The Swan Has Landed…Confused

July 2, 2016

In the run up to the referendum, much was said about the absolute horrors that would descend on the world should the Brits be so callous as to depart from their association with their European friends and erstwhile enemies…and consequently leave them to stew in an EU without Britain. Not to mention the isolation and financial desert to destroy the British economy. Really terrible prospects it was. Then, when late on the 23rd it became clear that the disaster was really happening, and into Friday, the markets went bonkers as investors flew en masse to seek safety in bonds. It was true blue panic! However, over the weekend a miracle happened! All markets kicked higher in a steep recovery that left no doubt that everyone was mistaken; Brexit was not a disaster, but the beginning of new prosperity! As is to be expected, that left the poor Swan completely confused!      

The DJIA even breached the once distant 18,000 level again on Friday, but failed to hold it into the close before the Independence Day long weekend. Very tough task on the DJIA support to even have pushed it that high on the first trading day after half-year end when every fund manager is selling the equities bought to improve his fund’s positions on the ranking list before they get stuck with them. Perhaps truth only lies in the DJIA as traditional safe haven; after an initial recovery when most of the investors believed the fairy tale of a tame Brexit, and the 10-year yield moved higher again, it soon reversed and is plumbing never before seen lows. There are some people who clearly seek safety amidst uncertainty.

Oh, and there are also the old-timers who know that the gold and silver retain their value during good times and bad, apart from when brute force is used to silence the messenger of financial bad news. The London fixes of the metals were up month on month by 10.3% for gold and an inspiring 21.6% for silver!  In the wake of Brexit, the DJIA closed at 17,140 on Monday, 27 June, but recovered by 4.7% to close at 17,949 on Friday, truly a great effort by the PPT!

It was striking to see how intra-day trading behaviour on Wall Street changed later during last week from what had become the usual behaviour; instead of sudden and steep jumps in the DJIA, there was now a steady grand right from the opening to closing time. Flurries of selling in the past had pushed the DJIA much lower, but this time the DJIA hardly budged lower before resuming a steady rise. Desperation is a hard task master! However, so far 18,000 has been an elusive target.

Between them, gold, silver and the yield on the 10-Year Treasury Bond are acting as barometers that warn many astute traders and investors do not accept the bluff of a tame white swan landing in the UK and that all will be well. Some major players are of the opinion that it is better to be in what are widely believed to be bubbles in risk of being pricked than to be in equities and other usual investments. As always, time will tell, but I believe the major warning sign is the performance of silver.

It has been stated here for much longer than the past year that silver presents a bigger problem for the big banks than gold. The fact that it is now reacting higher at a much higher rate than gold shows that this belief is shared by people with the funds to act on it and to buy silver before supply gets threadbare. Readers who are not yet partially invested in silver (and gold!) in metal form may have little time to do so. Apart from the price running steeply higher, the problem of limited supply is not far away.

Euro-Dollar

Euro-Dollar, last = $1.1138 (www.investing.com)

Brexit and a stronger dollar last week cut the legs from under the euro and it broke well below the recent bull channel, KL ($1.1203). Line W ($1.1029) is added to the analysis as a possible lower rising trend for the embattled euro while the EU tries to identify and digest the potential effects from Brexit, and a threatening risk of others following the UK example. Of course, a recovery back into bull channel KL will be a positive sign that the effects of Brexit will not be as sever as initially thought, but it could also be the result of new problems in the US economy that carry the US dollar lower. Until more clarity is obtained, it is presumed that the new euro support along line W will hold. 

Dow Jones Industrial Average (DJIA)

As mentioned in the introduction, Wall Street had a severe downward reaction to a UK that will be departing the EU.  This was a fleeting reaction only as – similar to so many selling spikes since at least 2011 – the recovery was instantaneous and as steep as the spike lower.

It was not a question of tentative buying in the hope that a new rising trend could take hold. No, it was more as if a jet engine was switched on and the after-burner engaged as the DJIA rocketed higher, generally to exceed the level from where the selling panic had started. Line B (18007) and now line P (17949) have acted as key resistance to recent attempts to achieve a recovery back above 18 000 – certain to calm the fears about the economy that could be developing along Main Street – and thus politically with a high priority in this election year. So far the few minor breaks above that key level have failed to hold – as had happened on Friday again. 

Dow Jones Industrial Index, last = 17947 (money.cnn.com)

Gold PM fix - Dollars

Gold’s sprint higher last week, seemingly largely driven from the new metal futures exchange in Shanghai, has taken it clear of the recent resistance at lines C9 $1281) and Q ($1290) as well as the long sought and strongly defended $1300 level.  This move higher was however not sufficient (yet?) to enable a recovery back into the long term bull channel that has line V ($1358) as its lower boundary. However, that price no longer seems out of reach as gold managed to achieve a PM fix of $1340 on Friday.

Steep runs in any market typically results in a pull, back as soon as the price over-shoots what a majority of traders/investors consider a reasonable advance. On the other hand, there are occasions where a new bull simply ignores what conservative traders believe is reasonable and continue to surge with no more than some brief and minor hesitations. This week should reveal if the break higher after suppression for such a long time will be one of these unique cases.

Gold price – London PM Fix, last = $1340.00 (www.kitco.com)

Gold PM Fix - Euro

The euro lost even more ground against the dollar last week after the Brexit voting. That and the stronger price of gold helped the euro price of gold to really challenge the resistance at line R (€1198.8) – this after breaking quite easily above resistance at lines A (€1125) and W (€1180).

Line R has acted as strong resistance for a long time and breaks higher were mostly of brief duration while the price confirmed the presence of other strong trend lines before reverting back below line R. Of course, this could happen again on a break above line R – that a break higher would be brief and limited in extent, soon with a return to below line R after the other preferred gradient – whether identified by one of the trend lines or not – has been completed.

Here, the next logical resistance only sits at line V (€1301) which is a long way off. It does not mean, however, that there are other resistance levels not identified in this analysis. Most importantly, though, is that the euro price of gold remains in bull channel KL (€1108) which leaves a large cushion of comfort. A move lower to test the resistance at line L calls for either a sharp decline in the price of gold or further collapse in the value of the euro – probably more likely than a much weaker price of gold. 

Euro gold price – PM fix in Euro, last = €1202.9 (www.kitco.com)

Silver Daily Fix Chart

Silver Daily Fix, last = $19.24 (www.kitco.com)

Just more than a week ago, on the Friday morning, silver had its first London fix at a level above $18.00 since early in 2015. That was really just an optimistic flash in the pan, because it was not long before the price had retreated back to settle near $17.50. As has happened often, silver is really not allowed to poke its head above certain significant resistance levels and perhaps ignite more optimism among the silver bulls.

Last week changed the whole scenario. Silver started the week quite slowly, doing by steadily moving higher, tick by tick, with limited and brief retracements. Then on Thursday t took off at a charge, later to easily break above the Comex $19.00 level and on Friday later coming close to challenging the $20.00 psychological level in the after hours Shanghai trading.

This now confirms the long term analysis of silver on a chart of its monthly close that showed silver at the beginning of a new major bull market as early is January this year. It is now only a matter of time and we should see silver trying to set a new all time high. Not in days and not in weeks, but perhaps in a matter of months to a year or so. The physical supply is so restricted that when demand really takes off – when silver makes the Main Street headlines – the price will rocket.

US 10-Year Treasury Bond

U.S. 10-Year Treasury Bond, last = 1.456%   (www.investing.com)

On Friday a week ago, after the Brexit vote, the yield spiked lower to reach as low as 1.406%, before reversing higher again. This is a new all time low yield – or its maximum price equivalent – for the US 10-year Treasury note, much lower than its previous all time low at 1.430% in July 2012. When the yield retreated higher as a sign that the degree of panic that reigned in the bond market was subsiding, this was confirmation that Brexit was no more than a grey swan.

However, soon the yield dropped again, as some major market players decided that the swan was a very young one and would soon begin to darken and become black. The yield then settled, with some volatility not far of the new all time low in what surely has to be a bubble – UNLESS the sharp move to lower yields following Brexit caused a small tsunami to run through the massive amount of global interest rate derivatives! 

At the time of the steep move, I was wondering about these rate derivatives and how many hedge funds and banks were caught on the wrong side of the Brexit vote after making a play for bond yields to move higher when the remain vote won. This is perhaps a better guess as to what is happening with bonds. The question now is whether any major bank is in deep trouble and will require a bail out of some kind – probably in secret! – to survive opportunism and a wrong analysis on Brexit. 

West Texas Intermediate Crude. Daily close

WTI Crude – Daily close, last = $49.27 (Investing.com)

After the failure to permanently hold the recent rally above the $50 level, signs that demand is still less than the supply, kept the price of crude back below $50/bbl and in the process remained below the steep support of channel UV ($51.40). Events in the UK and in Europe may not have immediate or direct effect on demand for WTI crude, but the rebound off support at line D ($46.61) that challenged the resistance at line V failed to extend and settled in a sideways band above support from line D.

The break lower that is holding so far, is bearish for the near term, perhaps longer. It now all depends whether support at lines D and T ($46.27) can manage to hold.

©2016  daan joubert,   Rights Reserved      

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