PM End of Week Market Commentary - 5/27/2016

davefairtex
By davefairtex on Sat, May 28, 2016 - 5:12am

On Friday gold fell -4.50 to 1215.30 on moderately heavy volume, while silver dropped -0.09 to 16.25 on light volume.  Gold hit a new low to 1209.00 near end of day, but managed to rebound by the close, narrowly avoiding the 1206 support level/line-of-death.

This week, gold fell -37.60 [-3.00%], silver dropped -0.30 [-1.81%], GDX lost -7.36%, and GDXJ was down -10.77%.   Platinum fell -4.43%, palladium dropped -3.88%, and copper rallied +2.65.  Aside from copper, the metals had a fourth bad week in a row, and the pace of the decline is starting to accelerate.

Last week gold dropped through its 9 EMA.  This week it fell through the 50 MA, which happened on Monday.  Moving averages are signposts to traders; a move below them signals that a particular trend has changed, and in this case, it was the medium term uptrend that had been in place since the first few days of 2016.

By trading the 50 MA, you would have bought back at about 1075, and sold at 1250.  It doesn't always work this well (and there might have been a few head-fakes you had to deal with) but when something has a decently strong trend, the moving averages provide some great, unemotional guidance.  Moving averages don't "hope for higher prices", they just are.

A break below critical support at 1206 will (probably) lead to another rash of long liquidation from the momentum traders at COMEX.  Currently the trend is down, so odds are we'll probably see this happen next week.

While silver also crossed its 50 MA this week, it didn't experience the same sell-off that gold did, instead chopping more or less sideways at its support zone of 16.00-16.25.   Why did silver do so well, relatively speaking?  I think that was all about the bounce in copper, which managed to put in a swing low and then follow through with a reasonably good rebound this week.  The copper COT report shows the typical bullish imbalance between commercial shorts and managed money longs that usually marks a low, so we might well see a more significant bounce out of copper in the weeks to come.  This should help silver to keep its losses to a minimum if gold continues to tank.  Theoretically anyway.

Miners

After dropping below its 9 EMA last week, miners tried rallying but couldn't close above that 9 EMA, which is now acting as resistance.  Miners appear to be in "sell the rallies" mode, with the large volume days coming on the down days.  Miners continue to be in a downtrend, and closed below its 50 MA just at end of week, the first time it has done so since late January.  That's all bearish.

The kick-off for this correction, for me, was the heavy sell-off on the day the FOMC minutes were released.  From that day forward, it appeared that some significant percentage of traders had moved into the sell-the-rallies mindset.  Overall, the miners really do not like the prospect of a rate rise.  We can all guess if such a thing will or will not happen, but the moving averages are our friend here.  The 9 EMA doesn't lie, and when it moves from acting as support to acting as resistance, you can see for yourself that the underlying mood of the market has changed.

Risk is increasing.  A close below the 50 is a danger sign for the miners.  Remember what happened to gold last week when it did this.  Did I mention that risk is increasing?

The USD

USD more or less chopped sideways this week, rising +0.21 to 95.50.  It printed a swing high on Thursday, but then rallied on Friday making a new high which invalidates the swing high, which ends up leaving the uptrend intact.  A lot of words to say "dollar drifted higher."

On the other side of the pond, the Euro had a bad week, dropping -0.99% and closing right at its 200 MA printing a nasty red opening marubozu - meaning, it closed at lows of the day  As I have said for quite a while, if you expect the dollar to croak, then you must love the Euro, because the only way the dollar turns into confetti is if the other currencies rally strongly.  For a currency to fall, big money must decide to flee, and right now, if any fleeing is happening - it's happening from Euro-land to other places.  That Euro downtrend line is as pretty as you will see.

BRExit vote is coming - June 23rd.  Does England want to tie itself to a boat-anchor or not?  The EU "Parliament" can neither propose legislation, nor can they vote to eliminate laws they do not like.  All they can do is vote on proposals handed to them by the unelected Brussels bureaucrats.  Seriously, this is how the place works.  If the bureaucrats don't want something to change, the matter will never appear before the "parliament".  When UKIP says its anti-democratic, they are absolutely not kidding.  We may complain about our bought-and-paid-for Congress, but in the EU, they've side-stepped the requirement to buy all those legislators that keep changing - over there, you can just buy the un-elected bureaucrats who can never be voted out of office by an enraged electorate.  This way, once you make an "investment" in a bureaucrat, it just keeps on paying off.  Theoretically anyway.

My guess is England will vote Remain, but you can probably also guess that I think that's a bad idea.

US Equities/SPX

US equities had a strong week, rallying +46.74 to 2099.06, printing a convincing weekly swing low and bringing the last five weeks of shallow downtrend to an end.  Although the corporate earnings continue to drift lower, so far that has not affected equity market prices.  Pick your reason as to why; maybe its just as simple as the SPX dividend yield is 2.09%, the Dow 30 yields 2.66%, while the 20 year treasury yields 2.25%.  My sense: as long as it appears that the US economy continues to avoid disaster, big money has to park somewhere, and some yield beats no yield.  That's not how I'm deploying my money, but I'm guessing that's the thinking currently in play.  VIX fell -2.08 to 13.12.

The sector map shows that tech led this week, followed closely by homebuilders and telecom.  This wasn't an energy/commodity rally.  We had a strong new home sales report (still way below the bubble years, but much better than anything since 2008), and that tends to get everyone excited.  Why is that?  Building a new home is expensive - say a new home costs $300k, usually with newly borrowed money, and that money is spent directly into the economy causing all sorts of follow-on economic activity.  Tech, the builders, and financials often lead market higher.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Technology XLK 3.21% 2.88% rising rising rising falling ma50 on 2016-05-24 2016-05-27
Homebuilders XHB 3.19% -5.11% rising rising falling rising ma200 on 2016-05-25 2016-05-27
Telecom XTL 3.02% -2.80% rising rising rising rising ma50 on 2016-05-24 2016-05-27
Financials XLF 2.59% -2.04% rising rising falling rising ema9 on 2016-05-20 2016-05-27
Healthcare XLV 2.14% -3.84% rising rising falling rising ema9 on 2016-05-24 2016-05-27
Cons Discretionary XLY 2.08% 4.82% rising rising rising rising ma50 on 2016-05-25 2016-05-27
Materials XLB 1.94% -5.41% rising rising rising rising ema9 on 2016-05-20 2016-05-27
REIT RWR 1.75% 8.71% rising rising rising falling ma50 on 2016-05-27 2016-05-27
Industrials XLI 1.64% 1.38% rising rising rising rising ma50 on 2016-05-25 2016-05-27
Cons Staples XLP 1.61% 10.68% rising rising rising falling ma50 on 2016-05-26 2016-05-27
Energy XLE 1.47% -14.46% rising rising falling rising ema9 on 2016-05-20 2016-05-27
Utilities XLU 1.12% 13.60% rising falling rising falling ema9 on 2016-05-26 2016-05-27
Gold Miners GDX -7.36% 14.65% falling rising rising rising ma50 on 2016-05-27 2016-05-27

Gold in Other Currencies

Gold was down fairly substantially in most currencies; it fell -40 in XDR.

Rates & Commodities

Bonds (TLT) fell slightly, down -0.23% more or less chopping sideways.  This was a decent enough performance, given the sharp rise in equity prices.  I'm guessing foreigners like the 20 year treasury at 2.25%/10 year at 1.85%.  Maybe you'd prefer German 10 year at 0.14%, plus you get a free position in Euros to go along with it.  This week's drop in the Euro = 7 years of interest payments on that German 10 year bond.

JNK rose +0.80%, making a new high and continuing to signal risk on.  It remains in a strong uptrend in both the daily and weekly timeframes.  My sense is, we are unlikely to see an equity market crash while junk debt continues to rise.  Oil keeps going up, commodities too, and this continues to support the revenue for the companies that have issued the junk debt.  Commodities rise = junk debt rises = financials rise = equities rise.  More or less.

The CRB (commodity index) rose +1.05%, continuing its steady improvement.  PM was the only commodity component to fall this week - all the others did fairly well.  CRB is nearing a bullish "golden cross", this wil happen perhaps a week or two in the future if CRB manages to remain in its current uptrend.

WTIC climbed +1.08 [+2.23%] to 49.56, briefly touching 50.21 before falling back.  Oil inventories showed a fairly large -4.2 million barrel draw this week, which ended up keeping prices moving slowly higher.  Oil remains in a strong uptrend, with its 9 EMA acting as support.   Momentum appears to be slowing somewhat, but as long as oil remains above those moving averages, trend remains clearly up.

Physical Supply Indicators

* Shanghai gold closed the week at a -1.51 discount to COMEX.

* The GLD ETF tonnage on hand fell -0.60, with 868.66 tons in inventory.

* Gold is not in backwardation; the two front month contracts differ by +0.40.

* ETF Premium/Discount to NAV; gold closing of 1212.40 and silver 16.21.

 PHYS 10.03 +0.33% to NAV [down]
 PSLV 6.14 -0.81% to NAV [down]
 CEF 12.40 -4.43% to NAV [down]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) showed no particular sign of premium for gold, and perhaps a 1% premium for silver.

* HAA big bar premiums are slightly higher for gold [2.76% for 100 oz bars in NYC].  Big-bar silver was quoted at 3.69% over spot [higher], while silver eagles are up slightly at a 15.7% premium.

Futures Positioning

COT report covers trading up through May 24th.

Gold commercials started covering short in a big way, closing -41.3k shorts and adding +23.7k longs - a really large net change for the commercials.  Let's say this brings them 25-30% of the way to a "bullish" position for the COT.  It was a big move this week, but we also have a long way left to go.  Managed money added +14k shorts and sold -42k longs - also a big change for them.  They are about 1/4 of the way to being in a "bullish" position for the COT.

In silver, commercials added +4.3k longs, and closed -7.2k shorts, a more modest change.  Managed money had a similar change, closing -7.4k longs and adding +2.7k shorts.  Managed money is still very heavily net long.

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

PM components are now mostly below the 50 MA.  Its a more serious correction now.  Silver is doing best - unusual, I credit copper.  Juniors are getting hammered, which is what you expect in a correction.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Silver SI.CW -1.81% -2.51% falling rising rising rising ma50 on 2016-05-24 2016-05-27
Gold GC.CW -3.17% 2.20% falling falling rising falling ma50 on 2016-05-23 2016-05-27
Platinum PL.CW -4.44% -12.31% falling falling falling falling ma50 on 2016-05-24 2016-05-27
Senior Miners GDX -7.36% 14.65% falling rising rising rising ma50 on 2016-05-27 2016-05-27
Silver Miners SIL -7.39% 21.32% falling rising rising rising ema9 on 2016-05-18 2016-05-27
Junior Miners GDXJ -10.77% 28.65% falling rising rising rising ma50 on 2016-05-27 2016-05-27

Gold Manipulation Report

There was one after-hours spike in silver on Thursday, which did not seem to have any effect to the trend.  There were no spikes in gold.

Summary

Commodities continued to rally led by oil, and industrial metals finally managed to put in a low.  This seemed to help silver, but gold continued to sell off, seemingly spooked by the prospects of a second rate rise by the Fed and the drop across the 50 MA.

The gold/silver ratio fell -0.92 to 74.79 this week which is a positive sign.  The GDX:$GOLD ratio fell sharply; miners are now starting to give way.  Same thing in GDXJ:GDX.  Both are now short term bearish.  Miners still have a bid from all the goldbugs that missed out on the second half of the big miner rally - but each time the miners make a new low, I suspect the declines will get larger and more pronounced.  We're in a downtrend now.  I'm telling myself this as much as I'm telling you!

COT report for gold show that the commercials engaged in some fairly heavy short covering this week, but the change in position is still far from conclusively marking a low.  Silver did not see nearly as much short covering as gold - silver remains very bearish from the COT point of view.

Gold and silver big bar shortage indicators show no signs of shortage.

Gold's decline has started to accelerate, while silver may have found a low at 16.25, aided by the rally in copper and industrial metals.  Will silver hold 16.25 if gold continues to plummet?  Maybe - if copper continues to improve, which I think it just might.  Buck should continue to rise - or rather, the Euro will probably continue dropping.

Current view from the computer: Uptrend: USD, crude, DJIA, SPX, natgas, copper.  Downtrend: gold, silver, US treasurys, and the miners.

A final note.  Next week gold's near term prospects may be dominated by the commercials, who have a strong interest in seeing price driven below 1206 support.  I'd guess there are lots of stops below 1206, and the sneaky commercials really want to hit them in order to collect on their big short position.  Of course, we might also see a headfake down that is immediately bought, or a false rally higher that is then heavily sold - market works hard to get everyone to lose money, so you just never know.

While I believe that controlling the trend is extremely expensive, its not so difficult for the commercials to pound price temporarily lower - or higher - to get a quick payday, especially if they are doing this in the direction of the the trend.  Right now, trend is down.  I believe that risk is high of a commercial-induced break below 1206, and if buyers don't appear relatively soon thereafter, we could be in for a substantial drop.  Miners will get sucked right down into the maelstrom if it happens.

Be careful out there.

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3 Comments

mikeg's picture
mikeg
Status: Member (Offline)
Joined: Aug 30 2009
Posts: 11
Thanks

Your weekly wrap is always a must read for me, even though I'm a wild eyed metals conspiracy theory nut!

But seriously, I'm investing (large sums for me) long/short (metals) or long/flat (miners) on the COT positions and your analysis is the perfect cross reference or validation of direction for me (timing is of course left to the team dunce... yours truly... but so far so good, although I'm still a little under water in silver this cycle).

The technical's are of course used to bully the specs around... your work is concise, and flawless.

Thank you,

Mg 

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5685
thanks mike

mikeg-

Glad you like it.  It actually helps me to write it.  That way I make fewer boneheaded mistakes - like forgetting momentarily that we're in a downtrend.

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1469
New Case for Gold Book

The section on manipulation is worth the price of the book.

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