Tuesday, 24 March 2015

The nature of this rally

As readers know, recently, my models were warning me that gold may fail to break down immediately to new lows as so many bears had been expecting, and instead reverse course for a spell, and head north.

So far, that warning has played out.

The key warning signal was when gold recently declined for a rare nine straight days (without breaking to new bear market lows), creating an extreme downside over-extension in momentum that would likely need to be relieved.

The question now is how far could this rally go? Here and now, I really don't have any firm ideas, but I'm watching closely for clues. The gold chart is unusually sloppy, and any number of upside magnets ranging from $1208 to $1214 to as high as $1220 or even the low $1250s may be pulling on gold here.

Because of the sloppy gold chart, I really don't have a strong sense of where this rally may go, so my preference is to just observe.  But I'll say this -- nothing would surprise me here: I think the odds are about 30% that gold suddenly craps out again and heads south before hitting one or more of those potential targets above $1200.

There is another factor at play: the U.S. dollar. Many analysts now seem to be expecting a rather large correction from the dollar. The dollar has been on a tear for over eight months running -- highly unusual. The big reversal last week may or may not be flashing a warning sign of a more extended correction to come. IF -- and it is a big IF -- the dollar corrects in a more substantial way in the days and weeks ahead, gold may get an unexpected tailwind. I'm suspicious of the suddenly widely held view among analysts the dollar may correct in a severe way. The market rarely follows the majority view.

If the dollar were to correct even a little further, it could start to bring out renewed calls for the dollar's demise from the bunker crowd, and could really encourage some gold bulls that the bear market bottom is really in. But I have doubts about a really severe dollar correction here.  My sense is the correction in the dollar will likely threaten to go much lower, but may not carry through with the threat. I could be wrong, of course.

If the dollar corrects some more, as seems likely, one or more of those gold targets in the $1200s could possibly come into play.

It seems there are quite a few moving parts in play here, and in the short-term any number of outcomes seems possible.

This "surprise" upside reversal in gold doesn't change my view that gold remains in a bear market. That being said, I am not complacent about the potential strength of the current upside reversal. Whether that potential actually plays out remains to be seen.

This will be my last post for quite a while -- and it's possible this may be my last post. I'm taking an extended break from blogging. I need more time to explore some potential discoveries I may have uncovered in the behaviour of the precious metals complex. The only way to get that time is to put aside blogging.

Best of luck to everyone navigating these challenging but always intriguing markets!

Friday, 20 March 2015

Round numbers

Big round numbers tend to be natural resistance points.

One such round number I have my eye on is the 100 level in the USD index.

In the last couple of days, the dollar poked above that big round number (for the first time in about 12 years) then spiked down and recovered. As I write this well before the market close, the dollar is down again hard (not shown on chart below, which is a day old.)

It's the spike down off the 50-day moving average of the dollar index that has my attention.

At this time, I believe that candle with the long wick is inconclusive, though today's weakness in the dollar may change that. Many simply view it as a bounce off the 50-day. However, it could turn out to be a warning signal of impending weakness in the form of what is called a hangman candle.

The dollar has been going up for a remarkable eight straight months (going on nine); a rest to refresh may possibly in order. Hangman candles often form after a prolonged uptrend. The dollar has certainly been in a big uptrend, and that is one big candle with a big wick.

Should the dollar enter a corrective period for a spell, it could bolster gold, at least temporarily. Whether that candle is warning sign or not , well it's a little too early to say. But I'm watching the action in the dollar closely -- just in case. How the dollar closes out the week will likely be important.

Thursday, 19 March 2015

The market always does what it is supposed to do...

I've been unable to post recently as I've been travelling. But I have been keeping an eye on the markets.

The warnings I flagged in previous posts about the precious metals markets being oversold and possibly due for an upside reversal at anytime came to pass on Wednesday when the U.S. Federal Reserve open market committee issued a statement with a dovish tone.

My observation from scanning precious metals forums is that many bears backed up the truck on the short side as gold appeared ready to make a major breakdown earlier in the week. The breakdown didn't materialize and now that gold has bounced hard many bears are now taking the reversal in stride -- and many bears appear to be shrugging it off.

My models show this cockiness of the bears may possibly be misplaced in the very near term, and there may be a risk the upside reversal in gold could extend, possibly with some unexpected vigour. There are no guarantees in the markets of course, but I continue to heed the cautionary signals from my models that are warning bears to tread carefully short term.

By some shorter-term chart measures, the recent oversold levels in gold rivalled those seen at the 2008 panic lows. That type of short-term overextension to the downside is a potential set-up for an upside surprise, at least to my eyes.

The apparent complacency of so many bears may be a flag the market may be in a mood to taunt them.

There's an old saying in the market: The market always does what it is supposed to do -- just not when.

Time will tell.

Friday, 13 March 2015

Will gold close out the week with 10 days straight of declines?

As I write, well before the stock market close, gold is trading in the red again (along with the mining indexes).

If gold closes out the week on a down day, gold will have closed down for 10 consecutive days in a row. That is highly unusual and extremely rare if it happens.

For gold, a naturally volatile item, a 10-day steady run in one direction would be something out of the ordinary.

Thursday, 12 March 2015

Gold down a rare nine consecutive days

With the decline in gold on Thursday, gold is down nine consecutive days.

That is extremely rare action, with little precedent in the past 15 years.

Betting on a tenth consecutive day is betting on extreme odds.

I submit bears may wish to consider exercising a healthy dose of caution here.

Are bonds putting a bid under gold?

I've been watching the U.S. bond market and gold this morning with interest.

As a generalization of late, rising bonds (lower yields) has tended to support support gold, while lower bonds (rising yields) has tended to put pressure on gold. Relationships in the market do not always correlate indefinitely -- that just appears to be the relationship at this time.

What I am seeing is that the U.S. bond market is once again rising, despite the ongoing strength in the U.S. dollar, and the market's assumption of rising interest rates in the U.S. on the horizon.

The current, somewhat surprising strength in the bond market appears to be putting a bid under gold.

Here is chart of a U.S Treasury bond fund -- with the gold ETF GLD plotted below -- showing the action:

Many bears appear perplexed that gold hasn't yet broken the 2014 lows. The chart above may partly explain why gold stubbornly refuses to break down, at least for now.

Frankly, I'm not entirely sure what to make of this. I'm keeping an eye on it. IF this rise in bonds picks up more steam in the days ahead, gold bulls may get a welcome, but likely temporary, respite.