Old blog: Market Analysis

FEAR OR GREED?

The last two weeks have been extremely volatile in the markets, and for the first time in a long time my friends and family have called to inquire about “what is going on in the markets?” Coronavirus contagion fears, coinciding with all-time highs in the markets, has been the scapegoat for a rapid, deflationary decline across nearly all markets except bonds, which resiliently continued to fetch a bid. Even the US Dollar, traditionally a safe haven in deflationary swoons, declined.

Here is how I see the markets:

S&P500

The S&P500 broke out to all time highs in September of 2019 and proceeded on a rapid, almost linear ascent to new highs ~3400. During this period, equities became way overbought, and the fear/greed index topped out at an unimaginable 97/100. These levels are/were unsustainable. That this inevitable pullback has been violent and rapid is as much a reflection of the swift ascent of the market as it is any underlying issue or influence of a pandemic. As the saying goes, the market is a staircase up and elevator down.

In the initial decline, I expected the S&P to find support ~ 3030-3060 level, where there was a confluence of rising channel support, horizontal support, and the 200 DMA. This area was also an approximate 10% decline from all-time highs.

However, equities knifed through these levels on the way to rising channel support from the 2018 low, and in the process reversed the enthusiasm from January, got way oversold, and pushed the fear/greed index to 5/100. This is where we have seen the bounce.

And if we zoom out even further, and use a close-only linear chart to remove the noise and volatility of the candles, the pattern is a really simple (and bullish) breakout and successful retest. Resistance is now support.

BONDS

The response to these panicked conditions has been further monetary easing, as the plunge protection team came to the rescue this morning with a significant 50 basis point rate cut, adding further fuel to the bullish case for bonds and reinforcing the thesis that the Fed’s true mandate is supporting the equity market. Using the ETF TLT (20-year treasury bond ETF) as a proxy for the bond market, the chart remains bullish in a rising channel with an initial target of 158 (an area I have targeted for nearly a year).

Of particular interest to me is the mortgage-backed securities ETF the MBB, which is the best proxy for the trend of mortgage rates. The January breakout was a signal that the MBB was poised to retest all-time highs at 110+. Based on the strength of this move, I think we get there and eventually break out to new all-time highs. This is going to create a tailwind in the housing market as mortgages get cheaper. Those who already own a home should benefit through the refinance process.

US DOLLAR

The monetary easing has put a headwind on the US Dollar, which in the recent rise to ~99 reacted to the long term falling trend line and is now falling back towards rising channel support from May 2018. I continue to believe a long term secular resolution for the dollar is coming before year end.

PRECIOUS METALS

The precious metals sector remains in a strong bullish uptrend. Like the S&P, gold broke out above former resistance to new six-year highs at $1690, and swiftly dropped $100/oz to retest the breakout level. That level is now support, and as of this writing gold has bounced hard back up to $1650.

Silver has bounced off of horizontal support and is forming a broadening megaphone pattern. A sustained move above $18.60 should set up a move to $20.70.

The miners also remain in a bullish uptrend. Support has held for GDX, which is consolidating in a rectangle pattern just below resistance at 31. The measured move on a breakout would target the 36-37 level, which coincides with the 50% Fibonacci retracement.

Horizontal support and rising channel support also held for the Junior miners, GDXJ, which seem poised for another run at resistance at 52.

PRICE PREPPING FOR NEW 7-YR HIGHS?

Happy New Year! We are kicking off the New Year with stocks at all-time highs, oil prices spiking on Middle East tensions, and the precious metals complex following through nicely for our November/December videos. If you haven’t had a chance to watch those videos, they offer a helpful background on the technical setup for metals and the price action we are seeing today.

12-03-19 Gold and Silver Mining Stocks Price Update (Video)

11-15-19 Gold Price Update (Video)

GOLD

Gold finally broke out of a bull wedge in late December following a four month (healthy) consolidation I had labeled as wave 4 of 5 in a five wave Elliott Wave pattern. This pattern has been neatly contained within a rising channel from the $1180 low in summer of 2018 to the September high of $1565 (the 61.8% Fibonacci retracement from the all-time high in 2011). The breakout occurred at rising channel support, and unless this is a truncated fifth, the length of the rise should target a move to the 78.6% retracement at ~$1700. Gold has some work to do to get there, and will likely consolidate/pull back as it works through supply between $1560-$1580.

The move is supported by strong confirmation throughout the mining complex, the breakout in silver, the overbought levels in the RSI (strong indication that the bulls are in control), the outperformance of junior miners relative to the producers, and a falling gold:silver ratio. The dollar has also shown recent weakness, breaking down from a multi-month channel, and is coiling into a multi-year symmetrical triangle that is likely to break strongly up or down before year end.

I would also add that gold has been outperforming the S&P 500 since September of 2018. This is not well publicized, especially as equities continue to make all-time highs, but an important development, to be sure.

Lastly, I tweeted this chart of gold performance by months for the past 20 years. It is worth noting that January tends to be a very strong month for gold.

SILVER

Silver has lagged gold for six years but is finally showing some signs of strength. The gold:silver ratio has fallen from a peak of 93 in July to a near term low of 79 in September, and has pulled back to 86 in recent week. However, the trend is now down, and the recent move is forming a bear flag that should take the ratio lower (good for the entire metals complex).

Silver has followed a similar pattern to gold, moving in a rising channel from the September ’18 low. A strong close above 18.78 would signal that a move towards the 38.2% Fibonacci retracement at 22 is the likely terminal move for Wave 5.

PLATINUM

Platinum has underperformed the sector for years. Price has flirted with the psychologically significant $1000 level twice now since September. However, the key level for platinum is $10-40-$1050. A break above that level would set up a test of the 38.2% Fibonacci retracement at $1300.

PALLADIUM

Palladium has been the all star of the metals complex, even through the bearish six year trough for gold. Price skyrocketed to just under $2,000/ounce as it met with resistance at the 361.8% Fibonacci extension and multiple rising channel resistance. If Palladium can breakout here, the next price target is $2250.

MINING STOCKS

I will not outline charts here of every mining stock I cover, but as a brief overview, see the charts below of GDX (Gold Miners ETF), PAAS (Pan American Silver), and Newmont Gold (NEM).

GDX has mirrored the technical pattern in gold. The key level is 31.50. A strong close above that level should usher in a swift move to 39.

Pan American has already broken out well above former resistance and seems poised for an eventual retest of all-time highs at 37, likely pausing at 29 along the way.

Newmont is just now breaking above the 43.30, but not definitively. A clean break above that level would set up a run to 51.

As always, I hope this is helpful, and I welcome any feedback or questions. Have a great weekend!