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Ignition - Then Lift Off Soon?

November 23, 2015

Three markets, closely related because of the shared influence of the US dollar, last week tested or is testing major long-term support and has held – so far! Should the support continue to hold into a rebound, gold and silver may have made their long term lows, and is close to starting off on a new bull market; ignition point, followed by lift off. Nothing in markets is ever certain, but the coincidence of gold, silver and the euro finding key support in the same week could be a sign of what will happen soon – while the support holds!

These lows on gold, silver and the euro occurred at the same time as the US dollar index reached a post March 2015 high. The euro also failed to reach its March 2015 low, thereby demonstrating a consistent relationship with the dollar index. However both gold and silver has now set new long term lows: gold since February 2010 and silver since September 2009. This extraordinary weakness – which is now becoming widely accepted to be induced and not natural – must have a reason beyond a mere whim. It is something all know has to end when available stock of the metals dry up to the extent that actual physical demand can no longer be satisfied on the western metal markets.

If the forces placing the sustained pressure on the metals know this too, why would they persist with something that has to end, and perhaps quite soon, is signs from the market place are interpreted correctly. Is the problem still seated in both these metals, or has silver become the main overriding problem, as speculated here? The coming week should reveal some answers; All three markets ended, and held – so far – at longer term technical support. If they all do reverse higher into a lift off, it would be a positive signal for gold and silver in particular.

Whether it can really be expected to happen this week should depend very much on the state of open interest in December contracts, mainly those contracts with prices below the ruling prices at FND on Monday, 30 November. It is near certain that part of the recent pressure was to prevent requests for deliveries and now that the lows could be in, this week should see the pressure sustained to limit such requests. It is even possible to see new lows, breaking briefly below the technical support. Thus a recovery starting only in December is quite possible – if the reasoning is correct.

At the same time, much effort and funds flow into the need to get the DJIA above the 18 000 level again. Given the rather bad news – even when sugar coated – that comes from the statisticians, a strong Wall Street is an imperative to ensure that no warning flags about the economy are raised within view of main Street. Therefore, we can expect rallies on the Street irrespective of any bad news that may break, in response to this demanding need to push the DJIA 200 points higher and to hold.

A year ago it seemed certain to me that something would break down during 2015. It has not happened – yet! There is still a month to go and in view of the absolute desperation visible in the increasingly blatant market intervention, much could still happen during the last month of the year, now it seems there could be ignition.

Euro-Dollar Chart

Euro-dollar, last = $1.0646 (www.investing.com)

There is little more to be said than the euro has reached significant support and it could be the end of its bear market. A reversal higher, just off line D ($1.0659), still has to clear the resistance at line Q($1.1209), some distance away. There is ample room for the euro to move sideways before then, while line D descends lower. It all depends on whether the key support along line D holds.

Dow Jones Industrial Average (DJIA)

The new rally, off line W (16789), broke clear above lines B (16612) and K (16807) and also above line A (17734), to reach and hold at resistance at line L (17825) – at first reversing just lower and now again testing the resistance at line L. There is little doubt the rally off the lows near 16 000 has been so engineered to ensure that the DJIA and Wall Street send the ‘right’ message to Main Street; also to all foreign investors, who already have the stronger dollar in their favour.

It would be a brave thing to say that the resistance will hold and that a trend lower will resume. However, if gold, silver and the euro could hold their support, this may imply that there is some general change happening. If so, the DJIA could be a part of that change in market sentiment. This week should provide some indication.

Dow Jones Industrial Index, last = 17824 (money.cnn.com)

Gold PM fix - Dollars

Gold price – London PM fix, last = $1081.75 (www.kitco.com)

Last Wednesday the PM fix at $1067.75 was a fraction below the support of line G, the bottom of the large wedge LG ($1068). Since then there had been a rebound off the support with gold holding mostly above $1080 since Wednesday. November 30^th is first notice day for December futures and it will be high priority for everyone that is short to ensure that the gold price is low enough to place a tight limit on the number of contracts that could stand for delivery.

Ideally, that would require the price to be near or below $1070 as this week close – hopefully without having to go short of too many new contracts that might become a problem in the new year. Given the kind of support gold has received recently, it is not going to be an easy or trivial task to survive FND.

Gold PM fix - Euro

Euro gold price – PM fix in Euro, last = €1012.2 (www.kitco.com)

Weakness in the euro helped to keep the euro price of gold close to support at the bottom of bull channel KL (€1009), without slipping lower to test key support at the bottom of the large triangle, AS (€995) – as the dollar price had done in its wedge. It still leaves some room to move lower before major support is breached.

Given the abnormal situation in the markets, with widespread intervention and also the month end approaching, it would nevertheless not be a surprise if various prices do break below significant support – provided it is of limited extent and duration.

Silver Daily Fix Chart

Silver daily fix, last = $14.29 (www.kitco.com)

The sustained pressure on the price had silver, just like the gold price, last week at a multi- year low, if only by a small margin compared to recent prices while testing support along line S ($14.12). The break from wedge SG ( $13.95) promised a new bull trend, but we all know that technical signals can get corrupted by massive and sustained intervention by powerful forces.

So far, these forces have effect, but to a surprising degree prices tend to obey the existing chart patterns, even if the volatility is higher while false breaks do occur at times. The break higher from the long term wedge challenged the resistance at line D ($16.34), but failed to break higher. Now there is a new test of support at line S and – if the support should hold with a new rally to begin soon – the test of line S will count as a goodbye kiss on line S after the break higher; a quite valid reaction within this pattern recognition methodology.

Should support at line S give way, line G will come into play as the second level of support. Silver will have to break clear below the $14 level and line G and then hold there before one may assume that the bear market can continue much longer. If it does happen so, the weakness is likely to extend to gold and the euro as well, with widespread ramifications to other markets.

U.S. 10-year Treasury Note

The latest ‘hurry up’ phase in the yield on the 10-year US Treasury note, two weeks ago, has settled into a fresh ‘wait’ phase. The rebound higher off market resistance at lines F (2.028%) and W to remain in bear channel VW (2.184%) ended abruptly in a gradual slightly bullish consolidation or ‘wait’ phase. From the perspective of a foreign holder of treasuries, a stronger dollar compensated for the weakness in the bond market and thus did not trigger the need to close positions.

The break above the bull channel JKL in which the yield had spent the more than 2 years since July 2013, has been broken to the upside to give a distinct bear signal. The question now is whether the market resistance along line W will prevent a new bull trend to develop. Recovery in the yield to break below line W also has to break below line B (2.165%) to confirm, but still with increasing distance before a break back into bull channel KL can be achieved.

U.S. 10-year Treasury note, last = 2.264% (www.investing.com)

West Texas Intermediate crude. Daily close

It seems that $40/bbl is a psychological support level for WTI crude. The recent dip in the price has broken below the technical support at line T ($42.00) and then held the break without declining any further. This is nevertheless a far too low price for shale oil producers to service their debt out of positive cash flow from operations.

This has the potential to create two kinds of problems. The one is that as producers are compelled to pull rigs and stop drilling, the supply from local sources will dry up and make the US even more dependent on imports. This oil problem is however the lesser of the two. Far greater impact on the financial system could come when debt of the shale oil producers go into default.

With debt one should always keep in mind that while the original amount of all the debt could undermine the financial system should much or most of it go into default – perhaps affecting some banks more than others in what may become a cascade – it is the debt insurance that could be vastly bigger than the amount of debt itself. It is apparently not necessary for someone to actually own debt to take out insurance in case of default.

That means gamblers see a major lender in trouble as opportunity to bet the lender will not survive. Gearing on such a bet is very good, just like betting on an outsider at the track in the hope that a small miracle will happen, but perhaps a bet on the shale oil debt is even better than on an outsider. Depending on the amount of such gambles on default insurance, the total damage to the financial system could easily be many multiples of the original debt – as was discovered when securities based on mortgages defaulted in 2007/8.

West Texas Intermediate – Daily close, last = $41.49