GDXJ lost -8.59% on heavy volume, and also printed a swing high.  Miners could easily correct down to the 200 MA, but they will likely follow gold.  If gold stops dropping, miners should find support also.  We will soon see just how much enthusiasm traders have to own the mining shares.  However, the massive volume tells us that this signal is not to be ignored: it's bearish, and caution is warranted.  I would not buy the miners until I saw visible signs of support - some sort of reversal bar at a minimum.

Platinum fell -2.59% and printed a swing high, palladium dropped -2.86% and printed a swing high also.  Copper actually rose - up +0.74% - but the inverted hammer suggests a failed rally.

The buck followed through off Friday's swing low, rising a big +0.89 to close at 96.88, right underneath the 200 MA.  A move through the 200 will be bullish for the buck, which remains in a downtrend.  If the buck continues to rise, and the current patterns remain in effect, risk on for US assets should remain in place.  Having said that, the buck remains in a medium term downtrend, so it is more likely that this is just a shorter retracement in the middle of a longer term downturn.

SPX also followed through from Friday's swing low, rising +30.80 [+1.65%] and closing above its 9 EMA.  Even the bank stocks are staging a reasonable rally, although until the underlying problems are fixed, its more likely this is just a brief bounce in a longer move lower.  VIX fell -1.29 to 24.11.

JNK rose just +0.16%, not a stellar move; if JNK's bounce is petering out now, I'd expect to see selling to start appearing in the next few days.  JNK is the weakest of our coal mine canaries - it is likely to faint first.  If it starts descending, likely this risk-on bounce doesn't have long to live.

TLT also followed through from Friday's swing high, dropping -1.06% and signaling a return to risk on.  Even after this correction TLT remains above its 9 EMA: the uptrend for TLT was just that strong.

CRB dropped -0.93%, encountering resistance at its 9 EMA.  CRB has yet to break its long term downtrend line, and remains looking ill.

WTIC was trading during the holiday - it made a nice rally on Monday that was promptly sold.  There was a meeting of Russia and Saudi Arabia this weekend where it was hoped they'd agree to cut production.  Of course, they didn't.  They agreed to freeze production at current levels.  Since they are both producing flat out, it means very little.  I guess its not yet time.  After all the fuss was over, oil managed to close up just +0.10 to 29.12 after first rallying to 31.53.  For the two day period, oil printed an evil-looking doji - almost a gravestone doji - which strongly suggests a failed rally.

As long as risk on continues, gold will probably remain under pressure.   But until this problem of the banking system is addressed - somehow - gold will probably remain in an uptrend, so the dips should be bought once support appears and we start to see signs of risk off from other things: TLT, SPX, JNK, and a weakening dollar.

However, our central banker friends are full of tricks.  The latest one: ECB is threatening to buy bundles of non-performing loans from the Italian banks. This is a page straight out of 2008: take a pile of crappy loans, bundle them up, and rate the "top tranch" as AAA.  But these aren't just bundles of subprime loans that will probably fail - these are loan bundles where all of the borrowers have already stopped payingSimply bundling up failed loans doesn't make the borrowers able to pay again.  A bundle of crap - even the top tranch of crap - is still crap.  We should have learned this from 2008.  But it turns out if the Italian government slaps a guarantee on the crappy loan bundle, the ECB is able to buy the now-guaranteed crap.

http://uk.reuters.com/article/uk-eurozone-ecb-abs-idUKKCN0VL28S.

Under existing rules, the ECB can buy ABS as long as they have a credit rating above a certain threshold, thereby ensuring it only buys high-quality securities.

It also likely means the central bank will only be able to buy senior tranches, which are the last ones to absorb any loss if the loans are not repaid.

This would limit the pool of Italian ABS the ECB could buy.

Italian banks, however, can help enhance the rating of their senior tranches by purchasing a guarantee from their government, which has an investment grade rating, provided that at least half of the junior tranches are sold.

Basically, some percentage of the failed Italian loans are going off to the ECB to die; ECB is turning into a "bad bank."  ECB will take losses on these loans slowly over time.  One hopes they don't buy too many of them.  One hopes.  There is no way the Germans could be happy about this plan.

In (possibly related) news, Euro fell -1.01%.  Perhaps that's one reason why money flowed back into the US from Europe.  Which makes me think.  "Risk off" and "risk on" may be the wrong terms to use.  Perhaps just international capital flows are a better term.  If money flees Europe, it goes into SPX, TLT, or a bank deposit, and the dollar rises.  Gold could also rise under this scenario.

It will be interesting to see how it all plays out.

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8 Comments

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 761
Tech has swung low for now.

Here are some charts on tech stocks, which I started watching casually in 2013 when Chris spoke about overvaluations of Netflix and LinkedIn, and started paying more careful attention to last summer. (Link here to Adam's Death of Hopium article on the bursting of the tech bubble.)

XLK - (SPDR's tech sector ETF - Top holdings here)

Note the closing swing low* last Friday, and a close on Tues. above the 9 day moving average:

 

And FDN (First Trust Dow Jones Internet Fund - holdings here)  

FDN has much lower volume, but does a better job tracking the more overvalued internet stocks than XLK does.  For example, tech blue chips Apple & Microsoft are the two top holdings in XLK, but more the more bubbly FB and Amazon are the top two in FDN.  

FDN printed a closing swing low on Fri. and closed above its 9 day moving average yesterday:

It looks like, for the time being, tech has printed swings low.  The last six weeks have provided some good shorting opportunities in tech and it's likely that there are plenty more opportunities to to come.  I'm going to wait and see if valuations rise for a few days or weeks to find a good entry point for another short.

-------

*Closing swing low definition:  daily closing price > the high of the lowest candle

Closing swing high:  daily closing price  < the low of the highest candle

 
(...I think. If anyone more knowledgeable than me wants to correct anything I've written, I'd be grateful.)

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
swing highs & lows

Just so you know, if all you do is trade the swing highs and lows, using stops, you end up more or less flat.  That's where the art comes in - figuring which high and low indicators make for a good long or short opportunity.

I did a recent study and came up with this important data point.

There is no one magic signal that can, if used, make us all money.  Unfortunately.  :-)

 

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1447
Sure Thing
davefairtex wrote:

Just so you know, if all you do is trade the swing highs and lows, using stops, you end up more or less flat.  That's where the art comes in - figuring which high and low indicators make for a good long or short opportunity.

I did a recent study and came up with this important data point.

There is no one magic signal that can, if used, make us all money.  Unfortunately.  :-)

 

Agora Financial and Rickards say there is a sure thing.  Something about Tuesday.   

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Importanter data points......
davefairtex wrote:

Just so you know, if all you do is trade the swing highs and lows, using stops, you end up more or less flat.  That's where the art comes in - figuring which high and low indicators make for a good long or short opportunity.

I did a recent study and came up with this important data point.

There is no one magic signal that can, if used, make us all money.  Unfortunately.  :-)

Correct.  There isn't one.  But there are 4.

And when they all cross at the same time, moving in concert with a freshly moving larger market, if used correctly, will make you money.  LOTS of money. 

Nothing wrong with that.  As long as you understand that one day you may have to answer for what you did with it....

Oliveoilguy's picture
Oliveoilguy
Status: Platinum Member (Offline)
Joined: Jun 29 2012
Posts: 578
What are the 4 signals?

Are you in the mood to share? Probably too complex for a carpenter/bluegrass player. Ha ha

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
no

No, OOG, Dogs isn't going to share.

He never shares.

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Dave, Dave, Dave.....
davefairtex wrote:

No, OOG, Dogs isn't going to share.

He never shares.

You have my contact info.  The offer still stands.  cool

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Of course....
Oliveoilguy wrote:

Are you in the mood to share? Probably too complex for a carpenter/bluegrass player. Ha ha

Check your PM**

** Not Precious Metals.  I mean, you could check them if you want, but that's not what I meant.

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