Carnage vs. Calm

Well, that's it. It's official. The gold bull is over. Dennis Gartman said so, so it must be true, given his outstanding track record. And Jon Nadler agrees, so it's as good as in the bag. Even the perma-bullish blogosphere is full of doom and gloom.

I'd agree that things feel pretty bad. Gold has made a series of lower highs since it hit $1900 back in September, and silver is still suffering from its broken parabola of 2 May. It's not surprising therefore that last week's plunge on the back of disappointment that the FOMC minutes didn't endorse new quantitative easing measures (i.e. 'QE III') has rendered an already bearish community almost without hope.

But do the charts support the thesis that gold's bull run is over? Are we sitting on the precipice awaiting carnage, with our already red positions about to go scarlet? Or are the charts telling us that nothing unusual has happened, and that all is calm. Let's take a look, and - for fun - let's keep score on the Carnage vs Calm points...


The Yellow Metal

First, the gold daily chart:


The inverse head and shoulders formation remains in play. As I said in my 21 March post on the subject, and then again in my 31 March post, the completion of the right shoulder could well need a dip down past $1625 to preserve the symmetry. I also postulated that it would be the week just passed in which this would occur. My latest candlestick count would suggest that if (IF!) the right shoulder is indeed now completed, it formed almost an equal number of days after the 'head' as from the left shoulder to the head. Crucially, the Slow Stochastic and RSI are now in the right place to indicate a move higher.

In other words, this is a very likely-looking right shoulder which came in on time and at the right price - as predicted. NB: this does not mean that the IH&S cannot still 'fail' - it could still resolve sharply downwards. What I'm saying is that nothing took place last week which indicates that the IH&S will fail, and nothing occurred that was unexpected in terms of TA. This chart therefore contains some evidence for things playing out as expected, but contains no evidence (as yet) of a forthcoming slaughter. [Calm = +1]


Looking at the Bollinger Bands, we can see that Wednesday's action slightly pierced the lower band, and then re-bounded on Thursday. This suggests to me a move back up to at least the moving average at around $1665, and possibly up to the top band at around $1705:


The %B is turning up, and from a low base, which often indicates a new trend higher. Importantly, many investors use Bollinger Bands as one of their key technical indicators (often in conjunction with the RSI), and so a 'buy signal' for them can often become a self-fulfilling prophecy because of their scale and their faith in the indicator. [Calm: +1]


Moving to the weekly chart, we can see that the long-term trend line is still in play, and excitingly gold stopped bang on it before moving back up. That's nice technical action:


Let's be rational - what was the most likely scenario for gold, given the action of the last few weeks? After the Leap Day drop, it seems vanishingly unlikely (in retrospect) that gold would have done anything other than retest its long-term trend line. This it did beautifully. Of course, a serious plunge through this line (with volume, and for more than a few days) would be seriously bearish. But that's not what happened on Wednesday. We need to await the next weekly candlestick: if it's white (and, hopefully, big) then I think we can say that a successful retest has taken place. [Calm: +1]


In addition to the inverse head and shoulders pattern, there is another very strong multi-month feature on the gold chart, which I have been remiss in not discussing earlier. Regular readers will remember my account of the silver 'pennant', which we'll look at again in a minute. However, it is patently obvious to anyone with eyes that there is also a 'pennant' (more strictly, a 'symmetrical triangle') on the gold chart - and it's a whopper. Here it is on the weekly:


This pennant started to form following the crash after gold's $1900 high back in September 2011. The upward-sloping line is obvious: it's the long-term trend line. There is a choice for the downward-sloping line, however: the one in green follows the strict 'tops' whereas that in purple takes a more pragmatic approach (essentially ignoring the end of February burst and plunge which effectively neutralised each other). The first must resolve by July, the second by mid-May. Exciting! Not least because it is estimated that around three-quarters of breakouts from such formations end up resolving in the direction of the long-term trend - i.e. 'up' in gold's case. The fact that both versions of the 'pennant' are still in play means that 'carnage' wins no points here either: [Calm: +1]


The B@$!&£#  F*$£!{# Gold Miners

Moving to the gold miners, we have a bit of a different story, however. The HUI just looks awful. When I first posted my thoughts about gold miners getting ready for a bounce (back on 13 March), the HUI was at around 500. In a follow-up piece on 17 March, I said I thought we were entering a really good 'buy zone', with the HUI having hit 476.

Needless to say, having followed my own analysis, I am now the proud owner of some seriously  underwater mining positions, as the HUI has managed to heave its innards out all the way down to 440. The chart is so horrifying that can't actually bring myself to post it.

So I shall instead represent it using the medium of dance. The character on the right represents me - plucky JdA bravely taking on the naysayers and the cynics of the gold mining world. The character on the left represents the HUI index.




Oh go on, then, here's the chart - if you must...


Both horizontal support at around 480 and the slightly down-trending line of 'lower lows' have been blasted through. They have been dragged through a hedge, molested by a polar bear, and burped at in the street by rough schoolchildren. There's no getting away from it - it's a very bearish state of affairs. On the plus side, the indicators are screaming 'oversold', but I've been saying that for weeks and the fecker keeps on falling anyway.

What can I say? The only case I can make for the bulls is - and it's a pathetic one - that I just don't understand 'why'. I mean, the fundamentals are great - some of these mines are churning out serious amounts of product, gold prices are high, new mines are being acquired, p/e are laughably favourable, dividends are attractive, etc., etc. The technical analysis was spot on - a perfect set up for a move higher. A delay to the move higher I could've taken - but a serious crash like that? There's nothing in the TA that I could see which predicted it or even hinted at it. Sentiment couldn't be lower. And yes, there's been some miner-negative events (the FOMC minutes, the coup in Mali), but the HUI has gone from 560 to 440 in five weeks (21%) - there have been no events on a scale to justify that.

I'll say that again: the HUI has fallen 21% in five weeks. That's an index full of highly profitable, growing companies, with low p/e and the fall comes at a time during which the general equities markets have been on a tear.

So all I can say - and I know this will sound very weak - is that given the fact that the HUI is bucking the technicals, the sentiment, the events, and the fundamentals, the shorts are playing a dangerous game for themselves.

If (IF!) gold makes a good move higher then the HUI should hopefully snap back into shape as shorts realise it's time to stop being greedy and take their profits. NB: I say this merely to inspire and give hope to those who like me are underwater on what should have been a good investment. I would absolutely not recommend anyone to establish new positions until we have clarity on (a) what the gold price is going to do next, and (b) whether or not the HUI is going to follow gold's lead. I would also steer clear of trying to short at this point, however, as the HUI is so far below its 50-dma that shorts could get crushed in any sudden snap back. [Carnage +2]


The Grey Metal

Not too much to say here. Despite a big fall in the silver price this week, I'm able to put up exactly the same chart as last week without any changes at all to the annotations. Silver is still in the middle of its 'pennant' and seems to have no idea which way to go next:


As I said last week: if you can call this one, then I'm full of admiration for you. But there's nothing here for me upon which I'd bet any hard-earned money. [Calm: 0; Carnage: 0]


Equities

As Kid Dynamite pointed out in a good post this week, anyone listening to the news would think that 2008 had just hit the stock exchanges all over again. To quote KD himself:

"What – you didn’t hear? The stock market got crushed today. Yep – the S&P 500 was down 1.02% – only the second 1% or more down day all year. I’m being sarcastic of course – 1% down days are nothing to get your trading panties in a bunch about. CNNMoney described the selloff as a “NOSEDIVE” while CNBC wondered if this was the big selloff “everyone was expecting?” Oh the horror. Blood in the streets. (/sarcasm)"


He could've said much the same about the NYSE, on which most of the miners in the HUI are floated:



Things can of course easily change next week, but for now it looks like all that took place here was a simple retest of the 50-dma, as noted by me as a distinct possibility on 17 March. The Stochastic is back in a zone where it might either turn or fall a little more before turning, but it's not something about which to 'get one's trading panties in a bunch' [idiom (c) 2012 Kid Dynamite].

Again, let me be clear. I'm not saying that a crash is impossible. The whole system could go to ruin on Monday and we might be eating our neighbours by Thursday. What I'm saying is that so far there is nothing in the charts that indicates such a state of affairs. All I see for now is a healthy (and small) correction in a bull market in equities. [Calm: +1]


The US Dollar

Much has been said this week about how the Euro is about to get crushed and the US dollar is going to go to the moon (at the expense of gold). The US dollar index is a useful measure of the likelihood of this. Interestingly, the USD index is trapped in its own 'pennant' at the moment:


This pennant needs to resolve one way or the other by June. I think it's fair to say that there will be a retest of the upper line (currently at around 80.5), but it's harder to make a case for the USD having enough momentum or firepower to break through it. It looks a bit early in the lifetime of the pennant for this to happen, and the Stochastics and RSI are getting into overbought territory. If (IF) it smashes through the upper line, then it's probably very bearish for gold. If it simply retests the line, however, then it'll work its way back down to around 79.

In fact, if the gold charts above are to be believed, a strong move in gold could well accompany the USD breaking down out of this pennant in a few weeks. Now that would put Mr Gartman in his place... [Calm: 0; Carnage: 0]


To Conclude

A quick count makes that 5 for calm and 2 for carnage. Not very scientific, I know. But it is one way of regaining a bit of a sense of perspective.

I do not doubt for a minute that we're at quite a critical time for the PMs. Although the charts posted above do not suggest to me (yet) that there's about to be carnage in the PM world, they do not exclude it either. Far from it. There are some important support levels that must be maintained and some important pennants that must resolve in the 'right' way for the bulls. Otherwise it'll be party time for the bears. But the wailing and gnashing of teeth of last week is perhaps a little premature.

I for one think it's a far riskier proposition to try to take advantage (e.g. by shorting) of a mighty gold bull that you think is dead, because you may quickly find out to your disapprobation that it was in fact merely wounded. And wounded bulls are very dangerous things indeed...

12 comments:

Dan D. said...

Quick comment if I may ... great work by the way.....

Shoulders need not be symetrical when looking at head and shoulder or inverse head and shoulder patterns. The symetrical nature of the shoulders makes the pattern easier to spot but in reality, using the inverse gold head and shoulder pattern that we are all aware of, the right shoulder is still in play so long as the low associated with that shoulder does not dip beneath the price at the "Head".

You can still have an inverse head and shoulders pattern in play if the right inverted shoulder dips to just a cent above the head. You would have a declining neckline however which mught cap any rally that ensues.

However, we are at an important juncture here ... I have stated this before on my own blog ... I have cash already set aside for when I feel it is the right time to climb back into physical metals.

My bearish stance of late has been more to do with the disinformation in the permabull world than it has been with the actual metals.

Jeanne d'Arc said...

Since drafting this post, I see that the NFP figures are out and they're not very pretty.

As you know, on the spectrum of conspiracy theorists I'm pretty much as far to the left (with GATA/KWN, say, being at the extreme right) as one can be. However, the fact that the announcement was delayed to a non-market day, following a poor week on the markets in general strikes me as rather suspect. Had the figures been announced yesterday, the bears would have had even more wind in their sales and moving averages could easily have been smashed.

Let's see what happens on Monday. I see that Bernanke is speaking on Monday evening (US time).

A rough guess from me is that the general markets will dip sharply, negating what I've just written about the NYSE for example, and then Mr Bernanke will say something accommodating about accommodative monetary policy in the evening. Tuesday could see a sharp rise as a result.

Gold, presumably, will be encouraged by all this. Depending on what is said, it might be the 'spark' that I've been waiting for which would allow the TA's 'predictions' to turn into fact. Of course, the opposite is always possible...

Finally, what this means for the miners on Monday I cannot imagine. I may have to make sure that I'm far away from my trading account at all times...

Jeanne d'Arc said...

@Dan - yes, good points. I suppose my attraction to the 'symmetry' comes from my post about the 'beautiful' inverse head and shoulders pattern. This formation is so large and - seemingly - so perfect, that I'm perhaps more drawn to it than I should be. But you're absolutely right to say that symmetry is unnecessary.

One counter-point, however. I would normally agree that we could go to within 'one cent' of the head. But in gold's case that would take us to about $1525. Now gold is already pretty much on the long-term trend line. I would submit that any fall through that line would be so bearish at the moment, that gold would be in real trouble - and the IH&S formation would be forgotten about.

What I mean is that given the long-term trend line, gold can almost not afford to have a right shoulder now that dips below about $1600 at the most. Otherwise the bears will be very much in control.

Dan D. said...

Listen to Bernanke's words very carefully and not the often mis-interpreted versions of both inflation and deflation camps.

Louis Cypher said...

Thanks Jeanne,
Very eloquent and very sensible.

It's a sad state of affairs when our fortunes rise and fall based on a few queefs from a bearded clam.

/SleepingVillage/ said...

What's really sad is that the clam's beard is hardly worthy of a queef, even. He gives beards a bad name.

Good stuff, Jd'A, but I want to see more carnage! I'm fixin' to make a large purchase and my beard likes deals:)

The Power of the Holy Ghost!

victorthecleaner said...

Here is an argument that is neither technical nor fundamental, but political. Take a look at this long term chart since 2002. The black line has a slope that corresponds to a 19% annual increase. The blue band is 15% on either side. I just fitted a straight line and made everything else up. Nothing sophisticated.

Do you think this is the random walk that an efficient market produces, or is this perhaps manufactured?

I'd like to argue that the gold price is political. If yes, then the previous target on March 30 was $1644 (met) and the next targets will be:

June 30, 2012: $1717
September 30, 2012: $1794
December 31, 2012: $1873
December 31, 2013: $2229

and so on. Note that even $1400 today is still inside the blue band, and historically, the blue band was not always guaranteed.

I'd also like to argue that if the blue band is violated for good - on either side - you will probably already know from the newspapers why.

This point may be approaching because of this chart. The chart is not ideal because they use WTI whereas what matters is Brent, but it looks similar.

Brent cannot go up much further without seriously hurting the economy. When it eventually goes down (as many expect), but when the central banks keep gold high, it will become very difficult for the dollar.

Victor

somanyroadsinvesting said...

Thanks for the post. Yeah no fun in the miner camp now.

Victor thx for your comments as well. Nice charts. Is that gold/oil chart updated? I get 15.8x and 13.3x for Gold to WTI and Brent respectively. That chart seems to imply we are over 21x?

Thanks

Kid Dynamite said...

Victor -

but surely a man as smart as you realizes that the gold chart looks totally different if you make it a 20 year chart instead of a 10 year chart... or a 30 year chart... (never mind the anchoring bias that is natural in looking at your chart, which is really showing a 15% margin of error around your base 19% rate)

Look - what you did was take a 10 year chart of an asset in the midst of a bull market! I wouldn't go crazy overanalyzing that. You could do the same thing with 100 different assets over 100 different 10 year time periods...

feel free to email me off-board if you wish.

aside: I think that thinking that the gold price is political is the biggest mistake that the goldbugs make - I don't think that anyone except the goldbugs gives a crap about the price of gold. I've said it before and I'll say it again: the destruction of fiat currencies results in an increase in the price of gold, but the converse is NOT true! ie, an increase in the price of gold does not result in the destruction of fiat currencies.

somanyroadsinvesting said...

Kid,

You seem to remind me of those guys in high school who tried to yell over other people when they were talking and as a result felt like they won every argument. Maybe its just your style but you always come across as very abrasive and dear I say 'cocky'.

If you study some history you will find out pretty quickly that the gold price is very high on govts and CB's watch list. London Gold pool, Summers paper on strong dollar, Greenspan & Volkcer etc. comments.

Oh BTW I like how your offer services of enlightenment to Victor if he chooses to humbly email you for your profound wisdom.

Most people are here to learn. You seem to have it all figured out so maybe no reason to read much on the web.

Kid Dynamite said...

@somanyroadsinvesting:

I think your past readings of my posts is skewing your judgement.

Let's be clear: when I write blog posts (or blog comments) about the blatant horseshit (re: ETFs, futures, complete lack of understanding of reality, pointing out that they are blatantly making stuff up, etc) that is spewed by the silver pumping blogs, I have no sympathies and I take no prisoners. It's not "cocky" - because it's not a debate - I understand how the markets work, how ETFs work, how futures work, etc, and I'm not going to tolerate horseshit lies that try to manipulate people into believing falsehoods.

now, this conversation with Victor is nothing like that. Victor has proven himself on multiple occasions to be pretty savvy in this metals space, and I think he's making a classic error in looking at a bull market asset.

as for email: Victor has my email address, and I don't have any interest in arguing on public forums - my comment was pretty simple and I have little to add to it: the point at the end (the: "aside") was labeled I THINK which is very different from what you've probably read in most of my blog posts aimed at Silvertards, which are I KNOW... .there's a big difference. See, I KNOW that the reason PSLV was trading at a huge premium was NOT because it represented the true price of physical silver. I THINK that goldbugs vastly overestimate the effect that the price of gold has on anything in global finance. The first is fact, the second is opinion.

finally, yes - people are here to learn, and if you aren't learning from the stuff I'm writing, then ignore it. I'd be shocked if that's the case. Cocky? nah - reality.

victorthecleaner said...

Kid Dynamite,

I understand your objection. If someone shows me the Apple chart and tells me it is political, I would react in exactly the same way. (Btw I still think it will be difficult to come up with decade long bull market charts that are that nice).

I made the comment above fully intentionally - I just wanted to get people think about the politics of gold. Most people think that gold was removed from the international monetary system in 1971 when the U.S. terminated the international gold backing of the dollar. 40 years is a long time, and it is easy to stop questioning it and to take the role of the US dollar as the world's reserve currency for granted.

It actually isn't. Kid is right that during 1980 to 1999, the gold price slowly and steadily declined. In 1999, the Euro was introduced, and at that time, the Europeans stopped supporting the dollar as the reserve currency, i.e. they stopped monetizing US$ as additional reserves - just take a look at the central bank balance sheets. They also declared that gold is their most important reserve (which is completely at odds with the U.S. propaganda that gold had been removed from the monetary system in 1971 - by the way the U.S. still hold some 8000 tons and have made it pretty clear ["deep storage"] that they are not going to sell it any time soon, and so they, too, think it is still relevant).

Coincidentally, this change in the world currency system is precisely the point at which the gold price turned around. If you take a look at the ECB's balance sheet (Eurosystem), you see that they have both US$ and gold reserves, and that with the rising price of gold in US$, the gold reserve has replaced the US$ more and more. You can also see from that balance sheet that the ECB must love the high gold price.

The next observation is that 1999 is also the turning point up to which the central banks in aggregate have been selling gold and at which they started buying. Now this is not so obvious because the financial press still reported sales after 1999. But if you look at the vault inventory data, the gold had been removed before 1999. After that, the Europeans have not sold any physical anymore, but emerging market central banks started buying.

My final comment is what do you think will happen to the US$ in the long run? Will it remain the world reserve currency? (i.e. will foreign central banks continue to purchase US$ debt and thereby fund the US trade and US budget deficits?) If you have any doubts this is sustainable, then take a look at the last currency that lost its reserve status before the dollar: the British pound. Not a very pretty sight. In fact, if you extrapolate from the pound to the dollar, it is rather scary.

It is not just me who has been thinking about it. Apparently, the global central banks have done that, too, and they have positioned themselves for the case in which the US$ disappears - well, some are prepared (Europe) but others are still in the process. And you can just take a look at their balance sheets to find out what the US$ will be replaced with. Rather simple, really. No goldbugs needed. No conspiracy theory either.

So the politics I am alluding to, even makes some fundamental sense after all.

Hope to get you thinking about monetary politics.

Victor