Big Pic Update: Gold, silver, dollar and bonds ...

Issue #108

Dear Member,

Here is this week’s big picture update.

GOLD

Fundamentals:

With Friday’s Non-Farm Payroll report beating estimates, gold predictably sold off as traders held out little hope the Fed will change their course of tapering at the next Fed meeting; although the yellow metal did mount a late afternoon rally to close out the week in a neutral position.

Despite a positive jobs number, gold still managed to close higher for the week helped also by the tense situation in Ukraine and inflows into bullion funds that has attracted $522 million of new money since the start of the year. Gold may continue to find support in the short term if a solution to the crisis in Ukraine does not come any time soon.

Looking at gold’s behavior, there may be some more consolidation in the next few trading days and another small leg higher after that. But I still maintain that a top in gold is imminent if we have not seen one already last week.

Technicals:

Gold made another new high this past week at the $1,354 level albeit only marginally above that of the previous week. Looking at the short-term trading pattern in gold, there remains a possibility for another leg higher that takes out the flat top achieved last week.

Were gold to push through this strong resistance area and close above $1,400 on a weekly basis, I may begin to alter my bearishness in the medium term. But at this stage that’s still unlikely.

On the downside, if we see gold close below $1,320 and then another closing below $1,300, then a retest of important support at $1,280 is in the cards. If we see a close below that on a weekly basis, gold would begin to turn bearish in the medium term and likely target the previous important lows down at the $1,180 area.

Indicators on a daily basis have backed off somewhat from the last few weeks’ strong upside action with the Relative Strength Index (RSI) consolidating in a sideways-to-down pattern and the Moving Average Convergence-Divergence (MACD) about to strike a bearish crossover.

Directional movement lines continue to narrow albeit marginally; however, the Bollinger Center Line is acting as support in the short term.

SILVER

Fundamentals:

Silver continues to underperform against gold which must have traders concerned for the prospects of both metals for the near term. Copper’s trading action of late has also contributed to silver’s poor performance and with Friday’s four percent sell-off in copper, gold will have an even tougher task trying to hold up silver prices.

With copper trading so poorly and being a key indicator of the global economic pulse and particularly the negative economic reports out of China, it calls into question the broad commodity rally of late and whether or not it has been one big short cover rally, which is what I believe.

Technicals:

Silver’s big selloff on the payroll number on Friday has left this market technically weak in the short term and was confirmed by a weekly closing below the 200-day moving average. This has left open the possibility of prices trading down into the next band of support at the $20.50 area.

Bulls have temporarily lost the advantage but will regain it if they can manage to take the metal back up through the $21 level and close above $21.20 on a daily basis.

Resistance will now come in the form of the 200-day moving average and the center Bollinger Line at $20.90 and $21.20, respectively.

On the downside, firm support can be found in the $20.50 area. A rising 50-day moving average is sitting slightly below this area that will provide extra support down at those levels.

Indicators continue to deteriorate further on a short-term basis with the RSI now falling below the 50 level. The MACD has struck a bearish cross whilst the Average Directional Index (ADX) continues to meander aimlessly in a sideways manner.

On a weekly basis, the 50-period moving average continues to act as resistance with price bouncing back after briefly testing it for the second week in a row. As I note the RSI is now also below the 50 level. The center Bollinger Line at the $20.50 level should come in as extra support on any retest.

THE U.S. DOLLAR

Fundamentals:

The European Central Bank (ECB) in its press conference last Thursday kept interest rates unchanged as President Mario Draghi signaled the threat of deflationary risks were easing, squashing any expectations of further accommodation by the central bank. This catapulted the euro to a two-year high against the dollar. Also adding to the bullish momentum for the euro was expectations of the eurozone economy expanding in the next two years.

Positive economic numbers out of the United States also spurred risk-on trades as traders piled back into equities and other assets. This compounded the dollar’s woes as it traded lower breaking down through the 80 level in the index.

I still believe that the dollar is unlikely to break down much further than the current levels and will likely rally at least in the short term to relieve oversold conditions.

Technicals:

The dollar did briefly penetrate below the lower Bollinger Line on Friday’s big drop but managed to close back within the band forming a bullish candlestick pattern in the process.

Thursday’s big selloff in the dollar came on the heels of the ECB press conference that caught the market by surprise. It was not expecting such a bullish outlook for the euro-zone economy. The dollar is trading quite predictably within the confines of the lower half of the Bollinger Bands and bouncing off support at the 79.50 level despite briefly falling below that on Friday.

I would like to see the dollar hold that level in next week’s trading and ideally rally from here without looking back. A close below 79.50 will likely mean a retest of the October lows at the 79 level. This area will likely hold in the near term at least as there are some major downtrend lines in this zone that will act as strong support. Only a weekly close below that level will I begin to get more bearish on the dollar. But I must stress that an imminent rally in the near term is likely in the dollar to relieve some oversold conditions.

Indicators on the shorter-term levels have not deteriorated that much despite the poor performance in the dollar last week perhaps warning of a divergence and the potential for a relief rally in the index.

The RSI has held the previous low despite a lower price. On the weekly level, prices did touch the lower Bollinger Line and rebounded back on Friday. But other indicators have deteriorated further to some extent.

THE U.S. 30 YEAR BOND

Fundamentals:

Strong jobs and economic numbers last week confirmed to the market that the weather-related slump in previous reports has subsided; promoting a selloff in bonds that saw the biggest weekly performance decline in over six months. This was on top of the increasing bearish bets speculators are making, increasing their net short positions by 88,000 contracts according to CFTC data as hedge funds and other large speculators decreasing their net long positions to the least amount since last December.

To compound the building bearish sentiment in bonds, investors pulled an average of $8.6 billion out of bond ETFs in the last five days.

Overall, investors have still poured more money into bond ETFs than its equity counterpart this year but that trend seems to be reversing so we must watch this space to see if this will continue. Perhaps this is the final hurrah for bonds as last week’s price action does have me concerned that we may have seen the final rally in bonds.

Technicals:

It looks as if the recent strength in bonds may have finally come to an end. This will be confirmed by a close below the previous pivot low at 131.50 and this now looks to be in the cards as early as next week given last week’s rout in bonds. The 200-day moving average and the center Bollinger Line failed to provide any support. This signals weakness in the bond market as prices came crashing through these levels without the slightest hint of support.

I did warn that the 135-135.50 level with three major intersecting resistance zones would potentially halt any further upside in bonds and it looks as if it didn’t even require bonds to reach those levels choosing to sell off just before it got there.

Having said that, the 131 level may provide some support in the near term as this is where the rising 50-day average and lower Bollinger Lines currently intersect. A break below this level and confirmed by a weekly closing will likely be curtains for bonds as bears are now heavily on the back foot and need to get the initiative back and quickly.

Indicators on the short-term level have been decimated with the RSI falling from over bought levels down to below the 50 level in only five trading days. The MACD has struck a bearish cross and the ADX is now looking to confirm a bear trend, waiting for the signal line to turn back up convincingly. On the weekly level, only the center Bollinger Line looks to provide some immediate support for bonds at the 131.50 level but a break below could be the nail in the coffin for bonds.

Best wishes,

Larry