Gold Mid-Year Review

It’s been a rough time recently for gold and gold stock investors.  The last nine months has been the second worst cyclical downturn in gold and gold stocks during this long term secular bull market for gold.  The next chart shows how brutal this recent correction has been:

This bear market was not only the second worst in percentage loss, but also the second longest in time duration:

If that’s not bad enough, it’s actually been over 1.5 years now since gold stocks have made and held onto any gains.  After closing the year at 573 in 2010, the HUI Gold Bugs Index made 4 attempts during 2011 to takeout the 600 level, and all 4 attempts failed.  The next chart shows the HUI’s performance since 2003, and notice how 2011 was the first year where the HUI had a down year the entire year.  This was then followed by the first half of 2012 where the HUI had it’s third worst half year loss of this bull market!

Gold meanwhile gained more than 11% in 2011, and muddled through the first half of 2012 with a small gain.  In reality gold’s correction off of it’s 2011 top has been extremely orderly, another example of how consistent this bull market has been.

Here’s where it gets especially brutal for gold stock investors.  Instead of leveraging the gains in gold in 2011 and the first half of 2012, the HUI drastically underperformed gold at nearly a double digit clip for the entire period!  The underperformance to start the year in 2012 was also the second worst of this bull market.

After making a bottom in the middle of May, there are encouraging signs this  gold bear market has run its course.  First the recent successful test of the 375 level on the HUI that was rejected for higher prices was a logical long term support level.  The 375-400 level was major resistance for 2006-2007, then became support briefly in 2008 before the financial crisis hit.  Then in 2009 that level was brief resistance again before the HUI broke above it in late 2009, then tested that level as support in early 2010 and didn’t look back after that.  Now that this 2012 correction has once again retested that level and soundly rejected it (at least so far) it could prove to be the final test for that level for this bull market.

Long term momentum has gradually started shifting back to the upside along with the recent monthly hammer candle.  Note also that the HUI staged powerful rallies in 2005, 2009, and 2010 that actually started in July, and didn’t have to wait for the full completion of the typical summer doldrums.

In the risk pyramid in the precious metals space, there is a notable positive divergence in riskier assets.  Junior gold stocks are displaying positive momentum vs. senior gold stocks.

Senior gold stocks are showing a positive divergence to gold, and also a large increase in buying pressure vs. gold when comparing relative volume.

Silver is showing a positive divergence to gold.

And gold is showing positive divergence to bonds, which is notable as bonds have soared since early 2011.

Speaking of bonds, note the negative divergence in momentum on the recent high, and also the lack of volume on this recent rally compared to the rally in 2011.

The dollar ETF UUP is also showing a negative divergence in momentum, and lack of upside volume on the recent rally.

In conclusion it appears as if the gold sector is gradually coming to the end of the recent bear market, given the technical evidence and severely bearish sentiment.  A top in paper assets (the dollar and bonds) would probably be the final nail in the coffin for this gold correction.

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The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice.  Please see the disclaimer.

 

Commodities Poised For A New Rally

The market has had an impressive run since the start of the year, but one sector that has lagged is the commodities sector.  Unlike general stocks, commodities are still quite a ways away from their 2011 highs.  Recession fears and a surging dollar contributed to the weakness in commodities last year.  But a number of factors are starting to show the tide potentially turning for the commodities sector going forward in 2012.

In the first leg of the secular bull market in commodities that started in 2002, commodities more or less enjoyed a steady grind higher.  They were helped along by a bear market in the dollar.  Countertrend rallies in the dollar had little effect on commodities during this period, most notably in 2005 where the dollar rallied for most of the year.  In 2007 commodities started to accelerate higher as more individual commodities started joining the overall commodities rally.  This included the grains sector which until 2007 hadn’t enjoyed the gains other commodities such as gold and oil had achieved.  All of this culminated in a peak in the CCI commodities index in 2008 as it accelerated into a parabolic move in March, underwent a correction, then made a final top in the summer of 2008.

Then came the stock market panic in mid to late 2008.  From the onset of the panic and ever since, commodities have acted much differently than they did during the previous 6 years leading up to the panic.  They have had two major swings to the downside, along with a mini correction in 2010.  All three corrections were in large part caused by three major dollar rallies that have occurred since 2008, shown on the chart below.

The primary driver of the last two dollar rallies has been a collapsing Euro.  The first Euro crisis, which seems like forever ago, actually caused a much more severe correction in the Euro than this latest Euro crisis.  But what is interesting is a similar setup to the end of the first Euro crisis is occurring again.  This of course would be bullish for commodities since it would imply a near term end to the rallying dollar.

The next few charts show how the Euro is positioned in a similar manner now to what is was doing back in 2010 when it bottomed.  First, taking a look at Euro futures positions, back in May 2010 large speculators finally stopped adding to their short positions in the Euro after a 6-month downward move.  Open interest also leveled off, which indicated a possible trend reversal.

On the chart below you can see how this leveling off in speculative activity helped confirm the final bottom in the Euro.  Note the divergence in price and momentum in May and early June.

Now moving to the current situation for the Euro, you can see a similar leveling off in the addition of positions in the futures market.  Open interest also topped way back in December.  It’s interesting to note that there was more speculative activity in Euro futures during this latest move in the Euro, but the overall move wasn’t as significant as the first Euro crisis.

Again, a similar divergence in momentum and price led to a change of trend for the Euro in January.  So far this change in trend has held up.

Money flows into the bullish dollar ETF UUP also were dramatically lower than they were during the last major dollar rally as shown in the next chart.  And  selling pressure has started to accelerate over the last month.

Finally, from a Stage Analysis perspective commodities are starting to line up into a potential Stage 2 breakout.  On the weekly charts of individual commodities many of them are starting to move back above their 30-week moving average.  Some of the money flows are moving back from negative to positive such as the grains sector while other commodities like oil and precious metals are showing increased positive money flow.  For comparison purposes, it will be important to monitor how this move compares to 2010 which proved to be a significant breakout to the upside for commodities.  Continue to watch the trend in price action along with increased volume for confirmation.

Follow me on Twitter: @nextbigtrade

The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice.  Please see the disclaimer.

Return Of The Euro Shorts

Back in July I wrote an article discussing the fact that the Euro had failed so far to come under pressure during this wave of the European debt crisis.  In fact it was still in a technical uptrend since bottoming in 2010 after the first wave of the Euro crisis.  Last week the picture for the Euro changed significantly as it fell -3.90% for the week and fell out of a trading range between 140 and 145.  The breakdown out of this trading range could be the beginning of a new Stage 4 downtrend for the Euro, as it is now trading below its 30-week moving average which has also turned lower.

The U.S. dollar conversely has broken out of its trading range and could be on the verge of a new Stage 2 uptrend.  This will undoubtedly have an impact on other sectors of the market, as the dollar has shown to be negatively correlated to most asset classes since the 2008 financial crisis.  Chris Puplava from Financial Sense just wrote a good article showing some of the correlations of the dollar to other asset classes.  Most sectors of the stock market appear to have a negative correlation in the -0.40 to -0.50 range to the U.S. dollar, which could be characterized as a moderate negative correlation.  What this basically means is that they don’t always move in the opposite direction of each other, but have shown a tendency to move in opposite directions.  Since most sectors of the stock market have transitioned into a Stage 4 downtrend it is not very helpful to the stock market to now have a rising dollar.

Gold actually has a negative correlation of less than -0.20 to the dollar, which means that gold has shown a weaker tendency to move in the opposite direction of the dollar than the stock market.  This runs contrary to a lot of common thinking that gold always runs counter to the action in the U.S. dollar.  Relatively speaking, this weaker negative correlation is good news for gold since gold has been the leading sector of the market over the last few months.  Gold is currently consolidating under the 1900 level which it needs to take out for its uptrend to remain intact.

Two other charts worth paying attention to now that the dollar is attempting to rally is copper and the commodities index.  Both have been consolidating in a Stage 3 instead of breaking down with the rest of the market.   But a rallying dollar could potentially be the push needed to transition them into a Stage 4.

This potential structural shift in the movement of the U.S. dollar is bearish for the stock market.  The stock market didn’t really need this bad news, since it has already broadly transitioned into a Stage 4 downtrend across most sectors of the market.  Stan Weinstein, who outlined the Stage Analysis method in the book Secrets For Profiting In Bull And Bear Markets, says in the book that above all else, do not buy or hold anything in a Stage 4.  I definitely agree with that statement, as the only way to lose significant money in the market is to stay on the wrong side of the market and build up losses.  As a trend follower the number one job is to listen to the message of the market, which includes the bearish potential outcome of a trend change in the dollar.

Where Are The Euro Shorts?

If you simply looked at a chart of the Euro over the last year or so, and didn’t know about all of the problems facing the European Union, you could conclude that the Euro was just experiencing a pullback in an ongoing uptrend.  That’s how good the technical action in the Euro has been given the considerable problems it has been facing.  From the recent May high in the Euro at 149.40 to the July low of 139.50, the Euro is down a mere 6.6%.  This pullback so far isn’t even as big as the pullback in the Euro at the end of 2010.

The Euro has been rising ever since the end of the first wave of the Euro crisis that began in October 2009 and ran until May 2010.  The first Euro crisis was a much more severe downtrend.  It took the Euro down about 20% from over 150 to under 120.  The Euro was not able to have many positive weeks during that multi-month move to the downside.

The massive downtrend in the Euro helped drive a big upleg in the dollar over the same period.  But just like the Euro hasn’t been as aggressively sold off this time around, neither has other major foreign currencies.  The next series of charts highlights the period of the first Euro crisis on charts of the Pound, Yen, Canadian Dollar, Australian Dollar, Swiss Franc, and New Zealand Dollar.  Note that all of those currencies experienced sideways to downward trends during the same period as the Euro crisis, which helped drive the dollar higher.

Currently the Swiss Franc and New Zealand Dollar are making new highs against the U.S. Dollar.  The Yen, Australian Dollar, and Canadian Dollar are getting close to making new highs.  If those three currencies breakout once again against the dollar then trend followers need to take heed that this current situation is much different than the previous Euro crisis.  The currency markets could possibly be signalling that the U.S. Dollar downtrend would resume.  Taking a look at the current chart of the dollar shows an ascending triangle pattern on the weekly chart, with a breakout level of 76.  The dollar has failed twice so far to hold above 76 during the rally from May so that clearly is an important technical level.

The 76 level also coincides with the 30-week moving average that the Stage Analysis trend following method uses.  Currently the dollar is still technically in a Stage 4 downtrend, which it has been for most of the past decade besides a few major countertrend rallies.

So to summarize the Euro still has yet to come under the same magnitude of pressure it did during the last crisis.  If the shorts in the Euro fail to get aggressive and foreign currencies continue to be resilient against the U.S. Dollar then a continued U.S. Dollar downtrend could be on the horizon.

Dave Skarica: Protect Yourself From The Declining Dollar

This is an interesting presentation from Dave Skarica who is the author of the book Addicted To Profits.  Skarica makes the comment that most Americans are not protecting themselves from a declining dollar, and that all major empires have imploded eventually, which has led to a big decline in their currencies.  Another good point is that even though the stock market is going up, if it doesn’t outpace the rate of inflation then investors are still losing money even if the nominal prices of stocks are going up.  Hard assets are the best bet for protection during inflationary periods and major currency declines.