PM Daily Market Commentary - 7/12/2016

davefairtex
By davefairtex on Wed, Jul 13, 2016 - 3:13am

Gold fell -22.40 to 1333.70 on moderate volume, and silver dropped -0.14 to 20.22.  A rebound in the pound, and a drop in TLT both indicate reduced uncertainty; save haven trades are being unwound, and gold is suffering as a result.

While we all know that the commercials have a strong vested interest in seeing price decline, the only way this fervent desire has any effect is if buy-side support dries up.  My sense is, that happened today.  Uncertainty has been removed from the market in two places:  1) the UK has identified a new prime minister (no long wait until October - it will happen tomorrow), its clear that "BRExit means BRExit", negotiations are proceeding on this front - and it appears the UK might actually have some decent leverage.  Evidence of this stabilizing effect: GBP rose almost 2% today.  2) Merkel stated that there would be no banking crisis in Italy, which the market interpreted as a willingness to "work something out" with the Italian government.  DB stock rose +6% on the day.  I believe the Italian banking crisis was manufactured: ECB kicked things off by telling the Italian bank to shed bad loans - "please die", in other words - and this put pressure on the Italian government to deal with the problem.  Unlike in the US where the regulator says "do this" and it must be done, in the EU it all has to happen in a much more public, roundabout sort of way where only the fear of a bank run will end up forcing the local politicians to act.

As a result of this double-dose of sunshine and unicorns today, gold fell through its 9 EMA, closing below the 9 for the first time since BRExit occurred.  In some sense, if you live by the "safe haven", you also die by it as well.  Now we get to see just how much of a premium was built into the gold price from the uncertainty in the EU.  Negative rates remain in place (and we could see something really exciting from Japan) so there should continue to be a bid for gold - but for now, we probably get to see the unwind of the BRExit and Italian Bank Crisis instability premium.  There should be strong support at 1300; below that is the 50 MA at 1281.

Gold OI rose by just 100 contracts today; GLD tonnage dropped by a massive 16 tons - the first drop of that size since December 2015.

Silver outperformed gold again today, dropping only -0.65% to gold's fall of -1.65%.  Gold/silver ratio dropped to 65.96.  If PM were about to enter a bear market, this sort of thing probably wouldn't be happening - typically, silver leads gold in both directions, so as long as that ratio continues to fall, it bodes well longer term for PM.

On the chart, we see that today's drop (a fairly benign "spinning top" candle) failed to confirm the northern doji from yesterday, and silver remains well above its 9 EMA.  Most likely, silver was supported by the exceptionally strong performance in copper - up a huge 3.14% today alone.  Yay copper!

Miners had a bad day, with GDX off -3.92% on heavy volume, while GDXJ dropped -4.16% on heavy volume also.  Senior miners printed a swing high today; they remain above the 9 EMA, but today's two-candle swing high print is rated as a "mid-range" print - meaning a 30-50% chance of marking a near term top.  The bearish divergence in the RSI shows that momentum in the miners has stalled - that sometimes precedes a fall in price.  Down-day volume is also relatively strong, which is bearish.  We haven't crossed the 9 EMA just yet but if gold continues to fall, we probably will.

Platinum fell -0.76%, palladium climbed +0.39%, and copper jumped a huge +3.14%; as mentioned, that big move probably supported silver.  If copper can continue to rise, that suggests we might see a continuation of our commodity rally which seemed to be momentarily derailed by BRExit.  Commodity rallies are generally bullish for PM - just like commodity bear markets tend to be bearish for PM.

The buck fell slightly, down -0.11 to 96.49, pulled lower by the 1.92% rally in GBP, and helped at the same time by a big -1.82% drop in JPY.  Market probably sees some certainty returning to the UK, and an impending "big move" coming from Japan.  I guess when the government starts talking to the helicopter salesman, traders start to watch the skies.  I'd say that was jawboning Japanese-style - a "secret meeting" which somehow everyone found out about anyway.  Nothing was said explicitly, but everyone got the message.  Who knows what they actually talked about - it might have just been the weather.

WTIC reversed course fairly dramatically, up +2.07 [+4.65%] to 46.62 on heavy volume, printing a two-candle swing low pattern which is a 55-65% chance of a low.  Even the API report which showed a bearish inventory build of 2.2 million barrels was not enough to derail the move, knocking perhaps 40 cents off the move at end of day.  Perhaps oil's correction was more about EU uncertainty than about concerns over oil fundamentals.

SPX rallied again today, up +14.98 to 2152.14 - another new all time high.  Market was led higher by energy (XLE:+2.48%) and materials (XLB:+1.82%), while utilities (XLU:-1.37%) were hammered.  Translation: it was all about commodities today.   A sub-category I've been watching, $XAL, rose a massive +4.56%, led by AAL, a stock that my computer chose for me about two weeks ago - but I was too embarrassed to tell you about.  (Airlines?  Are you kidding???  In the middle of BREXIT!??!)   VIX rose +0.01 to 13.55.

TLT dropped a big -1.64%, following through from the swing high printed yesterday.  This is another sign of the lowering of uncertainty from the UK and Italy - our sunshine & unicorn dividend.  TLT is now below its 9 EMA and is probably headed lower.  Risk on.

JNK climbed again, up +0.25% - pretty much JNK climbs no matter what these days - not dramatically, but steadily.  Oil driller RIG refinanced some of its shorter term debt, selling 7 year bonds for a 9% coupon while repaying the stuff maturing a few years earlier.  RIG weekly chart looks like it is about to break out. Boy.  9%.  Not a recommendation but...if you think Art Berman is correct, RIG probably survives and you can collect 9% for the next 7 years.  That's better than a poke in the eye with a sharp stick!  I don't have a position; I sold my NE bonds a while back; I was seduced by the capital gain.  Maybe that's why JNK continues to rally.

http://finance.yahoo.com/news/transocean-affiliate-prices-senior-notes-140602539.html

CRB rose +1.89%, moving back above both moving averages.  It still has a ways to go before resuming the uptrend, but it is definitely a positive step.

We're back to a risk on situation at least for now.  Is this just a relief rally, or does it have some legs to it?  It might depend on oil.  We'll have to see if crude can get back to $50.  If so, with some of the pressure off in Europe, we could see risk assets continue to rally.  This will likely help silver, while hurting gold.

Negative rates remain, and Japan's next move remains a wildcard, so our friendly commercials probably won't get to have their way with the gold market for any meaningful amount of time.   That's my current guess anyway; we will have to see how it plays out.  Theoretically, strength in silver and other commodities should keep gold from dropping too low.  Plus our commercials have a lot of covering to do.  That means buying back all that paper gold they shorted, which should put a cushion under any move lower.

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4 Comments

HughK's picture
HughK
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 764
Time frames for technical analysis

Hi Dave,

Yesterday you may have seen the KWN article with this chart by James Turk showing a potential cup and handle pattern for silver:

If that's true, it would certainly be great news for a lot of us, although it looks like the cup part has a ways more to go.  

More importantly, this got me wondering about time frames for technical analysis.  I get that stock charts have patterns that seem to be similar on small and large scales, implying a fractal-like quality.  

But, is TA legit for a forty year time frame?  Are there either very small scales (i.e. one day, one hour) or very large scales like the chart above, where TA is no longer considered helpful?

Thanks,

Hugh

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5686
time frames

Yeah, I remember asking that same question from a trader I respect long ago.

Thinking back...he said that resistance levels have to do with "trapped longs" who are looking to get out once prices rise back to where they get out even.  How many people, do you suppose, bought silver at the $50 high in 1980 and have waited all these long years to get out at break even?  I'm guessing, not many.  They've probably all passed away by now.   So "technical" resistance in 2011 from trapped 1980 longs probably didn't exist.

Then there's the psychological stuff - humans like round numbers, and round number 50 is an especially round number, and I suspect that actually helped our friendly commercials put a lid on prices in 2011. 

From the perspective of a breakout, exceeding 50 would probably lead to widespread, overall panic in the shorts, and if as Armstrong supposes, we might see $5000 gold, that probably means $150 silver (assuming GSR drops to 30ish), so any move past $50 probably ends up being really explosive.

We probably do have some shorts dating back to 2011 - as well as some longs too.  So I'd say it has some validity to it.

That said, adjusted for inflation, silver is way, way below its 1980 peak.  Silver went just batshit crazy back in 1980.  Adjusted using the lame CPIAUCSL, $50 in 1980 = $153 today.

Penny551's picture
Penny551
Status: Silver Member (Offline)
Joined: Nov 8 2012
Posts: 154
cup and handle...

,,,although it looks like the cup part has a ways more to go.

Hugh,

IF a 40yr cup and handle is valid, we're about there on the cup as a textbook c&h retraces no more than 50%.....Hopefully Turk is right!

Steve

Penny551's picture
Penny551
Status: Silver Member (Offline)
Joined: Nov 8 2012
Posts: 154
great point

Plus our commercials have a lot of covering to do. That means buying back all that paper gold they shorted, which should put a cushion under any move lower.

Such a simple, but good point.  Maybe I spent too much time in my past over at KWN to ever hear about the other side of that coin.

BTW, RIGP caught my attention recently and wondered if that's one you followed as well.  The 11.7% dividend was what made me look at that one in addition to RIG....Just curious, I know this isn't a stock picking forum.

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