PM End of Week Market Commentary - 5/6/2016

davefairtex
By davefairtex on Sat, May 7, 2016 - 5:43am

On Friday gold rose +10.10 [+0.79%] to 1289.70 on very heavy volume, while silver climbed +0.13 to 17.50 on moderately heavy volume.  Nonfarm Payrolls was the primary driver of Friday's price action; the relatively weak payrolls report was bullish for PM.

This week, gold fell -5.20 [-0.40%], silver dropped -0.39 [-2.15%], GDX lost -2.71%, and GDXJ fell -2.10%.    Platinum rose +0.26%, palladium fell -2.35% and copper plunged -5.70% - losing 13 cents to 2.15.  Copper's plunge has me concerned; copper doesn't usually plunge this much for no reason, and this is quite a move down for copper.

The USD

This week saw a reversal of trend in the buck, which dramatically broke support on Tuesday, marked a low at 91.88 and then abruptly reversed printing a strong bullish-looking hammer candle, which was confirmed the following day, resulting in a swing low.  The buck was up +0.86 to close the week at 93.88, rising 4 days out of 5.  On Friday, the buck initially sold off after the weak Nonfarm Payrolls report, but then buyers showed up and pushed prices back into the green.  This surprising strength suggests to me that the bid under the buck remains strong, and it will probably continue moving higher into next week, more likely than not.

The large number of people predicting the imminent demise of the dollar (non-commercials were heavily short) were probably responsible for making the low; after a long decline, there was nobody left to sell, and so price more or less had to rebound once the buyers showed up.  Reading too much "imminent hyperinflation/dollar will turn to confetti/dollar will fall to its intrinsic level" can be bad for you if it encourages you to ignore price evidence.  The buck will certainly make this transition to worthlessness on a 5-year-plan timeframe, but there can be a whole lot of back-and-forth between now and the final denouement.

The strong buck caused some trouble for gold, and by trouble I mean it appeared to help stop gold's seemingly irresistible move through last year's 1307 high.  The commercials were massively loading up short (just wait until you see the COT report!), but I was watching intraday activity during the two shots gold took at 1307, and there was no evidence of any visible attempt to keep gold from breaching 1307.  Evidence would include large volume above 1300 with no price movement - such abnormal volume would indicate that the commercials had placed sell orders for "infinite" contracts at a particular price creating a wall against movement higher.  No such thing appeared - volume appeared normal on both approaches to 1307.

On the chart we see four days of a very modest correction, with strong support provided by the 9 EMA.  Given how little gold declined during the four day dollar bounce, and the relief provided by the weak Nonfarm Payrolls report, I'd expect gold to blast through 1307 if the dollar ends up taking a rest.  Managed Money appears to have the bit in their teeth right now; if the commercials don't get a continuing dollar rally, they better start doing some of that "infinite shorting" or else we'll end up seeing a new high for gold.

Silver retreated further than gold during the four-day dollar rally, support from the 9 EMA wasn't quite as strong, and silver's rally on Nonfarm Payrolls Friday wasn't nearly as enthusiastic - you can see that in the much lower volume bar on Friday.  In general it looks like there is a lot less buy-side enthusiasm in silver vs gold.

Part of the problem could be plunging copper prices; copper looks terrible right now, and perhaps that is dampening the enthusiasm for silver.

Miners

Miners printed a swing high this week, and ended up dropping for three straight days, something that hasn't happened since January.  Miners also closed below their 9 EMA for a day before rebounding.  To me, both of these are warning signs that are hinting that perhaps the bid under the miners is starting to fade at these price levels.  Of course I think if gold makes a new high, miners will follow, but I think risk has increased for the miners.  If gold doesn't break out, the miners could experience a fairly serious wave of selling which we have not seen for a while.

US Equities/SPX

US equities fell slightly on the week, dropping -8.16 [-0.40%] to 2057.14.  SPX made a new low on Friday dropping briefly below its 50 MA, but recovered by end of day.  The weak Nonfarm Payrolls report did not seem to concern the market very much.  Is it really all about rates?  It probably is.  Who needs earnings when the other places for your money are yielding practically nothing?  VIX dropped -0.98 to 14.72.

Looking at the sector map, it shows that the energy/commodity equities did poorly, while interest-sensitive items did well.  Translation: falling commodity prices pulled US equities lower, while the ever-receding chances for an interest rate rise encouraged traders to buy the higher yielding stuff.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
REIT RWR 4.77% 8.43% rising rising rising rising ema9 on 2016-05-02 2016-05-06
Cons Staples XLP 1.80% 11.96% rising rising rising rising ema9 on 2016-05-02 2016-05-06
Utilities XLU 0.85% 15.81% rising rising rising falling ema9 on 2016-04-27 2016-05-06
Financials XLF 0.41% -7.08% falling rising falling rising ema9 on 2016-04-05 2016-04-15
Technology XLK 0.28% 1.51% falling rising rising rising ma50 on 2016-04-28 2016-05-06
Cons Discretionary XLY 0.10% 6.20% falling rising rising rising ema9 on 2016-05-04 2016-05-06
Homebuilders XHB -0.06% -6.35% rising rising falling rising ema9 on 2016-03-28 2016-04-15
Healthcare XLV -0.87% -2.86% falling rising falling rising ma200 on 2016-05-06 2016-05-06
Industrials XLI -0.93% 1.66% falling rising rising rising ema9 on 2016-05-03 2016-05-06
Materials XLB -2.00% -7.13% falling rising rising rising ema9 on 2016-05-03 2016-05-06
Gold Miners GDX -2.71% 27.81% rising rising rising rising ema9 on 2016-05-05 2016-05-06
Telecom XTL -3.16% -4.48% falling rising falling rising ma50 on 2016-05-04 2016-05-06
Energy XLE -3.30% -18.86% falling rising falling rising ema9 on 2016-05-03 2016-05-06

Gold in Other Currencies

Gold moved higher in most currencies except USD, XDR, and INR.  Gold's retreat in USD this week was a currency effect.

Rates & Commodities

Bonds (TLT) rose +1.03% this week, rallying strongly probably due to the declining equity market as well as the money flowing back into the buck.  Friday saw TLT sell off, printing a bearish harami, but it is not too dangerous (-23%).  TLT still signals risk off.

JNK was hit fairly hard, dropping -1.19%, printing a swing high, and falling below its 9 EMA.  JNK was not happy with the drop in oil prices.  Risk off.

The CRB (commodity index) fell -2.55%, printing a swing high on Monday and then plunging below both the 200 and 9 EMA lines.  Is our commodity rally over?  Too soon to tell, but they are definitely starting to weaken.

WTIC fell -1.43 [-3.11%] this week, printing a swing high on Monday and then it meandered sideways for the remainder of the week.  There was a failed rally on Thursday, but no follow-through Friday.  A somewhat bearish Petroleum Status report was sold, but not heavily.  Maybe oil just moves sideways here for a while.  Oil closed the week above its 9 EMA, which is a positive sign, and suggests oil remains in an uptrend, at least for now.  Oil is quite close to a "golden cross", where the 50 MA crosses the 200.  That's a longer term bullish trend change signal, and should bring more money into oil.

I'm guessing the wildfire up in Canada that took 1 million barrels per day offline contributed to the support for oil this week.  Canada is supposed to be a very safe jurisdiction for resources, but ... you just never know.  Nature bats last and all that.

Physical Supply Indicators

* Shanghai gold rose to a premium of +0.50 vs COMEX this week.

* The GLD ETF tonnage on hand rose a massive +30.05 tons, with 834.19 tons in inventory.

* Gold is not in backwardation; the two front month contracts differ by +1.10.

* ETF Premium/Discount to NAV; gold closing of 1289.10 and silver 17.50.

 PHYS 10.73 +0.77% to NAV [up]
 PSLV 6.67 -0.27% to NAV [down]
 CEF 13.12 -5.47% to NAV [up]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) showed no particular sign of premium for gold or silver.

* HAA big bar premiums are higher for gold [2.35% for 100 oz bars in NYC], much higher for silver [7.02% for 1000 oz bars in NYC].  Silver Eagle premiums climbed too [19.28% in NYC].

Futures Positioning

COT report covers trading up through May 3rd.

Gold commercials added massively to their short positions, adding +55k shorts, a near-record number.  (Last time this happened: second week in September, 2009).  Managed money closed -4.4k shorts and added +42k longs.  This tells us that last week's rally was not about short covering, it was about managed money throwing money hand over fist into COMEX GC contracts after the BOJ decided not to raise rates.  130 tons of paper gold buying.  What does that look like?

Open interest jumped by a huge +55k.  What does that look like?  You can see there are a few other times when the OI jumped in this way; a few, but not many.  All of them ended up being large rallies in gold.  While its true that gold's price would definitely be higher without the jump in OI, the commercials will have to cover all those shorts someday.  There is no free lunch.  My guess is, this short overhang will act to limit any downside in gold.  The commercial short position isn't the highest ever, but another week like this and it will be!

In silver, commercials added +1.6k shorts and sold -1k longs, while managed money added +1.1k longs and +4.0k shorts.  Most likely, silver's drop on Monday & Tuesday ended up rinsing some of the new managed money longs, leaving silver's COT composition more or less neutral this week.  Compared to gold, nothing happened in silver.

Moving Average Trends [9 EMA, 50 MA, 200 MA]

Everything green & gold again this week, in spite of the three-day correction.  That 9 EMA continues to work its magic.  Uptrend still in place.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Platinum PL.CW 0.26% -4.31% rising rising rising rising ema9 on 2016-04-19 2016-05-06
Gold GC.CW -0.36% 9.12% rising rising rising rising ema9 on 2016-04-26 2016-05-06
Silver SI.CW -2.10% 7.41% rising rising rising rising ema9 on 2016-04-07 2016-05-06
Junior Miners GDXJ -2.10% 51.75% rising rising rising rising ema9 on 2016-05-05 2016-05-06
Senior Miners GDX -2.71% 27.81% rising rising rising rising ema9 on 2016-05-05 2016-05-06
Silver Miners SIL -3.95% 31.50% rising rising rising rising ema9 on 2016-05-06 2016-05-06

Gold Manipulation Report

There were no after-hours spikes in either gold or silver.  I think the hungry wolves in managed-money-land would have eaten up any attempts to slam the market.  I hope the goldbugs who assume "commercials have ultimate power" are noticing the complete lack of manipulation attempts.  My theory is: they simply don't work during strong bull moves - they just provide a free dip for the gold bulls to buy.

Summary

Commodities faded this week, with oil and especially copper leading the way down, helped lower by the rebond in the buck.  Gold held up quite well, and may be looking at a breakout next week if managed money remains enthusiastic and the dollar keeps from going nuts.

The gold/silver ratio rose +1.29 to 73.68 this week, underscoring silver's under-performance.  The GDX:$GOLD fell; perhaps there is a bit of buyer fatigue in the mining shares, although the ratio remains very bullish.  The GDXJ:GDX ratio was up slightly and is bullish.

COT report for gold and silver show a massive escalation in the ongoing war between managed money and the commercials in gold, but little change in silver.  Positions remain very bearish, but the commercials have been unable to force prices significantly lower against the constant buying at COMEX.

Gold big bar shortage indicators show no sign of shortage; HAA big-bar silver premiums jumped dramatically, but PSLV's premium actually dropped.  Let's see if those HAA premiums are still here next week.

The buck reversed this week, but the dollar rally only seemed to dent managed money's enthusiasm for COMEX gold.  With Nonfarm Payrolls behind us coupled with gold's relatively positive reaction to the report, I see little potential for bad news (er, I mean little potential for good economic news) that would serve to derail the gold train.  It is possible if the dollar continues to rally gold might run into a bit of trouble, but I'm not even sure about that.

The only possible issue for gold longer term might be if BOJ and/or ECB decide to back off on the negative rate policy.  What are those odds?  It doesn't seem likely, but it is the risk I've identified.

I'm in the middle of rebuilding my computer's database; no trend update this week.

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1 Comment

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5683
self-compassion: a trading strategy

After reading the article on Good News Friday: "Why Self-Compassion Works Better than Self-Esteem", I realized that I'm both practicing and advocating this very thing as a trading strategy.

The worst thing you can do is rely on self-esteem as a training-reinforcement mechanism for trading.  You need emotional stability the most after a failed trade.  If you go into recrimination and blame, then it will be emotionally much more difficult in the future to bail out of a failed trade.  This leads to behavior where you end up riding the miners down 90%, as happened from 2011-2015.

Its far better to understand that wrong decisions are common in trading, that you need to first acknowledge the mistake, then forgive yourself, show compassion, bail out, and move on.   It is the failure to bail out that leads to most losses - certainly in my case anyway.  And the fear of bailing out is tied inextricably to self esteem and fear of failure.  "The trade hasn't failed until I sell."  Uh huh.  So you watch the red ink build and build, all in an attempt to maintain your self-esteem - and that is the most destructive and stressful thing you can possibly do.

Far better to say "whoops, I sure called that one wrong", bail out, and then wait for your next opportunity.

The bits of the article I found most compelling were:

A big one, which a lot of people just can't quite believe, is that it enhances motivation. People who are more self-compassionate, when they fail, they're less afraid of failure. There was a study where helping people be more self-compassionate about failure [on a test], later on when they had a chance to study for a second test, they actually studied longer than people who were not told to be self-compassionate. Because, basically, it creates an environment where it's safe to fail, so self-compassionate people are often more likely to try again. They also have more self-confidence, because they aren't cutting themselves down all the time.

If you aren't afraid of failure, then you won't hang on to bad trades for far too long.

Fascinating stuff.

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