Better Trader

Are Gold and Silver Melting Away?

By Kathryn James

Both gold and silver have been falling away from the highs made in October 2012, lured by the pulling forces of the 200-day moving average. While fear of deflation and imminent market collapse continues to drives economic policy and supports the markets to a large degree, precious metal prices should increasingly feel this pressure as funds are allocated further into riskier assets. Despite this lack of support from economic policy, even if the tide were to turn a stable dollar, deflation and a weaker stock market could also lead to more selling pressure in commodities and subsequent lower prices in gold and silver. So the outlook doesn’t look too hot for gold or silver either way and a sell signal trigger could provide a good trading opportunity in either of the precious metals. The following is a technical summary of where gold and silver sit today.

Gold:

Gold topped on 5th October at 1797 and has since declined by nearly 10% to the recent low of 1625 on 4th January. The lower high and lower low indicates that the downtrend is becoming established. The key technical 200-dma has provided support around 1660 which has fuelled a bounce back to today’s price of 1680 but the price would need to rally above the lower high marked back in November of 1754 to trigger a buy signal. A break above 1800 being super bullish on the longer term chart.

I’m watching the current trading channel for a break in either direction but I’m favouring gold as a sell and a rise to the upper boundary of the channel would offer a decent entry level to trade. A further test of the 200-dma is worth watching also, if it fails to hold second time round then trouble could be looming for gold.

 

Silver:

Silver shows a similar technical picture and has fallen by over 10% since it peaked in September. I’m equally as bearish on this chartbut as with gold would favour some strength to sell into. It barely sits just above its 200-dma. 30.00 support and the uptrend line from the June lows are too close to offer any comfort to the bulls and a fall back to support at 27.50 looks plausible. Upside resistance lies at 32.50 and a break from the current trading flag may take it there. However there is a strong technical indication that silver could peak fairly soon as it sits at the top of a small daily flag pattern (see chart below), but I’m waiting for further indications to confirm a trade.

Please note: Both Silver and Gold charts shown are the continuous CFD market. Silver CFD prices are shown in thousands i.e. 3000 whereas the cash market trades in tens i.e. 30.00.

 

Yields on Italian BTPs Break Support, Bonos Follow

By Ashraf Laidi  

Italian 10-year government bond yields post their fourth consecutive monthly decline, the longest decline in three years.

One of the least discussed aspects of the ECB’s announced OMT programme was its counter-intuitively stabilising impact. The announcement did not force Spain into requesting sovereign aid, but it succeeded in supporting the euro, sovereign bonds as well as European bank stocks. Those improved ‘market metrics’ removed the market strains accompanied with forcing a nation to request a bailout and led to more favourable conditions, enabling economies to pursue austere policies in less strenuous market environments.

More importantly, 10-year BTP yields have broken below their 200-week moving average for the first time since December 2010. The first attempt occurred two weeks ago, followed by a rebound, but this week’s renewed decline is rather considerable.

The Death Cross on the weekly chart is illustrated by the cross-over between the 55 and 100 WMAs. The chart shows two previous occasions of Death and Golden Crosses when yields moved accordingly. Not shown on the chart is the Golden Cross of 2006 (leading to higher yields), and the Death Cross of 2004 (leading to falling yields).

On the monthly chart, 10-yr BTP yields drop below their 100-month moving average, shortly after breaking below the 55- and 200-month moving average.
Marrying such powerful indicators from various schools of technical analysis bolsters the case for further yields downside and is consistent with our previous calls for EUR/USD and equities aid out here, here, here and here.

Sovereign bond spreads (against 10-year bunds) are also falling sharply. Spreads on Greek 10-year yields over their German counterpart hit 10.25% (from 35% in February) – the lowest in 19 months. Portuguese 10-year spreads have more than halved to 5.55% – the lowest in 18 months.

Spain’s 10-year yields have also fallen for the fourth straight month, hitting 5.17%, down 33% from their June highs. The weekly chart shows the next technical target stands near 4.92% – the 200-WMA. A move from the current 5.26% to 4.92% would likely translate to the next EUR/USD run-up, now seen at 1.3370s.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

Silver’s Latest Selloff

By Ashraf Laidi

So what happens to silver as it falls victim to metals’ selloff? The recent damage in metals –particularly gold – is a result of the unwinding of this summer’s buying gold against euro as a flight to safety from Greek election woes. The unwinding of that long gold/short EUR began to unravel these past few weeks after the dissipation of Eurozone tail risk (Greece debt buybacks, Spain bank bailout and preliminary Banking Union).

Silver is up 14% year-to-date, compared to gold’s 7%. It is the fourth best performing commodity after wheat, soybeans and platinum at 24%, 22% and 14% respectively. Speculative activity among futures’ traders has also been kinder for silver, with the number of net longs reaching a 22-month high of 41, 275 contracts earlier this month. In contrast, gold net longs fell to 166,000 contracts, the lowest in three weeks.

Unlike gold, silver has persistently respected its four-year trendline, currently finding support at 29.20. Nevertheless, weeklies are likely to extend losses below 31.00 and onto the 30.70 low reached in November. Due to a most constructive technical foundation on the monthly oscillators, we expect stabilisation to emerge near the 29.50 trendline. AT which point, gradual interest is seen building to guide the metal back up to 31.00 , followed by 37.00.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

Shanghai Composite Bounces Off 4 Year Low as New Leadership Meets

By Spreadbet Magazine

 

Its a topsy turvy world for Chinese stocks right now. The shanghai composite index rallied 2.8% today, after dropping to a near four year low earlier in the week after a meeting of China’s new leadership team implied that they would be ready to take action over the next few months to support economic activity. They also talked of the need for stability and a renewed focus on urbanization, potentially demanding more stimulative measures such as infrastructure spending. Another factor behind the bounce was China’s Insurance Regulatory Commission (CIRC) was reported to have lifted its limit on insurers to invest in banks, boosting Chinese bank stocks significantly.

Yesterday U.S. listed Chinese stocks were hit hard as the Securities and Exchange Commission (SEC) began to crack down on Chinese affiliates of the top four U.S. accounting, namely, Ernst & Young, Deloitte,  KPMG and Price Waterhouse Coopers.  The SEC has taken action after the accountants failed to produce fully audited documents and to cooperate in a fraud probe, despite the fact that the auditors claim that Chinese law prevents them from agreeing to the SEC’s demands. If a compromise cannot be reached there are several companies at risk of being delisted from the U.S. market exchanges. The SEC’s action adds to the misgivings of investing in Chinese equities listed on the North American market after a catalogue of accounting scandals revealed over the last few years.

The new Chinese politburo now needs to follow up action with words to add conviction to today’s relief rally in a market which looks cheap but can’t seem to consistantly shake off the negativity.

Research provided by Spreadbet Magazine

Is France’s Downgrade by Moody’s Already Priced into the Cac 40?

By Kathryn James

The markets still appear to be digesting last week’s downgrade of France by Moody’swith a pinch of salt. Although instant negative price action hasn’t hit France’s main index the Cac 40, I have observed that media interest in France’s economy is on the uptickand more articles are hitting the headlines as the subject of economic uncertainty in France begins to gather force (see this article  from the Economist).

The following chart is an overlay of the Dax versus the Cac which shows the Cac has underperformed the Dax throughout 2012. The Cac has retraced 61.8% of the 2011 decline compared to the Dax’s almost 100% Fibonacci retracement. In September the Dax measured a high of 7478, fairly close to the 7600 highs made in quarter two 2011. The spread between the two major European indices could be signalling that a disconnect in Europe is still at large and a surreptitious pricing of the Moody’s downgrade may have already occurred.

 

Since the 2011 lows the weekly Cac chart has made a series of constructively bullish higher lows but as yet has failed to break above the 3600 high made in March this year. The triangle pattern remains intact and 3600 is clearly the Cac bulls biggest resistance to overcome.

 

On the Daily chart the Cac has made steady progress from the June lows but has remained in a sideways consolidation phase since August. The daily uptrend is still intact but I’m closely watching the flag-like consolidation pattern for indications of the next direction. 3600 is close to the high end of this flag and as a significant resistance level a clean break with a sustained hold above could trigger a big rally that targets 4000. On the flipside if weakness hits the tape from here, a break of the uptrend followed by a break of the flag support around 3350 (with a close eye on 3300 as support) could mean a test of the June lows is possible.

 

To summarize, it seems the Economist and a few others media forces may have started the ball rolling on France and while this may well settle down - should market peace and goodwill return - it’s worth noting that further developments to this tale may excerpt influence on the Cac’s ability to break through 3600 and limit further upside potential. The Cac is stuck in a trading range, so a break of support or resistance in either direction should present a tradeable opportunity in the near future.

Silver’s Golden Cross

By Ashraf Laidi

Since 2007, there were six patterns of Golden and Death Crosses in silver. Each of the patterns successfully predicted declines and rallies respectively.

We’ve heard of golden and death crosses. Sometimes they work, sometimes they don’t.  The trick is to examine the frequency as well as the track record of effectiveness in golden and death crosses.

When short-term moving averages cross above longer-term moving averages, the pattern is called a “Golden Cross” and usually anticipates higher prices.  Conversely, when moving averages, cross below longer-term ones, the pattern is known as “Death Cross” and is usually indicative of falling prices to come. The key is to figure out, which moving averages to use.

In the case of silver, the 55-day moving average has just crossed above its 200-day moving average for the first time since October of last year.

 

 

2 GOLDEN CROSSES SINCE 2007
November 2007, the Golden Cross led to a 61% increase over 5 months.
March 2009, the Golden Cross led to a 291% rise over 25 months.

3 DEATH CROSSES SINCE 2007
July 2007, Death Cross leading to a 17% decline over 1 month.

August 2008, Death Cross leading to a 51% decline in 2 months.
October 2011, Death Cross leading to a 29% decline in 2 months.

GOLD vs. SILVER
Compared to gold, silver seems to have more scope to regain its record high as the positioning in the metal among speculators has more upside. The number of silver futures net long contracts in the Commodity Exchange (Comex) stands at 34,000, nearly 120% below the record high reached in 2004. Meanwhile, net longs in gold are at 191,000, less than 30% below the 2009 high.

Among the reasons silver longs remain well below their record relative to those in gold is the 2011 collapse in silver, which resulted from a four-time increase in margin requirements by the Chicago Mercantile Exchange. The cost of trading silver jumped by more than 80%.

As central banks find original ways to monetize their nations’ debt– ECB vowing to purchase unlimited amounts of eurozone bonds in the event a nation requests assistance & the Fed buys bonds indefinitely (until unemployment becomes more subjectively acceptable)—the case for metals grows in appeal. And with it, global short term rates remain near zero.

Industrial demand for silver and its eroding supply relative to gold also supports its price. People may desire gold, but companies need silver. Year to date, silver is up 22%, compared to 13% for gold. The gold/silver ratio could show further declines from its 52.0 level. In 2010, the year of QE2, silver rallied nearly three times as much as gold.  With gold/silver ratio expected to fall back towards low 40s and gold is seen regaining the 1850s, silver could well regain the 42.0-43.0 territory.

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

A Quiet Summer Reflected in the VIX

By Kathryn James

The stock markets have grinded higher throughout the summer holiday period as the soothing perception of ever-lasting support from the Central Banks appears to have placed a floor under prices. Summer markets are traditionally slower - trading volumes diminish and tough decisions are put on the back burner as investors concentrate on family, holidays and relaxation, focus on the financial markets wane  and tactical trading can be difficult to gauge and frustrating at best.

The low-volatility is reflected in the current price of the VIX which hit a low of 13.67 this week and closed yesterday at 14.29 down 48% from the 4th June high of 27.73; back on 16th March it touched 13.66 so an eye on this level for support may be prudent.  Lower levels from here would reflect numbers not seen since before the financial crisis began back in 2007 and a return to a ‘Goldilocks economy’ - yet there has been no fundamental change in the world despite the recent optimism.

The VIX is widely known as the ‘Fear Index’ where higher prices reflect the broadening levels of worry and angst in the market; on the contrary low prices reflect the opposite – denial and complacency.

In summary what we have at the moment is a complacent summer market, with an eerily quiet VIX hitting the low teens and while a summer panic has evaded us this year unlike the turbulent summer of 2011, the vacation period will soon be over and traders will trickle back to their desks, risk will rise to the fore again offering more technical opportunities ahead.

 

Spanish Ibex: A Cause for Concern?

By Kathryn James

The Spanish 10 year bond yield has tested and broken through 7% again today; this is not a good sign for the markets and doesn’t bode well for the Spanish Index. The Ibex has fallen back over the last two days from the highs of 7200 in the face of strong economic headwinds and realisation that the global recessionary stumbling block may be around for a while longer.

In analysing the daily chart (see below) you can see that the sell-off from the highs in March was relentless and steep – a little too steep – when the downtrend line was eventually broken at 6300 at the start of June, a rally of 900 points ensued over a one month period. It would have been tough to anticipate and trade this move with conviction, as bearish anxiety in Spain was extreme but I’ve seen this quite often, where the first trend line break of a fairly steep line can present an excellent set-up to trade a reversal (at least for traders brave enough to try!)  It’s currently trading at 6847 which is over 350 points down from the recent highs and has today entered the open gap on the chart, which would close at 6724.

For most sensible technical analysts, the trend is your friend is a favoured adage, and in the case of the Ibex the downtrend is strong and apparent. It’s highly likely that the trend will resume at some point and the fact that the Ibex has encountered major resistance at 7200 and failed to break through means this could be sooner than later. A break below the low of 5987 - seen on 6th June - is far below but would allow a more sensible and less aggressive trend line to be drawn from the March highs to the 7200 resistance high.

To maintain perspective and see both sides, the open gap could offer support here and the potential for a bullish NFP to edge the markets higher is possible, a break of 7200 and close above 7210 would be constructively bullish for the Ibex.

 

Oil, Gold, Copper & Silver

By Ashraf Laidi

NYMEX US Crude (WTI) is the 3rd worst performing commodity year-to-date behind coffee and cotton. The decline is highlighted by the fact that it has fallen 15% relative to a basket of 23 commodities. Speculators’ net longs (longs minus shorts) in the NYMEX have fallen to an 8-month low of 113,000 contracts.  Considering these negative metrics, we could see a corrective rally towards the 200-week moving average (88.30s). Selling the bounce is likely to ensue near 93.70-94.20, as negative global growth dynamics are seen offsetting any stimulus from central banks’ liquidity-injection operations. A return back to 80.00, is likely to pave the way for an extension in the 3rd major downleg, nearing 76.00.

GOLD attempts to break out of its 7-week long consolidation range of $100, facing immediate resistance at 1603-5, which is the 55-day moving average. A clear break above it is likely to retest the 1633 high from June 19. Subsequent target stands near the all-important 100-day moving average of 1642. Medium-term remains neutral-to-negative as the Fed’s decision to extend a shortened and sterilized version of QE is inadequate to maintain gold’s momentum. Risks remain to the downside, with the 100-week moving average as the principal focal point of support, currently at 1544.

COPPER has outperformed all energy commodities, year-to-date, while being on equal footing with gold and silver. The rebound in the final week of June proved the biggest since April. Momentum appears ripe for a break out above the April trend line resistance, for a follow-up ascent towards the 55-week moving average (8070), a technical level (the average and NOT the figure) not broken since August 2011 . We expect downside pressure to rebuild near the 8300s, which is just below the important 100-week moving average (8510). Key support seen holding at the 200-WMA (7095).

SILVER’s weakness is underlined by its 4-month decline relative to gold, a metal, which has remained mainly in consolidation. On the positive side, silver continues to hold above its 4-year trendline support near 27.00. We would need to see a daily close above 28.15-20 as a pre-requisite for the latest downtrend to reverse. Any such rebound would then be assessed against the key 55-day moving average (28.90), which has not been broken since mid March. Any further breakout is seen extending towards 29.95. On the downside, bulls must watch out from a weekly (Friday) close below 27. 00, which represents the all-important 4-year trendline. A break below it would threaten the foundation of the triple lows of 26.00 (September 2011, December 2011 and June 2012) for a potential continuation towards the 200-week moving average of 23.30.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

The Euro Breaks Continuation Patterns to the Downside

By Kathryn James

As Cyprus boards the bailout bandwagon and another Eurozone summit beckons, the Euro continues its struggles against adversity and technically looks to be firmly rooted on the losing side versus a few other major currencies.

EUR/USD has been in a downtrend since breaking the neckline of the triangle pattern at 1.3000. June began well for the Euro with a bounce from the 1.2287 lows, but the short-term volatile pause against the prevailing trend has sketched out a classic flag pattern on the daily chart, resistance of 1.2623 proved too hard to hold and the flag support line finally broke last Thursday (see post)

As mentioned previously on Better Trader flag patterns represent a continuation of trend, in the case of the EUR/USD this is down. To get an idea of how much lower the Euro can fall against the dollar the target for this pattern is calculated to 1.1750.

 

The Euro plight can also be seen in the currency cross charts of the EUR/GBP and the EUR/JPY. Against sterling, a similar pattern has emerged for the Euro, with the support line from the flag being broken yesterday.  The measured target is calculated to 0.7707.

 

The EUR/JPY chart also broke down from a rising wedge pattern yesterday; a wedge pattern is similar to a flag in that is a continuation of trend, but a wedge will make higher highs and high lows within a contracting range, as the correction loses strength and an imminent break presents.

 

Ironically Greece and Cyprus’s economies will benefit from a weaker Euro, as cheaper holidays for the rest of us will ultimately produce a boost in tourism to Europe.