"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET
After what must no doubt seem a near eternity to many, there is finally a sign of life in the mining sector. A BULLISH ENGULFING pattern appeared on the daily chart today. This is a pattern that is generally valid after a prolonged downtrend. It also is much more reliable if overall volume is good. So far we have both ingredients in place judging from some of the actual miners today.
There are two things I am looking for at this point. First - I want to see this index close strong on FRiday of this week and not puke out over the next two days. Second - I would also like to see it push through 370 on a weekly closing basis within another week or so.
Aggressive traders/investors can wade into the water on select shares PROVIDED that they use sound money management techniques. That means this - if this week's low gets violated - GET OUT. Don't stand around arguing why the market needs to go up. GET OUT! You can always get right back in if the market action subsequently dictates it is okay to do so.
Longer range, more conservative oriented investors would probably want to see that weekly close above the 370 level to prove that this is anything more than a dead cat bounce and actually has some legs to it. One day wonders are becoming way too frequent nowadays due to the nature of computer algorithmic trading so some confirmation is warranted for those who like to see some follow through before making a move.
I am noting that the indicator has turned higher from an extremely oversold level but it has not yet generated a buy signal. The index will need to add to today's gains to trip it into a buy mode. Also, I like to look at previous peaks in the indicator to see if those can be bettered. Remember, a trend that has been a long time in the making is sort of like a gigantic cruise ship. It takes a while to turn. The same sellers who have been pushing these shares relentlessly lower will be looking for a place, a level, at which they can sell any rally UNLESS THE MARKET PROVES THAT THE TREND HAS TURNED.
Keep that in mind...
The ratio briefly dropped below the low made back in November of 2008 before bouncing higher in today's session. It came very close to matching the October 2008 low. It could be that we have gotten the answer to our question posed previously whether the gold shares would need to move lower against the price of bullion before the HUI would finally bottom out. I want to see a bit more subsequent action to feel that has been confirmed.
By the way, I will try to provide a CLOSING chart of this later on today if my schedule permits.
As far as the actual index itself goes, it ran to within a point or so of the 61.8% Fibonacci Retracement level noted on the monthly chart before attracting what seems to be at this point a significant amount of buying. I want to take a look at some of the actual stocks that comprise this index to get a better sense of whether this is a one day wonder or is the long-awaited selling climax. Again, that will need to await the close of trading today and also how these things behave tomorrow. The weekly close is also going to take on a great deal of significance given the extent of the price decline in this sector, particularly against the backdrop of an upside runaway in the broader equities.
Note that the technical indicator has surpassed the 2008 low in regards to its oversold reading. It is back to levels last seen in 2001, TWELVE YEARS AGO!
Incidentally, gold itself is stronger in terms of all of the major currencies today; Canadian Dollar, Swiss Franc, Euro and Yen. It is basically holding steady against the Aussie which is vascillating up and down today against the US Dollar. This is coming on the heels of a stronger Dollar which is noteworthy. In observing the price action in the metal today it looked as if the bears were gunning for downside stops below $1570. They didn't reach them!
I was suprised at the ferocity of the rebound off that level as it reversed quite sharply to the upside around 8:45 AM CST on strong volume. Somone either covered in large size or some new buying came in. I am not sure which it was right now but the volume was big. I would like to see the metal close out a pit session trade this week ABOVE $1587 or so. That would make some of the Johnnie-come-lately gold bears extremely nervous. It will still take a closing push or good intraday push through $1600 to confirm a near term bottom. That would also need confirmation by the HUI.
Today's sell off in the mining shares dropped this ratio, which has already been collapsing, to levels last seen at the depth of the credit crisis back in 2008. It should be noted that the ratio did recover that month moved up smartly off its worst reading.
This time around however, the ratio is not recovering. It closed last month in February at the lowest CLOSE for a month since May 2001. That is an astonishing TWELVE YEARS AGO. The month of March is still young so the ratio has time to recover but so far it is showing no signs yet of reversing.
Some select shares are either the screaming buy of a lifetime or gold is going to fall further yet. It is unclear just what it is going to take to convince BROADER stock market perma bulls to stop chasing them higher. News that China is attempting to slow its overheating real estate market down was shrugged off like a bad habit in today's session in the US.
I know that many analysts continue to insist that the broader stock market is still cheap. That is their business and their opinion. I believe we are witnessing another speculative mania courtesy of the Federal Reserve. With the Fed having slashed interest rates to practically ZERO and with commodities in general out of favor with hedge funds and other larger investors, stocks are the only game in town to obtain any sort of yield in this insane speculative nirvana that the Fed's policies have created. I suppose the rally in equities will continue until it just doesn't. The tape continues to tell traders to buy the thing.
That of course is not much use as predictions go but these guys are drooling all over their chins while they eagery await any dips in the market to gorge themselves on more equities. Nothing, and I do mean "NOTHING" can disabuse this gang of the current Bullish rage that has seized upon them and will not let them go. Quite frankly, it is stunning to watch this herd mentality grow more virulent with the passing of each and every day.
The USDX has been unable to clear the 81.50 level for some time now, though it did close right on it last week. This week however was a different story as the Dollar powered through this resistance breaking out of a 5 month long sideways pattern. It should be able to make a run to at least 83. If it can push past there it stands a good chance of heading to 84. That should be a big test of the currency. If it clears that, it will begin a trending move to the upside.
Hard to believe isn't it considering the fact that next to Japan, the Fed has been the biggest debaucher of the currency in terms of the sheer size of money creation it has embarked upon. It just goes to show how rotten the Yen, the British Pound have become and possibly the Euro might be. In other words, the US Dollar is the lesser of the evils.
Let's see, the US is running a $16 Trillion+ deficit with its leaders unable to agree on slowing the rate of spending (note that i did not say CUT SPENDING) by less than TWO CENTS on the Dollar and yet the Dollar is the currency of choice. Absolutely amazing is it not?
Note the ADX below (the dark line) is turning up from a very low level indicating the possibility of the beginning of a trending move. This line will need to to climb above 20 to indicate that this is anything more than a grinding move higher. Momentum however is positive.
No, it is not the classic by Charles Dickens set against the backdrop of the French Revolution; rather, it is the price charts detailing the nature of the economy as told by two camps.
The first is the S&P 500 as it powers higher and shrugs off Italian election results, sequestration fears and moribond employment choosing instead to focus on the data detailing growth, albeit however minute that might be.
The second is the copper market, afffectionately referred to as "Dr. Copper" for its uncanny ability to project investor sentiment towards overall economic growth.
These two apparent lookalikes, Darnay and Carton, have recently taken to going their own separate ways unlike that of the novel wherein they find their paths increasingly intertwined.
Take a close look at the following two different colored lines. The blue line is the closing price of the S&P 500 (emini) while the red one is the red metal, Dr. Copper.
Don't worry about the actual price level of either one; look only at the DIRECTION of price movement for both lines. I have only gone back to June of last year with this for analysis purposes but wish to point out how the two lines are basically in sync until February of this year. Notice that they tend to both rise and fall together. Spikes in the S&P were matched by spikes in Copper with dips in the S&P coinciding with dips in the price of Copper.
Along about the beginning of this year, the two markets began to diverge a bit in the sense that while the general trend in copper was up, it began moving lower during periods in which the S&P continued to move higher. Copper would recover from the dip and move higher again, seemingly catching up with the S&P but right around the beginning of the second week of February, these two companions apparently parted company and did so rather glaringly.
Can you see how sharp the fall in copper has been over the last month? Can you also see that while the S&P has briefly dipped following copper lower since the middle of February, it then rebounded higher as copper continued to sink? The divergence is especially pronounced over the last week or so.
Here is the issue - both of these markets should not be both true. In other words, if Copper is a predictor, and a generally reliable one, of expected economic activity in the future, then one has to question why the equity markets are seemingly no longer paying attention to its fall. We are constantly being told by the pundits that the global economy is recovering and growth is expected to continue, even if it is at a rather lackluster rate. Yet, here we have copper falling lower giving us a clear signal that growth is expected to slacken.
Which one of these forward looking indicators is true?
I should also note here that the large macro funds ( the hedge funds ) are now playing copper from the short side. Talk about more fuel for further uncertainty. Watching to see how this will further unfold is certainly going to be interesting to say the least.
Here we are at the end of yet another month during which the mining shares have lost ground. This makes five months in a row of lower prices.
Given the continued weakness in the sector, I thought it helpful to try to take a look at the monthly chart to see how things now stand from a technical analysis standpoint.
Comparing this downleg that began back in September 2011 to the previous downleg that came on the heels of the inception of the credit crisis of 2008, we can see some similarities. I am using standard Fibonacci retracement levels for comparison's sake.
If we look first at the 2008 selloff, we can see that it occurred over an 8 month period in which prices peaked in March of 2008 and then bottomed in October of that same year. The retracement in prices broke all of the important Fibonacci levels including the 50% retracement level AND the 61.8% level. It was not until prices hit the last remaining retracement level at 75% that the bottom was formed.
Looking at this decline, which began in Sep. 2011 and has been ongoing for 17 months now (with only 6 months that prices closed higher) we can see that while the 50% retracement level has been violated (it was taken out this month after having served as support ), the 61.8% level has not. That level currently comes in near 337. At this point, given the monthly close near the monthly low, odds favor a move towards this level.
This must hold the decline or price will more than likely move to the 75% retracement level down near 272. I know that is difficult to fathom, but that is what the pure technicals would indicate if 336 or so cannot hold this thing.
Looking at a technical indicator that has generated fairly reliable signals, the thing that stands out to me is that the 2008 sell off produced the lowest oversold reading to date. What is a bit disturbing is that the recent selloff has not moved the indicator down towards the same level that produced the 2008 bottom. In other words, it has more downside possible in a straight up head to head comparison.
I should note here that the 2008 low in the HUI corresponded to 680-700 gold. Gold is obviously no where near that level today but it is the ratio that we are interested in, not the outright price.
The HUI/Gold Ratio Chart indicates a continuation of what has now become a 23 month long trend of the mining shares underperforming or losing ground against the price of the actual metal. During the height or should I say "depth" of the credit crisis in 2008, this ratio hit a low near .2040 before it actually rebounded closing that month of October 2008 at .2699. The following month it moved as low as .2174 before closing higher at .3031.
Let's assume for the sake of argument that the ratio, which at the present time stands at .2242, does hit the same low level made back in October 2008 of .2040. Let's also assume that the HUI stops falling and remains for some time at the closing price of today which is 354. That means that the gold price would have to move back up to $1735 to have this ratio hit the same low that it made back in 2008.
Another assumption could be that the gold price stabilizes here at, let's call it $1580 but the HUI continues selling off. The index would then have to fall as low as 322 to yield us the same ratio low made in 2008. I will refer you back to the first two charts in this post and you can see, that a move towards at least 336 is possible in this index. If gold did not move at all from $1580 and the index dropped to 336, the HUI to Gold ratio would then be .2121. That is actually lower than the second worst reading in 2008 which came in November where it did hit .2174 before the rebound.
Another possibility is that the HUI would have to fall further down with the gold price falling along with it. Obviously there are several different scenarios but let's just say for now that none of them look particularly encouraging.
The big question, which none of us really know, is whether or not this ratio is going to have to move back towards the lows made in 2008 before these shares can put in a lasting bottom.
Note that I included some Fibonacci retracement levels on the ratio chart to show you that while the ratio did violate the last Fibonacci retracement level possible, the 75% level, that is did close both the month of October 2008 and November 2008 above that level.
Lastly here are some price charts for the actual metal. I cannot emphasize enough how critical it is that gold does not violate the support levels shown on this chart.
A WEEKLY CLOSE below the last level of support near $1525 - $1520 would do very serious damage to even the long term trend in gold and would suggest a deeper retracement. Note that the 38.2% Fibonacci retracement level on this weekly chart comes in precisely at the horizontal support level I have lined out on the chart. That is near $1534 - $1535. That is the first level of support. Just below that is $1520. There is nothing, and I mean nothing that I can see on this chart with the exception of a bit of a blip near $1480 that could stop the price from testing the 50% retracement level near $1415 should the red support lines give way.
My suspicions are that if the S&P 500 takes out its overhead support resistance near 1520-1530 on a weekly basis, gold will take out that $1535- $1520 support level on the downside. I hope not, but we have to be objective and try to see this thing for what it is at the current time. Do you not find it ironic that in both cases, the S&P with 1520-1530 on the top as resistance and gold with 1530-1520 on the bottom as support that the resistancer and support numbers that mark both markets are identical except in reverse?
Markets can change very rapidly, especially in this age of the infernal computer algorithm, but gold needs something to bring back its sponsorship among the big players. Let's see what the month of March will bring us. Perhaps it will come in like a lamb and go out like a lion for gold. We shall see...
We have seen several headwinds blowing against gold over the last couple of months. These have been noted here and include the rush into equities, the general abandonment of the commodity sector by some large players, the notion that the worst for the global economy is behind us, etc.... At to this list the strength in the US Dollar.
It should be noted here that a great deal of this strength has been at the expense of the Japanese Yen, which has seen a strong move lower although it has temporarily stabilized. It has also been due to general weakness in the British Pound, which as you know by now, is in association with conditions that led to last Friday's downgrade of the UK credit rating.
Since Monday of this week however, the Dollar has gained at the expense of the Euro, which has been on the whipping end of the unwind of large one way carry-trade related bets. As the Euro sinks over fears of the growth potential in Euroland and a rise in concern over the austerity programs that were devised so as to alleviate bond market fears over there, the Dollar has now managed to break out to the upside from a 5 month long consolidation pattern.
The USDX has had trouble clearing the 81.50 level. It did manage to do that last week but only barely. This week however, especially when the results of the Italian election were made known, it added some decent followthrough to the upside and looks as if wants to go higher.
There is the potential for a wild swing however depending on what shape or form this upcoming sequestration thing takes tomorrow. If however, the USDX closes out the week above 82, odds favor a run higher towards 82.70-82.75.
The currency markets are incredibly volatile right now as risk trades are unwound and then reinstated. It is quite difficult attempting to read some of these markets due to the big price swings and somewhat erratic behavior of late. REgardless, a higher Dollar will keep some pressure on the gold price. Should the Dollar exhibit a negative response to the sequestration, look for gold to bounce again as it has entered a support region on its price chart.
