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PM End of Week Market Commentary – 10/24/2014

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    PM End of Week Market Commentary – 10/24/2014

On Friday gold dropped -1.00 to 1231.20 on moderate volume, while silver was up +0.01 to 17.19 on light volume.  Both gold and silver traded sideways for most of the trading day.

Miners did not confirm any reversal from their strong performance Thursday.

For the week, gold was down -7.30 [-0.59%], silver down -0.08 [-0.43%], GDX -1.06% and GDXJ -4.77%.

The three-week gold rally seems to have run into trouble at gold's 50 MA, backing off after failing to close above it on Tuesday and printing an inverted hammer candle.  Likely this weakness was encouraged by renewed strength in the buck during that same timeframe.


This week the dollar rallied modestly, closing up +0.50 [+0.58%] to 85.79.  The dollar downtrend is still technically in place, with the pattern of lower highs and lower lows remaining intact.  It appears that currencies are trading sideways ahead of the ECB bank stress test results due to be announced Sunday Oct 26th.  Will the resolution of these stress tests be market positive or negative?  I'd guess positive, since the market generally doesn't like uncertainty, and the Euro has sold off pretty hard over the past 5 months.  But I suspect the Euro has dropped for many reasons, not just the stress tests.  Perhaps the release will stabilize the Euro, and that would help gold, but I'm not sure the stress test release will result in a Euro rally, given the number of other factors encouraging the Euro to fall that are still in place.


Mining shares continued to drop, with both GDX and GDXJ making new lows.  Both mining ETFs remain below their EMA-9, and have renewed their move lower.  It appears that the spike above EMA-9 two weeks ago was just a headfake, and those five failed rallies last week were the "tell" that the downtrend sentiment was really still in place.

And all during that headfake higher, the GDX:$GOLD ratio continued to point to new lows for the mining shares.  For me, this really underscores just how important it is to watch the ratio to get a feeling of trader sentiment towards the mining shares.  Right now, sentiment remains negative.  That will change at some point, and watching the ratio will give us our first clue when this happens.

US Equities/SPX

It was an exciting week for US equities – if you were long – with SPX rising +77.82 [+4.12%].  Volume during this rally declined as prices moved higher, and this week's rally stopped right at its 50 MA.

Traders who are still long and are looking to exit their positions are looking for a point in the rally to sell.  Likewise, shorts are also looking for any sort of market weakness at resistance points (like the 50 MA) to enter short, and if these two groups outnumber the longs, it will end up creating the "lower high" that marks a downtrend.  The 50 MA is a fine place for this to happen.  That doesn't mean we can't move higher – it all depends on the balance of buyers and sellers.  But a failure to rise above the 50 MA will most likely result in a whole lot of high volume selling, since that would be a sign that the balance has shifted towards the bears.

Ultimately, we must watch the market for clues – if the sellers and the shorts appear en masse, if a bunch of long-term holders really do want out, it won't matter what sort of "plunge protection team" operations you imagine might be happening, traders with real positions will easily overwhelm them, just as they did three weeks ago.  However if the longs are more numerous, the shorts will cover and likely that will push us back up to 2010 for an attempt at another new high.

Rates & Commodities

Bonds fell this week, with TLT off -1.12% after last week's crazy inverted hammer print.  However, the loss wasn't as heavy as I had imagined it would be, which is impressive especially given the strength in the equity market.  Based on this performance, I think it is quite possible TLT still has more upside in spite of the bearish candle print from last week – but that likely happens only if the equity market weakens.  Could the relative strength in bonds be a "tell" for equity market weakness to come?  I think it could be.

JNK was up +1.10% on the week which is a reasonably good move, but it appears to be having trouble with its 50 MA, having chopped around that level for the past four days.  That is one of the reasons I think SPX might also have trouble at its own 50 MA – while traders were happy to buy the rebound, perhaps they are just in it for a trade and are now ringing the cash register on some short term gains.

Commodities were down -0.78%, avoiding new lows but still looking bearish.  Oil avoided new lows as well, but WTIC was down -1.62 to 81.30, and Brent was down only -0.03 to 86.13.  Brent is looking the best right now, trying to close above its EMA-9 for the first time since late June.  If oil does recover, that likely helps silver; from what I could tell, each time oil did well this week, silver seemed to strengthen.

Physical Supply Indicators

* Premiums in Shanghai vs COMEX dropped -3.44 to +0.25 vs COMEX.  Delivery volume has fallen from its highs but remains above average.

* The GLD ETF lost a big -15.54 tons, with 745.39 tons remaining.

* Registered gold at COMEX dropped -1.68 tons, with 27.73 tons remaining.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on October 24) of 1231.10 and silver 17.18:

  OUNZ 12.29 +0.01% to NAV [down]
  PSLV 6.97 +4.51% to NAV [down]
  PHYS 10.17 -0.57% to NAV [down]
  CEF 12.38 -8.18% to NAV [down]
  GTU 41.71 -8.37% to NAV [down]

ETF premiums were all lower this week.

Futures Positioning

The COT report is as of October 21st, when gold was trading around 1249 and silver around 17.50.

In gold, Managed Money increased longs by 9.25k contracts, and bailed out of -11k shorts.  Since gold made a new high and broke (briefly) above its 50 MA on Tuesday, that accounts for the big drop in Managed Money shorts, as a whole bunch of them probably covered on the spike to 1256.  Producers added 10k shorts and dropped -2.5k longs – perhaps some gold mining companies are looking to hedge their production at levels where they can actually make money.

Silver saw little change on the week – Managed Money was basically unchanged, while producers increased short exposure by a net 595 contracts.

While there was evidence of some long-side interest in gold from Managed Money this week, my sense is the strengthening dollar stopped that in its tracks.  Silver right now is going nowhere, awaiting some sort of catalyst.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

Gold: short term DOWN, medium term DOWN, long term FLAT.

Silver: short term DOWN, medium term DOWN, long term DOWN

Gold's 20 EMA has returned to moving down this week as gold retreated from its 50 MA.  On the charts, gold's 200 MA has actually started to rise, but that won't last long if gold's price remains below all three moving averages, as it is right now.


Gold ran into trouble at its 50 MA this week – it did manage to break above its 50 MA briefly intraday, but then promptly retreated for the next three days as the dollar strengthened.

The improvement in the ratios we saw last week have receded.  Gold's 20 EMA is now pointing down once again.  The gold/silver ratio dropped -0.11 to 71.60, just a hair below the high set last week.  GDX:$GOLD continued its downtrend and dropped further.  GDXJ:GDX and SIL:$SILVER both started dropping more rapidly this week, rounding out the almost completely bearish picture in the ratios.  Only the gold/silver ratio could be showing "good news", but mostly that's because it didn't rise – which really is just a lack of bad news.

The COT reports showed continued improvement in Managed Money interest in gold – but the report only covers through Tuesday, the day of the top in gold for this cycle.  For silver, there remains an almost-historic amount of fuel for a short-covering rally, but it awaits a catalyst.

Shanghai premiums are down again this week and are almost flat, ETF premiums are down, a large amount of gold left GLD, and COMEX lost some gold as well.  It looks like a large amount of gold left the west, resulting in flat premiums in China.  Seems like physical demand is in balance.

The dollar rebounded this week but the technical downtrend (defined by lower highs & lower lows) remains just barely intact.   My sense is, ECB bank stress tests may provide a positive catalyst for the Euro (which would be positive for gold) – but it might only be a short term affair.

However as of right now, things don't look great for PM.  In case you missed it, here are the instruments in a downtrend according to price vs. the EMA-9: Gold, silver, oil, GDX, GDXJ, commodities, GDX:$GOLD, GDXJ:GDX, SIL:$SILVER, the Euro.  If you pull back to the weekly chart, you see the same thing.  EMA-20, same thing.  MA 50, same thing.  We need some sort of change in sentiment to alter this picture.  Let's hope one comes next week.

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