Thursday, 24 April 2014

Cardiac action


"I try to stay in a constant state of confusion just because of the expression it leaves on my face." -- Johnny Depp

Anyone trying to trade the action in gold and the miners over the past few days has likely needed a new pair of underwear.

Gold and the miners are acting like the line tracings of an EKG print-out. (An EKG is a heart health test.) That's because in the past few days, both have been ping-ponging back and forth like an EKG test result.



Monitor and Cables stock photo by www.pixmac.net

In the past couple of days, the miners have been charging ahead strongly, while gold was essentially flat.

Then on Thursday (today), gold cratered, then rebounded strongly.  The miners cratered, but so far  (I'm writing before the close) they haven't recovered sufficiently to confirm gold's rebound.

I chose the analogy of an EKG because I believe the action may actually be a sign of distress in the precious metals markets, comparable to to a cardiac patient who is having chest pains before the big event.

In other words, I believe the ping-pong action may be masking deterioration. Because my view has returned to being bearish, I view the recent rally in the precious metals complex off the December lows as likely being one of the most devious bear market rallies in gold's modern trading history.

I view the rally as unusually devious because:
  • Some key miners and some key gold miner indexes recently made bullish crosses of their momentum indicators on the monthly charts. Crosses on the months charts tend to signify big-picture trend changes. 
  • Gold made a "golden cross" on its daily chart (when the 50-day moving average crosses above the 200-day). It made this cross after lengthy price deterioration, which makes the cross more significant. 
  • Some individual miners had spectacular rallies off the December bottom that rivalled the rallies off the bottom made in the 2008 financial panic lows. 
In other words, this rally, especially near its recent peak, was highly convincing. Indeed, it continues to convince many that the bottom has been put in.

I've reviewed some of the signs of technical deterioration that have since occurred in previous posts. To recap, the big red flags as I see them are:
  • False upside breakouts in the charts of gold and many key miners. Major false upside breakouts are usually an unwelcome sign in the precious metals complex. I view them as bad news until proven otherwise. 
  • With the false upside breakouts, and the subsequent price give-back, the move off the December lows no longer resembles bottoms made at major bear market lows in gold and the miners. 
  • A number of key miners are showing signs of serious and alarming price deterioration.
  • When gold and the miners appeared to have bottomed in December, the apparent third leg of the bear market appeared to have truncated as the rally picked up steam. That can happen -- there are no rules in the market.  However, the subsequent deterioration in the market posture suggests the third bear market leg may yet complete. Big bear markets tend to have at least three distinct legs. The third leg, when fully expressed, is often where investors throw in the towel in utter disgust. 
As well, the technical action in the gold miner ETF GDX is showing striking similarities to the bear market rally that started fizzling out in the last quarter of 2012 and early 2013:


I refer to such chart formation similarities as "echoes". I take certain types of potential echoes in the charts seriously, and this is one of them. My observation is that major moves, particularly in the precious metals markets, tend to unfold in waves. Often, these waves will feature repeating chart behaviours. Properly identified, these repeating chart behaviours can often provide clues to possible future price direction.

On Thursday, the miners fell hard, even with gold up for the day. This reversed the action of the past couple of days, where the miners were strong, while gold was weak.

There is a reason the miners are not confirming the action in gold on Thursday. Here is a chart of the gold ETF GLD, my proxy for the gold action. Note the back-test of the neckline of a possible head and shoulders top:


That possible head-and-shoulders top, IF it activates, is suggesting gold may intend to make a trip back down to test the area around the December lows in time.

To have any hope of turning the tide, the bulls need to charge hard and push GLD/gold back above that possible neckline with conviction in the days ahead.

The bulls have a headwind: physical demand appears to be on the wane, according to a report by Reuters:

*********************************************

Notable: Reuters reports that gold outflows from the gold ETF GLD vaults continues to decline, and the gold build in GLD inventory since the beginning of the year has been erased. Reuters also reports Asian demand is not as strong as it has been.




Sunday, 20 April 2014

Gold as loan collateral


"(Deflation) is the opposite of inflation, but equally serious to the borrower." -- Jack Kemp

I was in a fast food outlet the other day, and it was sporting a new temporary special: a small coffee for only 25 cents. When I saw that, I wondered: is this a sign of the times?

Is 25-cent coffee a sign of the times?
coffee stock photo by www.pixmac.net

The root cause of the ongoing weakness in the precious metals complex appears to be the entrenched disinflationary backdrop in the world economy.

The problem with disinflation is that it can lead to flat-out deflation, which has a tendency to increase the value of money relative to assets.

25-cent coffee -- even if it is a temporary promotion -- isn't a particularly gold-friendly omen.

***********************************************

The big news in gold was that the World Gold Council issued a report will a reference right at the very end of the report about an estimate that enterprises in China may be using as much as 1,000 tonnes of gold as collateral for loans and lines of credit.

Such arrangements have been long common concerning copper and iron ore in China. It wasn't a surprise to many that gold was being used in the same way. The surprise was the possible tonnage involved.

The amount of gold that may be tied up in such arrangements certainly surprised me.

The concern, of course, is that if the Chinese authorities clamp down on this type of loan collateralization using commodities, an awful lot of gold could wind up being sold into the market. Similarily, it seems at least conceivable that unexpected market stress or a credit squeeze could force liquidation of at least some of the gold collateral to repay the loans.

Gold used as loan collateral to get around financing restrictions also puts a question mark over the scale and nature of Chinese gold imports. Many gold bugs had assumed that the large amounts of gold going into China was moving into strong hands and that most of this gold would never hit the market again.

In my view, gold used as loan collateral is quite different from an investor socking it away in a vault.

Investors are always looking for the WHY when a market moves. It's possible this large tonnage of gold in China that is being used as loan and credit collateral is gold's weak link in terms of physical demand.

It may at least partly explain what I see as the currently droopy charts for gold, silver and the miners.

Food for thought.


Tuesday, 15 April 2014

Is the PM sector on the cusp of a major sell signal?



"Courage is resistance to fear, mastery of fear, not the absence of fear." -- Mark Twain

With Tuesday's plunge in gold, silver and the miners, the prospects for the precious metals complex have started to turn increasingly grim in the near term, according to my models.

Is the bear readying for a comeback?
black bear stock photo by www.pixmac.net

Tuesday's plunge is further confirming my view that the recent rally may have been one of the most devious bear market rallies in gold's modern trading history.

If so, the risk as I see it going forward is not a modest decline -- but a meltdown. Possibly a crash. That's because the real risk is that the third leg of the precious metals bear market  -- which had unexpectedly truncated following the December lows -- may be about to resume and complete.

IF the third leg resumes, as I suspect is likely, the damage, particularly to the miners, could be of significance.


That's because the third leg of a bear market is often where the real carnage takes place. That's where the final devastating washout tends to take place, as long-term holders give up hope and simply throw in the towel in disgust.

IF the third leg of the bear market resumes, my expectation is that gold will fall below $1,000 and the HUI gold mining index will get cut in half from current levels -- or worse. Under such circumstances many individual miners could simply implode, depending on their finances and the quality of their ore body grades.

That being said, the flip side is that IF the third leg of the bear market resumes, the coming bottom will likely represent a significant opportunity for those who are prepared for it.

The big news in Tuesday's decline was the drop in silver. Silver fell to the lower boundary of a possible coil formation, and is threatening to break below the coil's bottom boundary. Such a break would be ominous for the entire precious metals complex. Here is a chart of the SLV, the silver ETF, showing the action:


IF that coil breaks down in silver/SLV, silver is likely to sell off hard in the weeks ahead.

With Tuesday's decline, both the HUI gold mining index and the junior miners ETF GDXJ are both trading below the 50% retracement level of the rally off the December lows. That's bearish.


Further, that potential head and shoulders top in the gold miners ETF GDX is getting closer to activating. IF it does activate, new bear market lows for the GDX likely lie directly ahead:


To provide some balance, bulls may see a head and shoulders bottom in the GDX:


I see too much negative action overall in the charts to put much stock in a bullish outcome, but am aware of the possibility. There was late buying of the miners that took them well of the worst of the session's lows, which I assume was due to a combination of short covering and bulls who think a major bottom is completing in the miners.

My view at present is this is likely one of the most devious bear market rallies in the PM sector's history, and it is working to keep bulls' hopes alive as along as possible. Time will tell.

As for gold, that descending coil appears to be the operative pattern for the Noble Metal:


Until proven otherwise, I am assuming this chart pattern is the controlling pattern in gold. That gold's descending coil had a false upside breakout, makes the coil especially bearish in my view. As such, I expect the coil will express itself fully IF it breaks to the downside.

The bottom line is my models warn that a breakdown of the coil in silver and the head and shoulders formation in GDX would be a strong signal the third leg of the precious metals bear market has likely re-activated. With Tuesday's plunge, both GDX and silver appear to be toying with possible major chart breakdowns in the days ahead.






Monday, 14 April 2014

Why the miners look weak "under the hood"


"A little thought and a little kindness are often worth more than a great deal of money." -- John Ruskin

Gold and the miners popped with the renewed tensions in Ukraine Monday morning.

Despite the pop, I continue to be suspicious of the bullish case in the near term. I continue to believe the odds favour the scenario that the current rally may be one of the most devious bear market rallies in gold's modern trading history.

The miners tend to lead the metals. The action in the miners looks toppy to me. Here's a two-hour chart of the gold miners ETF GDX that explains my hesitation:


The 2-hour chart allows a view of the market action in detail. From a bullish perspective, this chart gives me the shivers.  There is the makings of a classic head and shoulders top. I don't like the look of it.

To ease my concerns, the bulls need to press the miners higher, and invalidate that potential topping pattern.

IF that topping pattern in the GDX were to activate, it is projecting new bear market lows.

There is something else in the action I don't like. In the GDX, the 15-day moving average (in green in the chart below) is below both the 50-day and 200-day. A similar set up is what occurred as the previous big bear market rally in 2012 began to give way to a renewed bear market:


I would want to see that 15-day moving average back above both the 50-day and 200-day to allay my concerns.

Finally, the junior miners led the rally on the way up, and appear to be leading the way down. The junior gold mining ETF GDXJ has closed back under the 50% retracement level of the rally off the December lows for the second consecutive day:


In my books, the action in the GDXJ is not an encouraging omen.

In my work, I also use what I call echo formations to track gold and miners movements. For several months, gold had been tracking a very detailed long-term bearish echo pattern, which broke when gold rallied off the December bottom. More recently, gold then appeared to be tracking a bullish detailed echo pattern, which broke on the recent retracement.

As far as I can tell, gold is no longer tracking any long-term detailed echo patterns. Gold appears to be in new territory, carving out new price behaviours. If correct, I believe the explanation for this may be the current apparently deflationary setting, which is a new development for gold since it was completely unhinged from the monetary system in the early 1970s.

IF this thinking is right, gold and particularly the miners may defy conventional wisdom and measures in how they perform in the months ahead. I'll have more to say about this in future posts.





Thursday, 10 April 2014

Make or break for gold?


"The hardest thing to understand in the world is the income tax." -- Albert Einstein

As readers know, I am concerned the recent rally in the precious metals complex may turn out to be one of the most devious bear market rallies ever seen in the sector.

The recent rally in gold and the miners has fallen short of what one would expect off a major bear market bottom at this point in time. And when the rally reversed, it left in its wake false breakouts in gold and many miners. Taken together, I view the action as a potential warning signal the bear market may not have finished its work.

False breakouts are always a big red flag in my books -- especially in gold.

The way I see the market, gold broke to the upside of a descending coil formation. Upside breakouts from descending coils are often powerfully bullish (because these type of coils are generally bearish and usually break to the downside). The upside breakout was targeting the mid $1500s in gold in time.

Here is a chart of the gold ETF GLD, my proxy for the gold action, showing the breakout from the descending coil:


So gold's breakout from the coil was huge deal at the time, a significant bullish confirming signal with big potential.

However, during the recent pullback, gold fell back into the coil -- negating the breakout, and making it a false one. (At the time, a possible bullish echo formation I was tracking also broke.) I viewed this false breakout of the coil at the time as ominous. The action in gold proved a truism of the market: that the main rule of the market is there are no rules.

Gold is currently back-testing the coil boundary from below, and faces other overhead resistance as well.

Here's the problem: by falling back into the coil, the coil is now operative again but from a bearish perspective until proven otherwise. The price target of the descending coil is well below $1000. That's a long way down from current levels, and many miners would look like a steamroller hit them if a drop of that magnitude in gold were to occur. Chart reading is not a guarantee of a future result, of course, but I take the warning of the chart above seriously because I see so many other warning signs in my work.

That's why I can't be bullish here and now. I view the risk as just too great that the third leg of the bear market could re-ignite at any time, if it hasn't already. And the third leg of a bear market is often where the real carnage takes place. At a minimum, gold needs to close back above the boundaries of the descending coil to begin to turn the tide. I'll believe it when I see it. I never like to see false breaks in the metals. By and large, they are bad news.

Even though gold and silver were in the green on Thursday, the miners as a group closed solidly in the red. The chart above likely explains today's divergent, nervous action in the miners.

As for the miners, I continue to monitor the 50% retracement level of the recent rally. Should the HUI gold mining index and the GDXJ junior gold miners ETF together fall below this level on a sustained level in the days ahead, I would view it a strong warning signal the bear market may be on the verge of resuming with gusto:

HUI:


GDXJ:

Today, GDXJ did a hard test from above of its 50% retracement level of the rally. If GDXJ falls through the 50% level on Friday, it will be a poor omen. That's because the juniors led the sector during the recent rally, and they appear to be leading the way down.

A few weeks after gold made a bottom in December, the rally up until that point had been strong -- so much so that the third leg of the bear market appeared to have truncated. The warning from gold's current pullback is that the bear may be on its way back to finish off its work on that third and likely final leg.

Only The Shadow knows what gold and the miners will do next -- and he isn't talking.




Sunday, 6 April 2014

The third leg



With Friday's pop in gold, gold and the miners have broken back above the 50% retracement level of their respective rallies that started in December.

In the case of the miners, the rebound was notably weak, as the HUI gold mining index gave up most of its gains in Friday's session.

The HUI then pulled back to test the 50% retracement level from above, showing its magnetic function:


It's not unusual for the miners to toy with key resistance levels. I am watching to see if the HUI falls back under that 50% retracement level in the days ahead. Were the HUI to slip back under the 50% retracement level and hold under that level, I would view the action as ominous. Despite the positive action on Friday, I remain wary of the bullish case, at least in the very near term.

The recent weakness in gold and the miners is greater than is should be at this juncture, according to my models. As noted in previous posts, there are false upside breakouts all over the place -- in gold and many miners. I don't like the look of that.

In a previous post, when gold rallied strongly off the December bottom, I had noted that the third leg of the bear market had appeared to have truncated, as the rally was so strong it broke my bearish models at the time.


The recent weakness and false breakouts in the precious metals sector suggests the distinct possibility that the recent rally may have been among the trickiest and most devilish of bull traps -- and that the third leg of the bear market may yet be set to resume and complete.

Only the market knows the answer, but I remain on guard to this possibility.