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Msg  100318 of 245267  at  8/5/2012 3:59:08 PM  by

Bretton_Woods

The following message was updated on 8/5/2012 4:16:12 PM.

Market Update Q3 2012: Reflation still in play

Hello Board,

Another market update for participants here. I have changed my chart views to larger sized charts. Hopefully this isn't too difficult, you may need to change your view settings.

For my work nothing has changed, I see global growth continuing to deflate and markets that are refusing to fully price this in, as the hopes for reflation remain. I don't know what central bankers will ultimately do, however I can see in the price action in key indicators I follow that markets haven't thrown in the towel on some sort of significant action. That being said we are definitely late in the day and something needs to be done shortly. I will start with the credit markets, look at key currencies, and finish with my gold and silver outlook. Equity analysis will be left out due to conflict issues with clients however I will update my services in the future for those seeking detailed trade information.

I see gold and silver in perfect position and believe we are at a great opportunity point much like the breakout above 1000 in gold post the financial crisis, or even the silver breakout at 19 a few years ago. This is likely contingent on central bank action however as we saw during the credit crisis in 2011 past relationships may be changing.

Credit Markets

The weekly charts for Treasury yields have dramatically improved. Not only have the daily's seen some impressive intraday moves, but the weekly's look like they want to bottom.

10 year yield, weekly chart. See the candle formation for the week coupled with the common divergences:
http://stockcharts.com/h-sc/ui?s=$TNX&p=W&yr=4&mn=0&dy=0&id=p82646474212&a=271869890

30 year yield, same thing happening. Strong hammer put in for the week:
http://stockcharts.com/h-sc/ui?s=$TYX&p=W&yr=4&mn=0&dy=0&id=p77152729522&a=271869887

On the daily charts we are seeing similar divergences and price action as indicated earlier. One of the indicators I like to run when we have price action like the above is to see how each price move related to the Bollinger band. One way in which Bollinger recommends using his bands particularly for possible double tops, bottoms, or divergences is to see where price fell relative to the lower or upper band on each move you are considering. With that in mind I point to the 10 year yield daily chart. You can clearly see the prior low was significantly more volatile in relative terms than the lower price low a few months later. This is a bullish setup and divergence:

10 Year with Bollinger Bands

http://stockcharts.com/h-sc/ui?s=$TNX&p=D&yr=1&mn=0&dy=0&id=p32835545832&a=273649367

All the above can be taken in context with the bond price market as well. Here I use the ETF TLT to give an idea of what this period of price has looked like. One reason I like using the ETF's is it gives good insight into volume trends in the market.

TLT-see the divergences taking place here on the upside. Most important for my work is what appears to be a distribution day during the last 2 weeks. This is the high volume downside day indicated.

http://stockcharts.com/h-sc/ui?s=TLT&p=D&yr=1&mn=4&dy=0&id=p98948193618&a=271869885

One note of caution here is that the TLT has been very strong, even in the face of this distribution day the on balance volume continues to hold steady and price is sitting at the 50 dma. If this were to break down I would get significantly more bullish risk but I would not be surprised to see this be very sticky up here. My point in the sovereign market is things look toppy if anything.

http://stockcharts.com/h-sc/ui?s=TLT&p=D&yr=1&mn=0&dy=0&id=p64303942571&a=272661176

Board participants can take this analysis out and look at additional ETF's in the space, including IEF. I recommend finding the 3x inverse 30 year yield ETF. See the volume in that market its a quiet indicator I have been using.

High Yield-See the washout volume, divergence, and push to the 200 DMA. This index has made new highs this week and the past push to the 200 could be setting the stage for a move higher. The key here is that risk is still being taken in this market even as the economy stagnates. My work uses these indexes for confirmation of what I am seeing in key markets. The fact we have strength here confirms the weakness in the treasury market and that is all. It does not speak to the sector, the spreads, or the economic reasoning. Personally I find it absurd people would buy junk in such a risky economy, however with the fed committed it could run for a long long time.

http://stockcharts.com/h-sc/ui?s=HYG&p=D&yr=1&mn=0&dy=0&id=p25063542400&a=271869952

Currency Markets

I am going to step back on the currency markets and look at everything from a weekly perspective, with longer term time frames. This is because as I post less here I have more stable longer term outlooks vs the intraweek work I do. Furthermore the market clearly is reaching inflection points on the long term frames.

USD-3 year weekly. Key here is see the post crisis trading range and the multiple tests of the 90 area. This move has been stable in terms of trend but has definitely weakened at the 83 level. In my opinion this is the markets way of being unable to fully price in deflation. Anyone who chases the dollar higher risks central bank action. If you look closely at the weekly structures the dollar should have been through this level by now but it looks to be weakening on a weekly basis.

http://stockcharts.com/h-sc/ui?s=$USD&p=W&yr=5&mn=0&dy=0&id=p71896285545&a=273672204

Yen, 5 year. The yen has also been unimpressive in my opinion. See the 5 year trend line broken here, with a retest and the potential for a serious double top shaping up.

http://stockcharts.com/h-sc/ui?s=FXY&p=W&yr=6&mn=0&dy=0&id=p19009449542&a=273656951

Euro 12 year, see the support in the 116-119 area. We are at a critical juncture one which should prove difficult to crack.
http://stockcharts.com/h-sc/ui?s=$XEU&p=W&yr=5&mn=0&dy=0&id=p82036727358&a=273653174

Zoom in on a 5 year to see the gap from the 3 year low in January holding. Also see the candle formation, engulfing with a follow through week on better volume. Downside momentum waning as well but ultimately market has a lot of work to do.
http://stockcharts.com/h-sc/ui?s=FXE&p=W&yr=5&mn=0&dy=0&id=p26265948286&a=273671527

Aussie dollar, 5 year weekly. Moving to upper end of the channel
http://stockcharts.com/h-sc/ui?s=FXA&p=W&yr=5&mn=0&dy=0&id=p07683288615&a=273604308

CAD-5 year weekly
http://stockcharts.com/h-sc/ui?s=FXC&p=W&yr=5&mn=0&dy=0&id=p92632967164&a=273656827

So we've seen the dollar, the euro, the yen, the aussie, the cad, now onto the swiss franc and then one other currency i'd keep an eye on...

Swissy long term. Whats interesting here is the price has come rich to the 200 week moving average...

http://stockcharts.com/h-sc/ui?s=FXF&p=W&yr=6&mn=0&dy=0&id=p02595789714&a=273655954

Finally the last currency I am watching is the Real. If you take a look again at this longer term chart one can clearly see the stabilization of the currency at the current support area. As much as these levels can eventually give ground , hopefully the above paint a pretty clear picture of support on risk currencies, resistance on the dollar and yen. I have specifically used the long term weekly charts to provide stability to this outlook. Ultimately, economically speaking, this should make sense as the concept of the dollar and yen providing global safety in the long run is rather absurd given the economic and demographic challenges we face.

Real, 200 is at 18.34

http://stockcharts.com/h-sc/ui?s=BZF&p=W&yr=5&mn=0&dy=0&id=p57632211640&a=273653660

Gold and Silver

For my work this is the fun stuff. We once again are at a critical place and one in which I think significant money is going to be made. For those who follow my work they know we've seen these longer term classic chart patterns trade perfectly in the gold market. This goes back to the inverted head and shoulders we saw post the credit crisis as well as the ascending triangle in gold a few years prior.

Gold 12 year trend channel with consolidation periods in between.

http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&yr=12&mn=0&dy=0&id=p70056403159&a=243111821

Gold, last 3 consolidations. One thing I like most about the current consolidation is if you look at the ascending triangle in 05-06 the low for the consolidation at 561 came almost immediately after the breakout high at 720. This is the same thing with the move to 1900. We saw nearly the low of the current consolidation at around 1535. This is in my opinion a perfect way in which the market can break out but then kick people off or keep those who are out, essentially out. They see the breakout don't jump on, then see the waterfall pullback, and then never come back assuming it was a false rally to begin with.

http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&yr=7&mn=0&dy=0&id=p42259504588&a=269442462

Gold, current consolidation. Multiple points here. See the weekly candles in the lower end of support, multiple shadows. The market continues to bid up the lows and close above the 1530 or so region. Secondly, a rule of triangles is that the most powerful generally break out about 3/4 of the way to the apex. I added time to the charts here to show where the apex would be, and from that worked backwards to find out where we might look for a move. That time frame happens to be September.

http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&yr=3&mn=0&dy=0&id=p98574765958&a=273674237

Silver

5 year has the same set up. Consolidation just about complete. I've added the triangle timing model into the chart.

http://stockcharts.com/h-sc/ui?s=$SILVER&p=W&yr=5&mn=0&dy=0&id=p79164526627&a=269443103

Silver zoom in of current consolidation. Comments here include see the weekly pushes back above 26.15 in the triangle consolidation as well as the way the market has 'quieted' down in the last 4 to 5 weeks. I see this as bullish as the market is essentially no longer volatile and off the radar.

http://stockcharts.com/h-sc/ui?s=$SILVER&p=W&yr=3&mn=0&dy=0&id=p80801915598&a=273675983

That is all for now,

BW


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Replies
Msg # Subject Author Recs Date Posted
100321 Re: Market Update Q3 2012: Reflation still in play danstraightman 0 8/5/2012 5:10:09 PM
100323 Re: Market Update Q3 2012: Reflation still in play glaciernine 3 8/5/2012 5:34:53 PM


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