Ignition: Then It Fizzled

Last week it was speculated that with three major markets, with the dollar as their common factor, resting on significant long term support, there could be a change in trend – a change that could perhaps be the long-awaited bottom in the bear market in the precious metals. A warning was also issued that with month end approaching and with it first notice day for deliveries in the December contracts, severe pressure on the prices of gold and silver and, by association, the euro, could be expected. It was therefore not unexpected to find there was no lift-off; ignition has fizzled out.

The US dollar index marched onward to a new post March 2015 high, while the PM metals slipped lower to new recent lows with gold and the euro breaking below the support that was in place last week. Silver, recently victim of relentless and severe pressure, managed to hold right at long term a support – a sign of defiance and of hope that there is still potential for a change in the trend as December takes hold. It is not uncommon to find a degree of overshoot through technical support in the form of a brief spike of limited extent, which implies that gold and the euro still can recover, despite their descent below key trend line support; provided this is not too deep and also of brief duration.

A strong dollar has much psychological ‘feel good’ impact on the broader population – the proverbial Main Street - but it brings with it real side effects that are positive and negative. Imports are cheaper, which should make consumers happy, but this could send the already far negative trade balance deeper into the red; exports on the other hand will suffer, for a double whammy on the trade balance. At least the Fed can feel heartened that foreigner holders of Treasuries will not consider selling as their investments in local currencies hold steady or even show gains despite the rising yields. However, these effects have less impact on the mood in Main Street than the implied message that a strong dollar equates to a growing economy.  

For Main Street, Wall Street is an even more visible barometer of economic health than the dollar. A shortened Thanksgiving week seemed to have prevented a strong rally from developing as the stock market failed to extend the usual strong start to the trading day – or the rapid reversal higher on days when they begin with a weak open. Black Friday was of course a wash out for stocks as America either swarmed into the malls or surfed the web for bargains. Which means that the 18 000 target still escapes efforts to place a positive spin on the economy. The DJIA closed last week at significant resistance that has to be overcome before 18 000 is in reach. 

By next weekend we will know whether the NFP employment data extinguished any hope of a launch for the precious metals, or whether the fuse was smouldering still, with lift-off just a matter of time. December is said to be a good month for gold and silver and probably, then, for the euro as well. Wall Street may go the same way as holiday shopping, and what this will be is not even worth a guess right now.

Euro-Dollar Chart

Euro-dollar, last = $1.0593 (www.investing.com)

So the anticipated support has failed to hold firm. The break is still minor and also is still short of new support at line R ($1.0593). Because of all the pressure on TPTB to counter-balance less than exciting economic statistics with ‘hard’ evidence that the economy is in fact growing, it is not surprising the dollar is that strong. There is not much else that can be used to impress Main Street.

Monday is month end and it is always of significance for professional players of the markets, so eyes will be on the rest of the week to see if the euro is going to slip below the nearby new support and/or recover back above line D ($1.0663). A break below the new support probably will confirm the extended bear trend. On the other hand, a recovery back above line D – with or without forming a small bifurcated low as sits below line B on the far left – should be quite bullish for the medium term.

Dow Jones Industrial Average (DJIA)

The new rally, off line W (16868), broke clear above lines B (16619) and K (16777) and also above line A (17741), to reach and hold at resistance at line L (17795). At first it reversed steeply lower, only to repeat what has happened so often after such a sell-off – a rally as steep as the sell-off was. The new rally could not break above line L and held there through the shortened week to close right at resistance.

Now we have to wait and see of the rally can continue or whether the DJIA will give up some of its recent gains.

Dow Jones Industrial Index, last = 17798 (money.cnn.com)

Gold PM fix - Dollars

Gold price – London PM fix, last = $1057.40 (www.kitco.com)

Despite the recent selling pressure, the gold price held at the support of line G, the bottom of the large wedge LG ($1067)- until the past week. Initially, it seemed as if the price might hold, but that may have been to draw in new buyers to be fleeced – as the week closed with a US holiday and then a day of very thin trading activity, it was the ideal moment to push gold below its long term technical support.

Should the price remain as low or dip even lower as the new week begins, there will be very few contracts standing for delivery, almost as if it were anticipated that the low stocks available on Comex would not be threatened by December deliveries. By achieving this objective the major shorts in gold bought time – and probably made a killing on hedge fund covering of short positions - but surely there was also much buying at these levels by gold bulls who have the funds to keep adding to their long positions in the knowledge that it is only a matter of time before demand for bullion will break the paper stranglehold on the price.

When that happens, the profit to be made will by far exceed the costs of carrying a losing position for so long. It is as close as a sure bet as one could wish.

Gold PM fix - Euro

Euro gold price – PM fix in Euro, last = €999.5 (www.kitco.com)

Weakness in the euro again helped to keep the euro price of gold above the support of the large triangle AS (€995.8), even though it could not hold the support at the bottom of bull channel KL (€1012) and has broken a little lower. Channel MJKL is a major bull channel and the break lower – should it extend clear below triangle AS to confirm the channel break – is likely to be medium to longer term bearish.

Given the abnormal situation in the markets, with widespread intervention and also a month end at the start of this week, this pressure was not a surprise and should continue through to Friday when the payroll number has its usual association with a renewed attack on the gold price. If that should result in a break below triangle AS – assisted perhaps by a stronger euro – it by itself a sign is not a sign that the bear market is intact, provided the break lower is of limited extent and duration.

Silver Daily Fix Chart

Silver daily fix, last = $14.11 (www.kitco.com)

The sustained and near extreme pressure on the price of silver the past few months at least supported a view that for some reason silver presented the biggest threat to stability in the markets and had to be kept under pressure at all costs. The price also dipped below psychological support at $14.00, but then failed to hold there for any length of time – so far. 

Rebounds overnight off the intra-day lows during US trading hours were sufficient to hold the London morning fix just above or at long term support of large pennant GS ($14.10), even though the pennant has closed. This may well imply that silver is seeing good demand at these prices and this could spell trouble for the shorts next year when delivery time approaches again. As for gold, it is physical demand for the metal for investment or save haven purposes that can spark the new bull market.

U.S. 10-year Treasury Note

The break above the bull channel JKL (2.144%) in which the yield had spent more than 2 years since July 2013, was a distinct bear signal. So far, this is confirmed by the steep market resistance along the bottom of bear channel VW (2.219%), while the resistance holds. It was being tested late last week and this week should reveal if the bear is still intact.

Recovery in the yield to break below line W also has to break below line B (2.164%) to ensure that a break below channel VW is not merely a switch to a shallower rate of change. It might be assumed that a bullish trend in the bond market may reduce the need to sustain the strong dollar, but the opposite can also be true – that a bull trend in bonds could attract an inflow of funds to keep the dollar firm.

U.S. 10-year Treasury note, last = 2.222%   (www.investing.com)

West Texas Intermediate crude. Daily close

It would seem that the price of crude is now settling sideways in a quite tight range between  resistance at line D ($45.31) and rising support along line S ($40.74) or even in a more broad range within the triangle SK ($46.13). Given that measures of global economic activity and trade are reporting a marked slow down, demand for crude should decline and help to keep the price of crude near recent levels. The effect of low prices on the extraction of shale oil in the US could counter the effect of reduced economic activity, but it may not be enough to change the global supply and demand relationship to where prices begin to increase substantially     

West Texas Intermediate – Daily close, last = $41.71

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