A Telling Week Ahead

February 8, 2016

Last week’s comments were influenced by the abnormally low silver fix, at $13.58. It was not by accident, but had to be carefully planned an executed. Deliberate as can be. Consider that the bank on the fixing panel HAD to know that as very large projected sales numbers kept swamping all demand at the projected price – forcing a new attempt to achieve balance using a lower price – that it was all artificial. That either a large client – or, heavens forbid, the bank itself – was in such an absolutely critical situation that it could risk sabotaging the future of the fix and possible time behind bars to let the fix go down that low. Nothing less would justify the risks.

Coincidence?? Two possibilities rear their heads; one, that the culprit behind a low fix knew what was going to happen to silver this past week and had to get out of a derivatives position or risk survival. Two, that the position(s) clear by the low silver fix had resolved the reasons for the recent extreme pressure on the metal and now the price can be allowed much greater freedom, as has happened. To repeat, only a matter of financial survival can compel someone, either bank or client, to behave in he manner that resulted in the very low fix – and then without dumping the large volume on the market, since the price jumped right back, close to its earlier range. 

Nevertheless, whether pre-ordained or because of reduced pressure – not complete freedom of course!! – the precious metals saw their best week in a very long time. From the fix the week before to the close last Friday silver gained $0.98 (7%) and the price of gold gained 5% in similar fashion. The question is whether the frequent waterfall attacks last week – which were soon if not immediately reversed – warn of sustained attempts to keep a lid on the prices and that a major attack is building.

During intra-day trading, the DJIA shows frequent signs of ‘out of the blue’ rallies, typically just at the open, after the futures market had turned very bullish, or when the DJIA had to sink steeply under a burst of selling. The late afternoon rally is also a near constant, but is not always successful; there are sellers who had missed their price early on during the day and have learnt to wait until late afternoon when the ‘force’, is back to lift prices; often even turning the DJIA positive on the day. The turmoil on Wall Street was sufficient to send scared investors into Treasuries.

Wall Street as well as the other markets discussed here, other than the PMs, have held mostly steady and sideways last week, if with some volatility. These markets are still waiting to take full direction to reflect the changing fundamentals and – for some of them – mounting risk from changes in their fundamentals. In particular, a resurging Iran can upset the balance in the global crude market more than what  it has been recently. The recovery from below $30/bbl has provided a (manipulated?) boost to Wall Street as well as the dollar index. The latter, though, appears to have accepted that the oil crisis is not over and could even get worse and fell steeply on Friday. Perhaps in this telling week for many markets the DJIA is to reflect this realisation as well. 

Euro-Dollar Chart

Still little new to be said, as the euro is still churning mostly sideways against the dollar. While the dollar fell on Friday, perhaps as a result of the situation with crude oil, the euro could not benefit as Europe has to deal with the migrant invasion and thus have no edge on the dollar. The euro remains within its new bull channel KL, (K: $1.1370, L: $1.07136) without having to test support or resistance at the sides. The sideways drift is moving closer to the support at line L, but it is not expected to be tested this week; unless there is some event global central banks cannot control and suppress – or a new wave of migrant problems in Europe.

Euro-dollar, last = $1.0889 (www.investing.com)

Dow Jones Industrial Average (DJIA)

The 10% decline in the DJIA since the close of 2015 found support at the bottom of main bull channel XYZ (15821) two weeks ago, triggering a rally that closed right at the resistance along line K (16429) ten days ago. That week ended positive with a break back into bull channel VW (16300), but the decline last week was sufficient to drag the DJIA back below the bull channel.

As mentioned last week, line K is the top of bear channel JK, and it previously acted as strong resistance and support. Because the price of crude seemingly had become the psychological driver for the stock market – providing a lever for those who wish to see a strong DJIA – and with the WTI price of crude now mostly in its sideways band, with good volatility, Wall Street has to stand more on its own.

The big banks appear to have a torrid time at the moment and they often reveal in advance what is likely to happen to the economy – and thus to the rest of the stock market. Investors may just begin to act on that insight in this coming week.

Dow Jones Industrial Index, last = 16205 (money.cnn.com)

Gold PM fix - Dollars

Despite continuing and even persistent waterfall attacks on the price of gold during every trading day, gold last week started a rally to move it further away from the support at lines R ($1055) and Z ($1035).

After previously having great trouble in holding above support of line L ($1129), the bottom of the long term bull channel, the price last week managed to clear the resistance it offered and opened up a bit of a cushion.

The trend is therefore still bullish, showing more promise than before. However, too often when gold looks promising, there is the bolt out of the blue that hammers the price lower by often tens of dollars. Which is why this week is such a telling one for gold; if it could sustain the rising trend and move higher away from the support of line L, the future will look even brighter than it does right now. Gold lags silver at the moment, but once the bull market gets into full swing - when that happens! - the golden metal is bound to catch up. That is something to really look forward to.

Gold price – London PM fix, last = $1150.35 (www.kitco.com)

Gold PM fix - Euro

Euro gold price – PM fix in Euro, last = €1034.2 (www.kitco.com)

The sideways move of the euro against the US dollar, keeping to a tight range with not much volatility, enable the improving dollar price of gold to drag the euro price of the metal higher in the long term triangle AS (A: €1046) S: €1008), where it is on leg 5 of the triangle, after a brief break below line S. Normally, the break from a narrowing formation happens at or shortly after the end of leg 5. Room to move sideways in the triangle is narrowing, but is still ample for the near future.

Silver Daily Fix Chart

The decline in the price of silver since the high in 2011 is so wide the visual scale of recent changes in the prices is highly compressed. The abnormal low fix at $13.58, hardly shows up on the chart – but it does serve as anchor point for the steep line L ($14.11) to enable a channel ratio for channel JKL of 499:501, the most often seen ratio of all channels are for those that are evenly divided (500:500).

So far, the channel is holding firm, to set a limited down side at first if the support will hold if tested. The move higher last week took the price further away from line L and, if this trend can continue this week, prospects for silver will soon look more rosy. As mentioned in the introduction, the extreme low fix two weeks ago may just have cleared the reason why silver has been singled out during the last few months – and even longer – as the main target for price suppression.  

Silver daily fix, last = $14.91 (www.kitco.com)

U.S. 10-year Treasury Note

As the break below triangle NF (2.117%) had warned – and despite making swings between the support at line C (2.006%) and the resistance at lines V (2.38%) and L (2.30%) – the yield started a major rally on the break lower. My initial reaction to the break lower, based on the general comments that the bull market in Treasuries was overdone, was that the break would not last; that profit taking would soon see the yield back into the triangle. I should have trusted the technicals more!

However, the question still is whether China and other large holders of Treasuries may have ceased to off-load their reserves in quantity. Or was their such a large flight to the accepted safe haven that the buying frenzy overwhelmed any selling that was going on. Another factor could be that the Fed decided to purchase bonds aggressively in order to get the mortgage rate low enough to stimulate the private properly market?

Whatever combination of factors is responsible for the rally, the yield ended right at resistance at line D. It remains to be seen this week if the rally can continue.

U.S. 10-year Treasury note, last = 1.843%   (www.investing.com)

West Texas Intermediate crude. Daily close

The sharp spike lower held and reversed just short of support at line F ($25.95) to turn bullish as fast as the price fell to below $20/bbl. Resistance at line Y ($39.37) is the first hurdle to cross if the bull market is to continue much higher, with line D ($45.72) as the strongest resistance to a sustained bull trend. However, it is to be expected that the psychological $40/bbl, just off the resistance at line Y could set an end to a recovery crude.

The supply demand relationship still seems heavily weighted towards supply; with Iran now having greater scope for re-activating their oil fields – kept alive by their under the table sales to China and others – to full capacity and the global economy in a down trend, this imbalance may not change very soon.     

Should the presumed effect of the price of crude on Wall Street continue to apply, the DJIA has further upside potential IF  the price of oil continue to extend higher off the support near line F.

WTI crude – Daily close, last = $31.00 (Investing.com)

©2016  daan joubert,   Rights Reserved      

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