Issue #84
Dear Member,
Here is this week’s big picture update:
GOLD
Fundamentals:
Gold did not react kindly to the news on Wednesday of the Fed’s $10 billion reduction in its stimulus program, and now the yellow metal is gasping for air. Perhaps the news of a taper caught most traders off guard as expectations were for a slight taper early next year. Given that gold has broken key support at $1,210 and $1,203, we continue to expect a major slide heading into January.
In other news, India’s central bank has announced it will not reverse its policy on gold import restrictions, dealing another blow to the precious metal already reeling from the Fed announcement. There were expectations of a slight easing of restrictions in the market, but Wednesday’s announcement by the RBI has reaffirmed the negative bias for gold.
Technicals:
With Wednesday’s Fed decision, gold has now broken decisively to the downside confirming my expectations of lower prices.
Gold has now pierced the lower boundary of the Bollinger band and should continue lower this week before finding some support.
Initial support for gold will come in at $1,180 on the daily level but that is unlikely to hold at this stage in the game. Since we achieved a weekly close below the key $1,203 level, we should see lower lows ahead. The previous June lows at $1,178 may provide some initial support. But failing that and a simple close below, we will see $1,150 very quickly.
On the upside, the center Bollinger line provided solid resistance throughout the week with gold failing to close on the daily level above this line. Gold only managed to close above this on the last pivot high at the $1,260 area, but this also failed to hold. This area will act as resistance on rallies where we also have the upper Bollinger line. Only a weekly closing above this level can gold alleviate the selling pressure.
Indicators are looking bearish and confirming the price action with the Moving Average Convergence-Divergence (MACD) forming a bearish crossover and Relative Strength Index (RSI) reaching oversold levels after bouncing off the 50 mark that typically proves to be strong resistance in a bear rally. Both the 50-day and 200-day moving averages are now heading lower confirming the trend in gold is still bearish.
As noted in my weekly update last week, the panic cycle did come into play during the week with the sharp moves we saw in gold and heavy selling on the taper announcement, plus subsequent downside follow through.
SILVER
Fundamentals:
Silver’s fate was tied to gold on the taper announcement and subsequently followed gold down to retest the lows of early December. As with gold, the bears are squarely in charge and unless there is a significant structural change in the fundamentals of the silver market, lower lows are likely ahead for the shiny grey metal.
Commodities in general did not come to the aid of silver last week with the entire sector down on broad-based selling tied to the Fed announcement and the subsequent dollar rally that ensued as traders were caught off guard expecting the taper to begin next year at the earliest.
Technicals:
Silver initially fared better than gold on the tapering news but this did not last as traders sold silver by the bucket load the following day.
Important support comes in for silver at the $19 level, but a closing below this and we can expect a retest of the $18.30 level with some minor support initially at $18.60. A closing below the June low at $18.30 and it’s lights out for silver where we can expect prices down at the low $17 level at a minimum.
On the upside, $20.50 proved too strong for silver to climb through, which stood as firm resistance last week with silver only managing to reach $20.29 on the bounce earlier in the week. Only when silver can close back above this level, preferably on a weekly basis, can the picture turn back to being somewhat bullish.
Once again, the narrowing Bollinger bands warned us of an imminent move. In this case, it was to the downside where we can expect some support at the lower line around $19.10, which did hold during Thursday’s heavy selloff. The 50- and 200-day moving averages are also sloping heavily to the downside confirming the bearish trend for silver.
THE U.S. DOLLAR
Fundamentals:
The dollar reacted to the Fed decision positively and has been a major factor in the precious metals selloff by strengthening as traders interpreted the slight taper as confirmation of a recovering economy and the “go to” place for foreign capital by piling into the greenback.
News over the weekend of an S&P downgrade to the EU’s credit rating may provide some further weakness for the single currency — and strength for the U.S dollar — as we head into another trading week. Dollar bulls may be encouraged to press ahead with their advantage after the credit rating agency downgraded the EU to AA+ from the AAA top rating.
Technicals:
With the Fed announcing tapering, traders wasted no time driving the dollar up through the 50-day moving average, which was acting as resistance for the past two weeks. It has since followed through with its gains into Thursday and closing out the week in a strong position. It is poised to head higher this week.
Only a simple close above the 81 level and we should see the dollar head higher back through the upper Bollinger line currently sitting at 81.09 which has kept prices in check for now.
Moving beyond that the dollar should encounter some resistance at the 200-day moving average. If we get a weekly close above 81.50, as has been mentioned in previous weekly update issues, this dollar rally should continue and should retest the 82.50 level.
Support for the dollar is currently the spike low following the taper announcement down at the 79.50 level. Above this we can find firmer support at the 80.40 level where we have a conjunction of the Bollinger center line and the 50-day moving average.
Only a weekly closing below the 79 level will we see a resumption of the bear market in the dollar, which at this stage is looking more and more unlikely.
Indicators are now more bullish with the mid-week rally and should continue for the dollar if we see prices head higher this week, as I expect.
MACD has formed a bullish crossover and RSI has pushed convincingly through resistance at the 50 level.
THE U.S. 30 YEAR BOND
Fundamentals:
Bonds fluctuated in a wide range on the tapering news as traders took time to digest the Fed’s decision to reduce stimulus. Perhaps traders were left uncertain as to the effect on the bond market as the hawkish stance of a taper was somewhat offset by rhetoric out of the press conference of a dovish policy regarding continuance of low interest rates.
2013 has proved to be a terrible year for bond funds as November was the sixth consecutive month of outflows. Funds are continuing to flow out this month. And the taper decision by the Fed was the last straw for bonds as we head into the new year.
Technicals:
On the downside, bulls will have to avoid a closing below initial support at Wednesday’s low coming in at 128.13. Otherwise, the head and shoulders pattern will be confirmed and the resumption of the bear market in bonds will continue.
At this stage, a close above Wednesday’s high is imperative for the bond market if it were to avoid lower prices. This means a closing above 130.08, but first, it must push through initial resistance in the form of the Bollinger center line currently at 129.13. Beyond this the 50-day moving average will provide resistance on any further price advances. But as previously stated, until we see a weekly closing above the 134 level it is likely that lower prices are ahead for bonds.
Indicators are showing continued signs of weakness with RSI failing to press past the previous peak on the recent bounce in prices that is looking likely to trend sideways at best. MACD is meandering in a tentative sideways pattern that signals a possible crossover to the downside.
Stay tuned to your inbox.
Best wishes,
Larry
