Unsteady Steady Markets

September 8, 2015

Or is it perhaps that most markets, almost certainly facing major reversals in trend are trying to remain as steady as possible in the highly uncertain situation. This has meant the fire and flames analogy of recent weeks has broken down, except if one went camping unprepared and is trying hard to start a fire with green wood and is battling to get out of the smoke while there is really little progress. The large, more widely traded markets, have a significant population of investors that have become very concerned, closing their positions. Yet, there is also a powerful sector intent on keeping those markets stable; the result of this battle is a display of turbulence that in and by itself is spooking the already concerned investors. Of course, as usual the media know which side their bread is buttered and they are solidly ranged on the side where the power lies.

Smaller markets, mainly the precious metals, are being kept in a lock-down mode that prevents them from acting as barometers that could warn of an approaching financial storm. As a consequence, these are largely range bound, because of they have reached a level where, if prices were pushed much lower, there is the risk of triggering uncontrollable demand. Prices cannot be allowed to break out, as if that happened it would precipitate massive interest and demand; running the same risk as when prices dropped too low.    

It is not a stalemate situation, as develops in chess; there the situation has become stable, because there is no acceptable way out of it.  Perhaps more a situation like the trench warfare of WWI, where both sides are feeding the trenches with millions worth of fresh resources to achieve control over the opposition – represented in the markets by concerned investors who want to exit in droves and vested interests who do not want prices to reflect the growing disenchantment with the markets. Or to have prices in other, manipulated, markets reflecting the also growing imbalance between demand and supply. 

However, it so happens that markets in history have always obeyed Stein’s Law, ‘If something cannot continue indefinitely, it will stop’. It is the timing that is unclear.

Euro-Dollar Chart

The recent market turbulence had the euro spiking higher, breaking clear above the steep bear channel, VW ($1.1148), but as the big scare in the stock market calmed down again, it reversed just as steeply lower to end and hold at the top of the bear channel. This could be a goodbye kiss on line W , as a prelude to a new rising trend - if the euro can set off on a new rally soon. The outlook is bullish for the medium term as long as support at line M ($1.105) or else at line Z ($1.0889) can hold.

olding above line N should reHH

Euro-dollar, last = $1.1151 (www.investing.com)

Dow Jones Industrial Average (DJIA)

Dow Jones Industrial Index, last = 16102 (money.cnn.com)

During the gradual and mildly volatile part of the move lower, the DJIA held below resistance along trend line L (16954); then, suddenly the DJIA fell steeply to break clean through the support at line L, spiking lower far below lines B ((16568) and R (16428). The spike was an over-reaction – or perhaps there was a vested interest in halting the slide and sending a positive signal to the economy! – and the DJIA reversed as suddenly and steeply. It is now settled in a sideways trend around lines B and R, making wild swings while waiting for new direction – likely to be bearish.

Gold PM fix - Dollars

Gold price – London PM fix, last = $1118.25 (www.kitco.com)

The fourth spike higher to just above pennant RZ ($11130) and also line B ($1159) failed to hold, just as happened three times before. The spike was in reaction to the sudden turbulence in the stock markets, but – while most stock markets remained volatile – gold was pushed lower to hold in a narrow range below the $1130 level.

At least, so far, gold has not yet tested key support at line L ($1108) or Z ($1073) – holding clear of these trend lines shows that the gold price, so far, is holding up well under the sustained selling pressure. This improves the probability of demand growing to where it becomes difficult to control it.

As line R trends lower, it will become less of a barrier to overcome and Friday’s PM fix is only $12 below the resistance. Line B is also a major hurdle where a break higher that holds and extend will be bullish for the medium term.

Gold PM fix - Euro

 

Euro gold price – PM fix in Euro, last = €1005.9 (www.kitco.com)

With both the euro and the price of gold showing volatility, but doing so in a rather tight range, the euro price of gold has done little during the past week. However, it is holding at and just above the support at the bottom of bull channel KL (€1005) – a steady performance after the little spike lower that happened when the market turbulence first erupted. 

Within the main pattern on the chart – the large triangle AS (A: €1086 – S:€982) –the euro finds itself closer to testing support at line S than challenging resistance at line A. This is to be expected as the euro and the price of gold both mostly react in a contrary mode to the US dollar. For the euro price of gold to break above its main pattern will require a long and steady progression higher of both the euro and the dollar price of gold. Holding to channel KL will therefore present a positive picture of the euro and the gold price.

Silver Daily Fix Chart

As with gold, silver also just broke above its long term pennant, FZ ( F: $14.89, Z: $14.42) in reaction to the market turbulence that started two weeks ago. Also, just like gold, the little spike higher, was not allowed to hold. It broke back into pennant FZ also failed marginally to hold above the support at line Z.

In line with what has been claimed in these Letters for a year or more, silver as the PM presenting the bigger problem for the permanent shorts felt the backlash of the market turbulence more so than gold. Where the gold price held at some distance above its key support, silver has been really testing the key support along line Z - and initially on occasion dipped below.

Silver is still dangerously close to that important support, and has to hold to be on the positive side of the fence – and begin to improve soon should the break, as is anticipated, be higher, to above the pennant. There is not too much time left before the two lines defining the pennant will close and cross – a matter of a few weeks.   

Silver daily fix, last = $14.69 (www.kitco.com)

U.S. 10-year Treasury Note

The break below channel VW (2.159%) two weeks ago, happened as people fled to the bond market safe haven when equity markets all over the globe took a beating. Then, as the stock markets steadied again – or as much as they could do in these turbulent times – the market turned weaker again, with the yield back into the bear channel VW. That also took the yield back above the 2% base that seems to be the level where bond market bears smile and take profit, anticipating a painful end to the bubble.

The wild swings on Wall Street seems to be keeping the funds in the safety of the bond market, as the movement there is more subdued and holding not too far from the 2% market resistance level. There nevertheless are widespread comments of a bond market bubble and the move higher after the spike to hold in the steep bear channel has a bearish bias, even if the hold is tentative.

U.S. 10-year Treasury note, last = 2.131%   (www.investing.com)

West Texas Intermediate crude. Daily close

The latest official EIA price from Cushing is for 31 August. After breaking below the previous firm support at line D ($44.72), the steep decline continued, spiking lower to test the top of the very steep bear channel, UV ($36.43) at $38.50. There, the  price reversed as steeply to break back clear above line D, but still well short of the next resistance at line S ($52.95).

Later price action after the 31st August indicates that the rebound off steep line V was overdone and the line D, as in the past, is still an important level for the price of crude. However, the recent sharp and steep moves do warn of much uncertainty in this market – largely, one can assume, because of the critical situation with shale oil extraction. If the price should remain at this low level for some months longer, perhaps even well into 2016, it is near certain to a major financial crisis will develop around the shale oil debt. 

West Texas Intermediate – Daily close, last = $49.20 (24 August)

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