Issue #65
Dear Member,
Here is this week’s big picture update:
GOLD
Fundamentals:
The bounce in gold we are witnessing is possibly due to the market becoming apprehensive of any near term tapering from the Fed given last week’s weak non-farm payrolls and bigger-than-expected weekly jobless claims.
Gold also reacted positively to last Friday’s Consumer Sentiment Index release as the market had expected a better figure reinforcing further doubt as to any tapering announcement by the Fed at its meeting today and tomorrow.
Technicals:
Gold was able to close the week out in a strong position at just above the $1,350 level and above its 50-day moving average which is an indicator many market participants follow.
Gold has now confirmed the false head and shoulders break of support from mid-October and looks set to test $1,375 to $1,400 soon.
Bulls now clearly have bears on the back foot as the rally from mid-October lows has seen only the weakest of corrections.
However, for there to be any sustained rally in gold, we would need to see a weekly close above $1,445. Until gold can manage this, we are only in a consolidation mode. Interestingly, the 200-day moving average is currently sitting at the $1,434 level so there exists some solid resistance for gold at $1,434 to $1,445.
Conversely, a close below the $1,300 level would put gold back in a bearish mode. Gold is approaching a major turning point where we will likely see a rally. The nature of that rally will determine gold’s next major move.
SILVER
Fundamentals:
Silver followed gold in extending its gains for the week on the slew of worse-than-expected economic numbers but has been somewhat outperformed by gold.
This could be attributed to the commodities price action last week, particularly in copper and oil which tend to have a strong influence on silver. The action in commodities in general is indicating that we are still in a disinflationary environment, and until this is over I expect to see commodities languishing.
China’s PMI Index figure released during the week possibly gave commodities and silver some relief as the preliminary reading of 50.9 beat the estimate of 50.4. Anything above 50 indicates expansion.
Technicals:
Silver has also managed to close above its 50-day moving average, but only barely.
For silver to continue to rally, we must see a close above $23.50 at a minimum and then above the $24 level. Only with a weekly close above the recent highs coming in at the $25 level will we see a more sustainable rally in silver. But keep in mind that there will be considerable resistance at these levels.
The 200-day moving average for silver is currently sitting at the $24.30 level, and that will provide some resistance. Should we push through that, it will be a strong sign for the bulls. On the downside, only a weekly close back below the $20.40 area will we see silver retest its lows of June.
As with gold, indicators are somewhat bullish yet not overbought. The Relative Strength Index (RSI) is currently at 57.17 having cleared the previous peaks and with some room to move on the upside showing that silver could easily rally further from these levels.
THE U.S. DOLLAR
Fundamentals:
The dollar extended its decline last week, continuing a three-month long downtrend as traders took the cue of recent economic numbers as confirmation of easy money from the Fed to continue longer than originally expected.
What is perhaps perplexing was the poor showing in the PMI reading for the euro zone, which fell from a two-year high of 52.2 in September to 51.5 for October. While that figure was worse than expected by economists, it seemed to have no negative effect on the euro, and actually the euro was able to put in a strong week to the detriment of the dollar.
The dollar is under some pressure in the short term and may still decline a bit further. But I still see strong headwinds for the euro zone in the coming months which ultimately will lend some support for the dollar.
Technicals:
The dollar is continuing its decline and is now retesting the lows made last February. We may see the dollar decline a bit further to briefly spike below these lows before turning around.
While the dollar is looking oversold, there is more room to the downside should it head lower as the RSI reading of 32.59 shows. Other indicators, however, may actually be giving some encouragement to the bulls as the rate of change/momentum indicators and stochastics are beginning to show some positive divergence.
The dollar may find some support coming in at the 78.60 level where we have the lows that were made in September of last year.
A closing below that level will likely see the dollar test 78. We do not want to see the dollar close below these levels as the technical picture will then be considerably negative.
On the upside, I would not get too excited about a dollar rally until we see a close above at least 79.90, but ideally above 80.85.
Moving-average indicators are now showing a decidedly bearish picture with the 100-day moving average now well below the 200-day average.
THE U.S. 30 YEAR BOND
Fundamentals:
What is perhaps confusing the market place is the strength we are seeing in the long bond as the dollar lags and equities set new all-time highs.
The old notion that when stocks do well bonds underperform is being put to bed as both markets have been rallying as of late.
Poor economic numbers out of Europe and poor jobs numbers in the U.S. may be giving a tail wind to bonds as traders continue to put a bid under this market.
With this month’s government shutdown expected to be a drag on the November non-farm payroll figures, traders have wasted no time in heading for Treasuries in anticipation.
Technicals:
Bonds have now managed to close the week above the 100-day moving average and look set to run higher into next week. While bonds have closed above the recent highs seen in August, I see some formidable resistance above for the long bond. If bonds can close above the 136.10 level, we may see a retest of 138 where the 200-day moving average currently sits. But there is still some ground to cover until we get there.
Indicators are starting to creep into overbought territory with the RSI now at 67.50 and the stochastics showing a reading of 99.95 on the daily level which can be considered overbought.
I’m also seeing some negative divergences on the charts with momentum and the rate of change failing to make higher highs.
On the downside, a close below 133.20 and subsequently 131.20 would see bonds test the lows it set in August at around the 130 level. I see initial support at the 134 level and stronger support down at the 132 level.
Stay tuned and best wishes,
Larry
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