Sunday PM pre-game, 8/31/2014














Greetings friends-

Another month is in the books, and it very much looks like gold's year-long trading range is approaching its long-awaited denouement. The key chart is above ...
Silver will probably reveal which way things will break. I lean pretty strongly bearish.

Note that on the long-term weekly silver chart below, I've put in a gray "line of best fit" (using the "Raff regression tool" on stockcharts.com), tracking the downtrend silver has been in since April 2011. 

What's interesting is that the "Raff regression tool" creates a channel, the width of which is determined by the furthest point (either up or down) from the current line of best fit. In this case, it forms a perfect channel -- i.e. the highs and lows since the April 2011 crash have been equidistant from the current line of best fit. 

Also note the 34- and 55-week moving averages, which I've been mentioning for silver for years now. Those two MAs are moving in parallel, and don't appear to be crossing any time soon.


Here's the key weekly 3-line break chart for silver. Study this one closely - note the regularity! If the dotted blue line is broken to close a week ... time to short the PMs, folks. As of this week, the $20.34 level would need to be cleared (on a weekly close) to mark a reversal. 

The main reason I lean bearish is because stocks are doing great, and my guess is, they will continue to do so. Check out the circled points on the RSI indicator below (a very long-term monthly S&P500 chart) and note how we're due for a new one. According to that long term RSI measure, stocks look far from overbought. Compare the nineties to now -- looks to me like we are possibly in the early stages of a long bull phase in equities that should have a similar blow off phase eventually. And of course, as stocks do well adjusted for consumer inflation, Western interest in gold remains weak.



More importantly, we can compare stocks to gold and look for patterns. I set a target for the S&P500 - GOLD ratio to start the year, and I stand by it (yellow line). The circled grey region was an enormous breach (as I mentioned at the time), which all but guaranteed stocks would outperform the metals for a substantial stretch going forward. That macro-cycle won't change, as far as I'm concerned, until the blue downward trend line is broken to the upside.
Here's a shorter term version of the chart. A starting point to get me excited about gold versus equities would be a breach of this 200-300 day moving average ribbon. Please note how well it has marked support-resistance.



Then, to continue with equities, there's the fact that the NASDAQ:TNX ratio (TNX = 10 year treasury yield) is very close to registering a reversal on this long term monthly 3-line break chart. Note going back 35 years, there has yet to be a case where a new green bar did not lead to more (usually many more) green bars. So if a reversal does occur, that would mean that the NASDAQ will continue to outperform treasury yields for the foreseeable future. Of course that doesn't mean the NASDAQ will go up (i.e. yields can simply fall faster), but I would bet both occur -- i.e. numerator up, denominator down. 




Here's a linear version of the chart just to illustrate just how surprising a reversal would be here. It looks like a classic bubble chart, does it not? -- new highs usually don't happen in these cases -- except when the Fed wants it to happen.


What abut the $HUI? Reader Gary commented that it looks to have bottomed. I don't really see a breakout in the works on the basic HUI chart (not shown), but the disjunction with crude oil (see 12-yr chart below) will have to be resolved, and fairly soon I imagine. So, I suppose this is the most bullish chart I'm posting today, although, of course, crude oil could fall down and hit the HUI that way ...

But perhaps it's unlikely crude will fall ... e.g. this chart, posted also last week, suggests it will outperform gold going forwards. Note as I predicted, the purple line continues to be resistance.



But, what I would really like to see is for the $HUI to outperform the Russell 2000 small caps, and register a new red bar on this 3-line break chart. Note how if you bought gold at every red bar on this chart, you would have timed each step of the recent bull market quite well. 

 Alright just some updated versions of charts from the past few weeks, with minimal commentary, to close out the post.

 Gold in swiss francs holding out ...

I mentioned last month that gold fell below the MA-ribbon ... it has predictably stalled below.
Let's see which way this all-important ratio breaks!


We need to first see RSI clear the green line on this long-term monthly gold chart (and price to break through the MA-ribbon--which always seems to coincide) before this grinding bear market is over ...




 Till next time!
GM







21 comments:

Warren James said...

I'm watching for a breach of the blue line support indicated on your 2nd last gold chart. That would be bad news for the bulls - it would also possibly snap gold out of the triangle it is in, as well as create a reversal in your 3-line-break chart (not in the above set). Having said that, the $100 rally in June surprised me somewhat.

GM Jenkins said...

I agree Warren - that trend line just looks ominous (it's also featured on the very first chart, which I just updated btw -- I realized I had an older version of the chart up... that goes to show how flat gold has been trading, I'm mixing up my charts).

I should add that gold has rallied each time it's approached that tend line -- but only to make lower lows. I find it hard to visualize a real sustained move up starting from where gold is now.

Warren James said...

Oops, I didn't spot that, good update.

Still in Asian trade, Gold just hit $1276 which breached the afore-mentioned line. We'll see if it springs back, but it looks ugly to me.

GM Jenkins said...

Wow, looking bad indeed. Remember, though, that that particular trend line pertains to the weekly closing price.

I think weekly closes are the most important, because even the biggest players who can really throw their weight around are probably far less comfortable going into a weekend with a position that doesn't reflect fundamentals-based analysis (versus purely technical/manipulative), to some extent.

Gary said...

I didn't say Hui was breaking out, I said it has been bottoming IMO.
I won't repeat my comments, let's see what happens, plenty of crash potential, but in the S&P rather than gold.

Gary said...

It's a fact that all trend lines break eventually of course.
I tend to pay more attention to lateral support levels, and 200 on the Hui is a key level of support/ resistance that I don't expect to be broken.

Elmer Habavilo said...

Did you guys know that the 38.2% retracement of gold from its intraday high on Sept 6, 2011 of $1921 would be $1187 ?... $1187 was the exact intraday low (from Kitco at least) on around Dec. 19, 2013. im guessing you probably know this

Elmer Habavilo said...

GM - also, the way youre drawing that trendline in the first chart... when I draw this line on Bloomberg terminal it, I draw it from July 2005 point , through Oct 2008 low point, through until today.... I don't actually intersect the recent Dec 2013 low with the trendline... so what I'm saying is that the trendline that I draw from July 2005 through Oct 2008 comes in at around $1225 on Sept 4, 2014 (today)... I guess youre aware of this ... but I don't think we are quite upon the moment of truth yet really... id say its broken though, if gold ever again goes to $1200, which I will wager that it doesnt

GM Jenkins said...

Hi Gary - sorry to misquote you there. I edited it.

Why are you so confident about 200 on the $HUI - It's been below that fairly recently, so what has changed? Also if you think the HUI has bottomed, isn't that equivalent to saying gold has bottomed too -- because highly likely if gold falls back into the low 1100's the HUI will fall below 200.

I agree lateral levels should in many cases be weighted more heavily, but the fact that all trend lines break eventually is not a bad thing for trading.

GM Jenkins said...

Hi Elmer - where you been? Glad you could make it.

You don't mention when your fibonacci level starts -- do you mean since the 2008 low? I don't recall exactly 1187, but eyeballing it, looks right form there.

Re: the trend line -- are you sure you're not looking at a log chart? that might have more slack. The 2005, 2008, and 2013 lows on the linear chart can essentially be connected by a straight line (maybe $10 away from the 2013 low). Calling it a moment of truth might be a little dramatic without confirmation, but I maintain that if we don't have a rally tomorrow - a weekly close at today's level or lower would be inauspicious to say the least.

Elmer Habavilo said...

GM - yeah glad I could make it back. Counting Fib levels from the intraday high of gold on 9/6/11 at $1921... 38.2 retracement to most recent low intraday of $1187 on dec 19, 2013. That important fib retracement has held so far.

On the trend line, I'm on an arithmetic chart.... I think ur trend line isn't tight enough... Starting from mid July 2005 (July 19?) .. Connect that to oct 2008 low... (Or even better, start with oct 2008 low and sweep the chord around and see how far back in July 2005 u can get... I believe it's in July 15 - July 29 range.... ) ... Then u have ur segment... Then project into 2014... I believe That line goes below dec 2013 low by about 10 - 20 bucks... Then ends up around $1225 today... That's why I'm saying I believe gold has some decent wiggle room here of about $50.... Or another way to look at it is of course it can never go to 1200 again, or that trend line is def broken...

Gary said...

I think Hui is still bottoming, rather than 'has bottomed' , and by definition I think the same of gold. I think all sellers have long gone, only firm holders remain, and bottom feeders too.

The c.200 level was resistance for hui on the way up in the early 2000s, and was support during the 2008 downturn. I can't see it bring broken this time round.

I think the S&P bubble bursts very soon, possibly next week, and gold starts to rise again thereafter.

Daniel said...

GM here's my question and a lot of people have valid points being made about gold holding support here. Where would be a good entry for a short. Here's my thinking on this when it happens it'll happen at 8:30 am on the comex morning of you'll miss the initial leg down and gold and silver elevator down. The problem I see is which fomc meeting in sept or in oct. You can make an argument for the pm's to rally at the sept meeting but silver has tested that 18 level too many times I can't think of one chart that has tested support at those levels so many times and the support hasn't been broken. I'm just trying to figure out the safest possible place for a retail investor to buy options on this. We're going lower so will stocks eventually but just not yet. I do think once this bottoms either at 16.xx or 14.xx that will be a tradable bottom for 2015 with the possibility of a monster move once they announce qe5.
Regards Danny

GM Jenkins said...

Good points Danny. Personally, looking for the perfect place to short would drive me crazy. I just have a bunch of charts and indicators i use to decide (a priori) when to take positions. E.g. my weekly three line break DOW:GDXJ chart reversed to close the week, so I bought some GLD puts. Also see the chart in my latest post.

Daniel said...

GM I'm going 5 star general on you right here. Lets see how I do. Silver and gold hover where they are for one more week. If they get slammed come tues, wens we're getting a dovish fomc statement g&s rally. If not it may finally be time for them to get ray riced. Either way I'm buying the option straddle into the following week. I'm hoping it rallies but I wouldn't hold my breath. Trader Dan makes a good point at 1240 must hedgies are underwater on their gold start selling losers into year end. If it falls I'm sending you to any 3rd world country of your choice for a good time. If it climbs there's your tradable top hits a lower high you buy the dec puts and close your eyes.

GM Jenkins said...

Thank you, General Dan. I like the strategy of which you have apprised us not least because the RSI is down so low already. I think we might rally going into the weekly close tomorrow, but still finish below the the big levels. Whereas i don't think in terms of hedge funds, I have been eyeing the $1237.50 level hit back in January from where the year to date rally started, and that's probably what Trader Dan means. I will try to get a post up this weekend -- things is gettin interesting!

Daniel said...

Can't what but what I said was a bit dramatic I just don't want to miss the move when it does happen its just free money for anyone who follows the pm's. But come next week there will be volatility of that I'm sure.

GM Jenkins said...

Yes, the straddle is a good idea if tomorrow is a flat day. The drama is good- in fact let us know if you'd like to guest post, your avatar could be a red-collared lemur with a glengarry or peaked cap.

Daniel said...

I am absolutely flattered. Could it please be a lemur with a flat brimmed new era hat because those are more like the dunce caps of my generation. (I also try and channel my inner hellen keller when making charts)

GM Jenkins said...

Hey Daniel, give me an email i can contact you and we'll photoshop the new era hat..

In other news, I'm gonna be late with the post but I see a relief rally this week.

Gary said...

Hello.

TNX: silver took a leap upwards today toward that ever declining trend line.

(I am confused, as when I divide the TNX by silver I get 0.145, whereas you would get 1.45, am I doing that correctly, or are you doing something else?).

Anyhow, something is in the air today, with the GSR leaping to over 68 as I type, that's a a big red flag.