Battle Of The Bulge Again

Germany started WWII on a high note, bypassing the defences of the Maginot line and sweeping across France in their stunning Blitzkrieg offensive. They seemed to be invincible, but only four years later after disastrous campaigns in Africa and in Russia, they were retreating before overwhelming forces over now snow covered ground their Blitzkrieg had conquered in the spring of 1940. They seemed to be in complete disarray, down and out and incapable of sustained resistance. Then came a surprise; a strong well armoured offensive known as the Battle of the Bulge (BB), that came so close to being a success. To someone who likes to see parallels in history, what has happened across some US markets the past few weeks has similarities to what had happened in 1944. Will the outcome be the same?

The BB was launched on 16 December, 1944; it is described as the biggest German offensive of the war in the West. This is not the place to revisit that battle, except to say that it failed in its objectives and added the word “Nuts!” to the military lexicon.

In October of 2011 the strongest and most sustained onslaught on precious metals ever was launched. Gold had peaked near $1900/oz and was breaking higher from a triangle that had developed, ready to resume the longer term bull market; silver was also looking bullish at the time. More than four years later, they bottomed at $1049.4 (December 2015) and $13.58 (January 2016). Since then, the metals have rallied, but not without strong rear guard action to keep their prices penned down. 

At the surrounded city of Bastogne, the commanding US General replied “Nuts!” to a German offer to accept his surrender. Their subsequent successful defence of the city against superior forces was a key element in the defeat of the offensive. Today gold is defending a PM fix of $1209 and silver its daily fix at $15.38 at important levels of support. So far the two metals have also been saying “Nuts” to attempts to completely reverse the new 2016 rally. It now looks to be a close shave on Monday when gold options expire and some other global markets are still closed for Easter.

Opponents of the belief that there has been consistent manipulation of the prices of gold and silver disregard the accumulating evidence that steep falls in the prices are associated with real world events, such as announcements by the FOMC and of the monthly NFP figure and, very prominently, expiration of options on the metals and their dates for first delivery notification. The steep ‘waterfall’ attacks on prices wipe out the large number of bids in the bid stack within a short while. This is only possible if either a very large number of small players successfully coordinate their actions or if only one or a few vary large players are involved in this practice. The first alternative seems unlikely in principle and more so given that that the practice is timed so well and has been for many years.

Recent evidence presented signs of increasing desperation in the suppressive action – based on the intensity and frequent repetition of the waterfall attacks as well as a very large open short position that has to be added to during these attacks, unless the prices can be depressed so far that a substantial number of the holders of long positions close out in surrender. Most long small traders will close positions as they lack the resources to carry these through margin calls; however, it is the owners of a large number of positions who seem able to fund margin calls with ease that have to surrender before a sustained bull market no longer threatens much financial pain for the short sellers.

Despite repeated attempts by the Bear to exact its justified revenge on the bullish Wall Street that since 2009 was funded largely by the Fed’s printing machines and not by growth in the economy, equities staged a major, ‘out of the blue’, offensive during the past six weeks. With even the FOMC accepting a weak economy, a rally like this can only be due to the release into the market of massed reserves, much like the Germans in the Battle of the Bulge. The offensive has been successful, so far, but can it be sustained when the economy reports new weakness in almost all statistical releases?

Further, the bullish Wall Street is charging ahead without its usual allies; the dollar index has turned softer and the euro and yen confirm the trend. The yield on the US 10-year Treasury note is rising to challenge recent highs, but this seems more in reaction to hawkish comments from the Fed rather than signs of growth in the economy. The quarterly close on Thursday is important to managers of hedge funds and they certainly must be throwing their weight behind the surge on Wall Street – but what about Friday and next week when economic reality takes over again?

Euro-Dollar

Euro-dollar, last = $1.1174 (www.investing.com)

The euro’s steep recovery off key support at the bottom of channel KL ($1.0936) is confirmation that the volatile and then failed bullish trend in channel JK ($1.1515) has resumed in the parallel extension KL below the original channel. The euro held onto the break back above the resistance of line Q ($1.108), reaching high enough to form a minor double top which – as technical analysts would have anticipated – has held, at least for the near term, with the new reversal lower.

Support at line Q is not yet threatened or tested, but could be called upon to hold in the time remaining before the end of the quarter. A stronger dollar is important to inspire confidence in the stumbling US economy and is likely to receive some further support at least until Thursday.   

Dow Jones Industrial Average (DJIA)

Dow Jones Industrial Index, last = 17516 (money.cnn.com)

The steep and remarkable 11.9% levitation on Wall Street, following the rebound 6 weeks ago off support at line L (16589), ended last week just short of resistance at line P (17680). Line P is the top of its current bear channel and has held firm so far. Ten days ago, the DJIA closed the week at 17481; however, the 4 days of trading last week could only add another 35 points to the weekly close. Efforts to close in on the so desirable 18 000 level must be ramped this week if that psychologically important level is to be reached by Thursday.

Even the next resistance at line A (17887) is only a minor hurdle, should a target of 18 000 be perceived as realistic for the rally into the end of the first quarter, given that many astute investors will see this as an opportune time to take profit.

Gold PM Fix - Dollars

Gold price – London PM fix, last = $1221.0 (www.kitco.com)

Gold has had a spectacular – considering its recent history – rally off the support along line R ($1048) to become a little more hesitant is it approached a technical resistance level at line C ($1272). An initial brief and limited break above that resistance was the top of the rally, after which gold reacted to that technical resistance as if it were a real barrier – clearly influenced by sustained selling.

The previous buffer between the ruling price and rising support along the bottom of channel KL ($1209) to enable room for a sideways trend, has narrowed. There now is less than $12 of the buffer left and a PM fix below line L would sound the warning that the situation has become critical. However, a break lower has to be substantial and last more than just a day or two to take effect. As soon as expiration of options and FND are past, the rest of the week should see reduced pressure on the price of gold and thus also reduced risk of the key support being broken.  

Gold PM Fix - Euro

The euro was a beneficiary of the recent dollar weakness and with gold being stuck below technical resistance and under increased pressure, the stronger euro exacted a toll on the euro price of gold. The new rally ended short of resistance and a trend reversal carried the price lower to end just short of support of new bull channel KL (€1080) – which has now come under siege, just like the dollar price of gold. 

This support has to hold – either because of a weaker euro, or because the price of gold is increasing after options expiration or as a combination of the two factors – to enable the recent bull trend to be sustained. Whether the trend is really bullish should be known perhaps as early as by the end of the week, when April begins.  

Euro gold price – PM fix in Euro, last = €1094.3 (www.kitco.com)

Silver Daily Fix Chart

By the close of last week it was evidence that the bull channel used in this analysis to contain the recent trend higher was too steep. Silver repeatedly broke just below that steep channel and last week moved lower to effect a clear break lower. A new and shallower bull channel replaces the previous steep one; the whole new channel fits the chart quite well and is offering support at the bottom of channel KL for the next London morning fix on Tuesday at $15.38.

The fix last Thursday is a few cents below that trend line, too little really to be of any consequence. Then, with Monday still part of the Easter weekend and a holiday  

In London, a day’s grace is available before the Tuesday fix for the full effect of the options expiration on the price of silver on Monday to be absorbed – which might be needed for the support along line L to remain unbroken. The vehemence with which the silver price is suppressed, if indicative of the greater danger and risk it presents for the Big Banks, also means that the silver price ought to outperform that of gold once the longer term bull trend gets into full stride.  

Silver daily fix, last = $15.28 (www.kitco.com)

U.S. 10-year Treasury Note

U.S. 10-year Treasury note, last = 1.877%   (www.investing.com)

Recent weakness in the bond market ended as the yield of the 10-year US T-note pulled back to challenge market resistance at lines D (1.866%) and Q (1.857%) – with line Y also in play at 1.855%. However, the resistance has held so far, with a rebound higher to the weekly close on Thursday at 1.90%.

The outlook for the yield, at least while resistance at these trend lines continues to hold, is more bearish to sideways at best, within bear channel CD  and the steeper bear channel KL (1.756%). 

West Texas Intermediate crude. Daily close

WTI crude – Daily close, last = $39.46 (Investing.com)

The WTI price of crude has rallied to challenge the $40 psychological resistance – with mixed and not lasting success. The breaks above resistance at lines K ($38.31) and Y ($38.61) brings a bullish bias, but a clear break above the $40 is now needed to confirm a new trend – and then it also requires that the support at lines Y and K must hold firm.

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