Market Update Q4 2012, Credit, Domestic Equity, Global Equity, Currencies, Commodities, Gold/Silver, | Precious Metals Message Board Posts


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Msg  105097 of 247186  at  11/18/2012 12:45:41 PM  by

Bretton_Woods

The following message was updated on 11/18/2012 1:03:47 PM.

Market Update Q4 2012, Credit, Domestic Equity, Global Equity, Currencies, Commodities, Gold/Silver, Miners, China

Thought I'd take some time post election and pre holidays to look at where we are in as broad a sense as possible. I continue to target Q1 for my chart/market report based services to be available online. For now I thought I'd address the entire market spectrum for readers here in terms of what I am seeing, planning for, and doing. This will be a VERY comprehensive report and will combine multiple markets as a courtesy for readers here. For gold only investors you will have to dig out that section which is towards the end. This report will address the following.

1. Credit markets-Treasury's, Spreads
2. Domestic Equity-Dow, SPX, NYSE, Wilshire, long term, XHB, Lumber
3. Global Equity-Australia, Europe, Hong Kong, the risks I see
4. Currencies-Dollar, Euro, Yen
5. Key Commodities-West Texas, Copper, Grains, CRB
6. Gold/Silver
7. Miners, NUGT, GDX, Components, GDXJ, CDNX
8. China
9. Fiscal Cliff and my notes going forward

One other quick note, I'd like to announce my official CMT license as of a few weeks ago. I mention that here because long-term readers know I have been pursing this amongst other credentials.

CREDIT

I want to start this report with credit, and specifically in the treasury market as I think its constructive. We all know that fed policy is impacting the entire curve, but I still find value using treasury's for key trading levels because regardless of the end buyer, treasuries continue to impact intramarket action. One of the strongest technical developments I saw in the treasury market in the 2nd and 3rd Quarters was the push higher in price without an accompanying move in momentum (yields sub 1.4%). On a weekly basis, for my work, this should have been technically very significant negative divergence (bearish price, bullish yields). On a price basis this pushed the tlt to 131, the 10 year to 134, and the 30 year to 153. Before I drill into that time frame, first context.

30 year bond monthly price chart. Just see where we are trading, at the upper end of the upper channel-see the perfect monthly trade up to 153...

http://stockcharts.com/h-sc/ui?s=$USB&p=M&yr=20&mn=0&dy=0&id=p37863784407&a=277671413

The significant price momentum divergence from above can be seen here on the 12 year weekly chart. See the price action and the drop in MACD. This has happened on the bull and bear side within this market about 6 times this decade on a weekly basis, and all have tended to cause a turn in trend. Given where we were in the long term channel, this divergence screamed.

30 year bond, weekly chart-see divergence between 146 price in 2011 and 153 price in 2012 and momentum readings at 5 and 3 respectively.

http://stockcharts.com/h-sc/ui?s=$USB&p=W&yr=12&mn=0&dy=0&id=p40009289613&a=277671459

If we look at the 10 year note weekly chart the same divergence took place. The key for my work is these are long term charts with significant price momentum divergences

http://stockcharts.com/h-sc/ui?s=$UST&p=W&yr=14&mn=0&dy=0&id=p22420297132&a=279764780

I am running through the above excerise because the equity market at the time did not break down on this large move higher treasury's as there were signs of bull technical divergences, or in other words excessive pessimism. In fact equities based and then made the pre election run. I do believe there was significant optimism during the past 2 months that rates would rise steadily (safely) as the economy recovered. There started to be a slight pricing in of a rising curve, or at least rising bank margins coupled with a hope of housing demand (long term credit growth) in my opinion. That said, something happened along the way very recently, and I believe we are now seeing this lack of a breakdown in the treasury market to the middle of the channel as a serious issue. Again, given where we were in the long term channel, given the level of the divergence on a weekly time frame, I am surprised to see bonds hold, on a technical basis.

Lets look directly where we are today on the weekly.

TLT weekly, see the holds at the 50 week ma, see the move higher last week. This in my opinion should not be occurring based on the overriding long term technical breakdown. This suggest risk aversion is still high, even with Fed manipulation.

http://stockcharts.com/h-sc/ui?s=TLT&p=W&yr=2&mn=0&dy=0&id=p45184899012&a=282740021

Here's what TLT did on the move to the high's, on a daily basis. There was a daily divergence too, readers take note we are on daily charts now so this is a daily momentum divergence within a weekly larger momentum divergence. See the first peak on heavy volume, the drop in volume on the high, and the pickup in downside volume. Also now see the shift, the move higher recently on good volume...

http://stockcharts.com/h-sc/ui?s=TLT&p=D&yr=1&mn=0&dy=0&id=p39431542210&a=282735336

If we look at UBT, a 2X levered long treasury price etf, we are seeing good up volume here as well as the market held.

http://stockcharts.com/h-sc/ui?s=UBT&p=D&yr=1&mn=0&dy=0&id=p98652750113&a=281133669

You can see this entire transition in my opinion from looking at the price/volume trends on SBND, a 3x levered YIELD ETF. Just see how broken down this looks. We had major volume on the bull side months ago, that is all unwinding, and simply put yields could not rally past to any economically meaningful level that would signify real macro demand for credit, and a reduction in financial market risk aversion. I would not be surprised to see a test of the 1.4 level on 10's if things don't stabilize.

http://stockcharts.com/h-sc/ui?s=SBND&p=D&yr=1&mn=0&dy=0&id=p09527405042&a=278348678

Ok, so that covers the treasury market, I am seeing an extremely sticky price market that could be the result of fed manipulation even as money comes out to take higher risks elsewhere, however I would prefer to wait and see that rather than assume it. Further the equity indicators I use don't suggest this, more there later. For my work, treasuries clearly say we are stuck in the woods. In a years time I would not be surprised to see Treasuries lower, but this past weeks hold at the 50 says it won't happen easily.

SPREADS

A quick look at where we are on spreads. Nearer term Corporates are trading under 1%. This doesn't mean the party has to end, but it does make allocation difficult. Again, I have commented many times on being in uncharted territory. That is to say the RFR (risk free rate) is no longer RF (Treasury Downgrade-soft defaults) yet the world works off these spreads and it important to understand where they are trading. One also has to be flexible enough to understand corporates can trade negative to treasuries under specific conditions, and historically this has happened in the past. I have commented on the end game for QE, which is to say at some point the underlying Treasury bill, note, and then bond hit price high's (yield lows), and ultimately spreads against any of those on MOST credit assets can only tighten so far(high yield will always carry more risk than a government bond). The last piece then is to push equities and other asset classes higher and higher but at some point Bernanke's attempt to use the financial markets as an economic transmission in my opinion has a limit. Although the fed balance sheet can absorb a different set of economic realities, one has to think about this as their balance sheet composition and duration changes drastically.

My key takeaway here is that yields are relatively tight, but it is a result of both the primary yield AND the underlying yield having both come in with the underlying trading at a historic low in nominal terms, and negative in real terms (Treasuries). Unless the fed is ready to assume a new set of credit risk on its balance sheet (beyond treasuries and MBS-QE 3 took MBS spreads negative on an OAS basis) or investors are willing to take spread valuations to 05-06 levels we are near a limit. Ultimately the fed can buy everything under the sun at prices that make no economic sense but I cannot see that happening without serious pushback. For now theyve taken the entire treasury curve down, brought in mortgage rates, and pushed everyone out on the risk curve to the point where fixed income spreads are tight(not historic if you include 05-06) and equities are at decade highs.

Corporate Spreads, under 1%
http://research.stlouisfed.org/fredgraph.png?g=cUc

As you move further out the curve there's about another 1% premium to capture, but is it worth the added duration given the stage of the cycle.

Corporate Spreads, 7-10 year, 1.88%
http://research.stlouisfed.org/fredgraph.png?g=cUi

LQD ETF price performance(duration approx 7+ years), US 10 year in lower panel-see both underlying and asset moving together limiting the upside here at some point.
http://stockcharts.com/h-sc/ui?s=LQD&p=W&yr=7&mn=0&dy=0&id=p90107870941&a=283419451

High Yield, 5.94%-see here, more room for spreads to drop but nominal yield is already low. This spread data is manipulated by such a large decrease in the underlying. Back in 03-07 Treasuries were paying 5% so spreads could tighten and still return a decent rate.
http://research.stlouisfed.org/fredgraph.png?g=cUf

HYG Price performance chart, 10 year in lower panel
http://stockcharts.com/h-sc/ui?s=HYG&p=W&yr=7&mn=0&dy=0&id=p30110145051&a=283420015

DOMESTIC EQUITY

For US equity I am going to take a giant step back. This will be a quick look at 4 longer-term headline indexes and 4 major indicators I find troublesome. I don't use the price projections on these longer-term patterns as a major indictor (20 year charts). I tend to view the price patterns as having some validity, but more importantly I use the longer-term price patterns to understand where 'we are' in the greater context. This then allows for better understanding as to what economic news and developments are actual financial market risks, and what if anything is priced in.

First the visuals....

Dow 20 Year-possible head and shoulders still developing, right shoulder still valid even though well above left. This is one of the technical megabears most infamous looks. For my work it just means we are still trending higher but are clearly in an upper range. I haven't fully ruled out an all time high in the Dow as it is price weighted and manipulation runs supreme these days. That said the Treasury market isn't cooperating and IBM is under pressure, both of which in my opinion would need to turn for that to occur.

http://stockcharts.com/h-sc/ui?s=$INDU&p=M&yr=20&mn=0&dy=0&id=p22027536054&a=277251807

SPX-upper end of the decade, cyclical uptrend still intact

http://stockcharts.com/h-sc/ui?s=$SPX&p=M&yr=20&mn=0&dy=0&id=p96497337996&a=277250185

NYSE 20 year, most interesting monthly candle held the diamond formation. This market has underperformed the indexes pretty significantly and is the only major US index to not best it's Lehman crash levels.

http://stockcharts.com/h-sc/ui?s=$NYSE&p=M&yr=20&mn=0&dy=0&id=p86497231001&a=277251494

WLSH 20 year, see the top looking more and more likely

http://stockcharts.com/h-sc/ui?s=$WLSH&p=M&yr=20&mn=0&dy=0&id=p98179954766&a=277206549

Breadth-A quick comment on breadth, just see the % of stocks above the 200 day ma on each rally since the 09 lows (bottom two panels). We are continuing to deteriorate and now have a triple top divergence between SPX high's and stocks above their 200 day MA's. This one is hard to square if you are bullish equity in my opinion.

http://stockcharts.com/h-sc/ui?s=$SPXA50R&p=W&yr=8&mn=0&dy=0&id=p20259715030&a=253596624

Yield curve-just see the uptrend in 10's/2's has broken it's uptrend from pre crisis lows. Classically this would hint at a slowdown however we know the fed is sitting on the 10 so the data is manipulated. I still think there is validity in some of this however, because low long end rates have not proven to be economically stimulative post financial crisis. The curve coming in does however reduce net interest margins and slowdowns in incentives to lend, assuming willing borrowers. Again I am of the belief that so long as we are in fiat based fractional reserve system, you need to see yields rise to confirm sustainable growth. Low long term rates is a sign of economic stagnation, not sustainability or growth.

http://stockcharts.com/h-sc/ui?s=$UST10Y:$UST2Y&p=W&yr=7&mn=0&dy=0&id=p81906430336&a=281130876

High Yield Relative to Corporates

HYG:LQD-see the lack of a higher high on high yield in relative terms to corporates on this move higher in equities. This divergence to me is an issue as outperformance by High Yield should confirm equity moves higher. Credit markets are implying a preference for corporate bonds while stocks trend higher, this is an economic divergence

http://stockcharts.com/h-sc/ui?s=HYG:LQD&p=W&yr=5&mn=0&dy=0&id=p31595734275&a=283448527

Savings Rate

Another important point on a macro level is that the US Savings rate has come down dramatically and is back near levels where we COULD top out. It remains to be seen if the fed can push this down to the 1% range which would imply a form of continued levering by consumers even if bank loans stay tight. That in turn could extend this cycle however from a longer-term perspective we are clearly running low on fuel.

http://research.stlouisfed.org/fredgraph.png?g=cU3

Quick comment on housing stocks. It was last summer after the debt downgrade that the XHB bottomed. For those who were ground floor they remember the divergence as stocks opened that monday on the lows below support only to rally in the last 30 minutes and from there on never looked back. The last year the big winner was the xhb. Now we have the complete opposite scenario setting up. I am not saying these stock have necessarily topped, the point is to recognize the difference. Nobody wanted these stocks last October, now I can't stop hearing about them.

http://stockcharts.com/h-sc/ui?s=XHB&p=D&yr=1&mn=8&dy=0&id=p35349387354&a=283470727

Lumber is also at a 5 year high...

http://stockcharts.com/h-sc/ui?s=$LUMBER&p=W&yr=8&mn=0&dy=0&id=p58058044296&a=283470081

GLOBAL EQUITY

I have 3 major large global markets that have me concerned or are on my very near term daily watch list. These are Australia, Hong Kong, and the DJ Stoxx 50, basically Europe's Dow Jones Average. For these 3 markets here are the important views. All 3 of these markets have their own macro story's, with Europe and Australia potentially being large and globally impactful. I will not review the fundamentals of each economy but for Australia and Europe I believe these are globally significant and not resolved as of now.

DJ Stoxx 50

DJ Europe. 7 year. See the down-sloping 200 week MA, see the trend line, and the price pausing here. Watch the RSI at 50 closely.

http://stockcharts.com/h-sc/ui?s=$STOX5E&p=W&yr=7&mn=0&dy=0&id=p27528018845&a=279308008

DJ Europe, zoom in 3 year weekly, see the candles inability to get above the 200 week moving average. Price is stuck.

http://stockcharts.com/h-sc/ui?s=$STOX5E&p=W&yr=3&mn=0&dy=0&id=p26716775536&a=279308444

DJ Europe 1 year daily, see support coming under threat

http://stockcharts.com/h-sc/ui?s=$STOX5E&p=D&yr=1&mn=0&dy=0&id=p65422917986&a=279486202

FEZ, DJ Europe ETF, 1 year-See what appears to be potential distributive volume. Point here is this index looks to be breaking after this weeks trade.

http://stockcharts.com/h-sc/ui?s=FEZ&p=D&yr=1&mn=0&dy=0&id=p53969600994&a=279768853

As far as Europe goes the point is the indexes remain week. On a long term fundamental basis the price levels and PE 10's etc are at historic lows but that is secular bullish point, not a near term price one. I am looking to Europe indexes to show strength or weakness in the near term and the potential for a pullback looks high. Right now the inability to break above key long term moving averages is an issue. Further the peripheries spreads are better but not great so I see that picture as mixed allowing for equity pressure if it were to develop.

Australia-we all know the housing market bubble (now valued higher than US at peak based on specific metrics) and the natural economic link with China. With the slowdown in China and with Australian consumers levered there has been much speculation as to when this index takes a hit. I want to be clear, this is not a gimmie. This is about evaluating real risks in the global economy and IF they are going to play out. The RBA is lowering rates, and China has shown some positive data recently. The other side of that coin monetary policy lags, we've heard policy makers in Australia talk of the end of the mining boom, and China's growth appears too centrally planned to be sustainable (ghost cities etc). On top of that we know that all bubbles end and Australias housing market is just that. First the visuals....

14 year, see the downtrend in play

http://stockcharts.com/h-sc/ui?s=$AORD&p=W&yr=14&mn=0&dy=0&id=p91822599305&a=277652308

7 year, see the break of the 200 week ma this week

http://stockcharts.com/h-sc/ui?s=$AORD&p=W&yr=7&mn=0&dy=0&id=p29808539671&a=277652361

2 year daily, see the potential breakout and the breakdown last week. There was a large 60+ point down day, this index to me could start a larger global pullback as it has enough size and significance to be relevant. The RBA put lowering rates on pause, they may need to reconsider if the selling continues.

http://stockcharts.com/h-sc/ui?s=$AORD&p=D&yr=2&mn=0&dy=0&id=p61841565984&a=279831070

EWA, Australia ETF, 1 year-again, potential distributive volume up here, but so far price holding. Option open interest on the put side of this market is heavy for next few months out.

http://stockcharts.com/h-sc/ui?s=EWA&p=D&yr=1&mn=0&dy=0&id=p85889845679&a=278730293

If we drill down a bit one of the more disturbing technical developments has been the divergence between key bank ADR's and the headline index. See 3 of the 4 Aussie Bank ADR's, and their price performance post 09. All have made 2012 high's while the index has not been able to best its 2011 high...

WestPac
http://stockcharts.com/h-sc/ui?s=WBK&p=D&yr=12&mn=0&dy=0&id=p68651782984&a=283412319

Australia and New Zealand Banking Corp
http://stockcharts.com/h-sc/ui?s=ANZBY&p=D&yr=12&mn=0&dy=0&id=p88587174255&a=283412351

National Australia Bank
http://stockcharts.com/h-sc/ui?s=NABZY&p=D&yr=12&mn=0&dy=0&id=p98806319704&a=283412480

Lastly, if we just zoom in on Westpac and it's price and volume patterns relative to a headline index unable to make new highs, the distribution is obvious...

http://stockcharts.com/h-sc/ui?s=WBK&p=W&yr=4&mn=0&dy=0&id=p75244245169&a=283412800

So Australia is on the front of my Global Equity radar. Now onto Hong Kong, which shares some price correlation but I do not see having the same domestic macro issues....

Hong Kong, 14 year weekly, same story as above

http://stockcharts.com/h-sc/ui?s=$HSI&p=W&yr=14&mn=0&dy=0&id=p60991918474&a=278628964

Hong Kong 2 year daily, see attempted breakout 2 week ago, only to fail the following week, watch this one close in my opinion. Not as dramatic as what is happening in Australia but still at a critical level. Hong Kong tends to have a bid under it during QE's as well due to the dollar peg however that can work both ways. more on the dollar next.

http://stockcharts.com/h-sc/ui?s=$HSI&p=D&yr=2&mn=0&dy=0&id=p21701889132&a=279829618


CURRENCY

Going to start with the USD. Here's what I see potentially shaping up. First some context. The post crisis dollar has basically been batted back and forth between the concepts of runaway inflation and massive deflation. I've discussed this at length so rather than repeat here is the visual of the post crisis dollar. The key is the bounces from the lower end when crisis hits to the selloffs when the fed steps in. Eventually intervention wears off and the dollar finds a floor again as deflation is in my opinion the true state of the economy left to its own vice.

The key here is this third bounce during which the fed implemented operation twist. The dollar hasn't been able to meet prior or lows, and is building more of a longer-term triangle. There is clear indecision here. Participants don't know if the fed can break or push off the 40 year build in credit and subsequent deflationary bust. Will consumers re-lever? Will the feds asset reflation efforts jump start real economic activity? Is the entire thing counterproductive and simply raises the cost of needs vs wants? If the fed doesnt see desired results, will they push till they blow out the currency vs allowing the mal-investment correct? You get the point, for my work if either of these upper ranges give way its lights out in that direction. So upside breakout would be deflationary (90 range), downside inflationary (70 range).

Post crisis dollar-see the triangle and the latest bounce to the middle range.
http://stockcharts.com/h-sc/ui?s=$USD&p=W&yr=7&mn=0&dy=0&id=p96143150151&a=279791759

Near term dollar-Here is my outlook. There has been a lot of talk of the dollar not weakening on QE3. There are some fair points there. This is not 2010 and we have not seen moves in materials etc like we did off QE2. We are 4 years into this cyclical bull and the business cycle is much closer to the end then the start. That said, the fed is committed to easing and this causes dollar rips to be sold in a relative context, but certainly feels different time than even a few years ago.

Notice the uptrend since last summers lows and the debt crisis, which has now broke down (no higher high but the prior low held as well). I see the potential for a head and shoulders building. I'd keep close eye on that left shoulder level at 81.78 and the 200 day at 80.71. If the market fails up here and reverses that could set off gold and yields in my opinion. If not, then I'd expect the fed to do more come January and clearly risk would take a near term hit. IF we fire through that left shoulder range I'd think that would be coupled with a negotiation breakdown, a rise in treasuries, and what should be a rise in gold. The point is we've got a good technical area on the dollar to keep an eye on as we approach the final 6 weeks of the year.

http://stockcharts.com/h-sc/ui?s=$USD&p=D&yr=2&mn=0&dy=0&id=p25788357897&a=283386757

Euro-essentially an inverse of the dollar as it is the largest component. See the potential for an inverse H&S at the 126 level.

http://stockcharts.com/h-sc/ui?s=$XEU&p=W&yr=7&mn=0&dy=0&id=p76007131443&a=277654081

Yen-Last currency I will comment on as the Aussie I wouldn't touch with the underlying economy there. The CAD looks mixed and swissy pegged themselves to the Euro so its moot. In my last quarterly I commented on a yen peak. We saw just that. I do not know if this has legs but I'd be constructive on pullbacks. This is one market where the dollar could exert strength without too much damage on other risk assets globally. Further the BOJ has made significant changes to their QE programs that has given them a near term lead in the race to debase.

Long term....

http://stockcharts.com/h-sc/ui?s=$XJY&p=W&yr=7&mn=0&dy=0&id=p01023289372&a=277652895

Near term weekly

http://stockcharts.com/h-sc/ui?s=$XJY&p=W&yr=2&mn=0&dy=0&id=p28887387238&a=279265354

KEY COMMODITIES

Quick look at a few key commodities.

West Texas. The 75 level has proven to be strong support, however the 82+ level has the 200 week and with what appears to be a sustainable skirmish abroad, price here seems ok....

12 year, see post crisis support area, we are back at it
http://stockcharts.com/h-sc/ui?s=$WTIC&p=W&yr=12&mn=0&dy=0&id=p23456142247&a=277652587

Zoom on the 3 year, weekly hammer as of last week, price holding 200. As of now I have this as bullish even though I recognize inventory and demand issues.
http://stockcharts.com/h-sc/ui?s=$WTIC&p=W&yr=3&mn=0&dy=0&id=p53435322971&a=277652589

Copper-a lot like West Texas, I'd say keep an eye on the 200 weekly ma here as well.
http://stockcharts.com/h-sc/ui?s=$COPPER&p=W&yr=14&mn=0&dy=0&id=p13815188409&a=279022097

Zoom..
http://stockcharts.com/h-sc/ui?s=$COPPER&p=W&yr=3&mn=0&dy=0&id=p13277062098&a=277652586

Quick comment on the breakdown in grains. I only post this because we had the big drought and price moves. See soybeans broke last week..

Soybeans, 1 year
http://stockcharts.com/h-sc/ui?s=$SOYB&p=D&yr=1&mn=0&dy=0&id=p52063721661&a=277652622

Wheat 1 year closed below 840...
http://stockcharts.com/h-sc/ui?s=$WHEAT&p=D&yr=1&mn=0&dy=0&id=p05321368612&a=277652602

Step back on wheat to 12 year, see there is room for correction...
http://stockcharts.com/h-sc/ui?s=$WHEAT&p=W&yr=12&mn=0&dy=0&id=p87755678721&a=277652603

CRB-similar to West Texas and Copper above. Just see the 292 level for a possible hold. That would be potential inverted head and shoulders and support at the 200 week ma.
http://stockcharts.com/h-sc/ui?s=$CRB&p=W&yr=7&mn=0&dy=0&id=p64969005696&a=279018182

Gold/Silver

For readers here they know the context of the gold market. We are coming off a multi year descending triangle consolidation, and saw a nice breakout last September right around when the seasonals, technicals, and bernanke came together as one would expect. Since that time the gold price punched out of the descending triangle to the 1798 level where prior 1792 resistance existed. Since then we have seen a correction which as of now I see setting us up for another move higher.

First context, long term with last 3 breakouts...

http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&yr=8&mn=0&dy=0&id=p29970301958&a=269442462

Zoom on current breakout. See the punch out and the resistance at 1798. Two weeks ago trading on the pullback was very positive from a technical perspective. On a weekly basis we held the 50 week convincingly, and volume's were good across the board. This week price has held the upper end of the prior weeks trading.

http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&yr=3&mn=0&dy=0&id=p12499343777&a=279310287

On a larger retracment level, on a WEEKLY CLOSING BASIS, the market pulled back a perfect 50% from the breakout level.

http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&yr=2&mn=0&dy=0&id=p18636066491&a=282854905

And lastly on a daily basis, what I liked about 2 weeks ago was how the market structured. We had a large shakeout down day to the 200 day ma, only to hold, and then take it all back in one day. This week saw resistance at the underside of the 50 this week which was to be expected. The question becomes where do we go from here. First the visual.

http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&yr=1&mn=0&dy=0&id=p18046825628&a=282855111

Silver

Long term-see price outside the longer term channel but the triangle consolidation complete. A recapture of the longer term trend would be bullish like 2010.

http://stockcharts.com/h-sc/ui?s=$SILVER&p=W&yr=12&mn=0&dy=0&id=p34608908263&a=244559623

Silver, past two consolidations, weekly

http://stockcharts.com/h-sc/ui?s=$SILVER&p=W&yr=5&mn=0&dy=0&id=p39870442257&a=269443103

Zoom in of current triangle-see the hold of the downtrend triangle line and the 50 week ma.

http://stockcharts.com/h-sc/ui?s=$SILVER&p=W&yr=3&mn=0&dy=0&id=p83769749644&a=273675983

As of this writing, the weekend of the 16th, I am very positive gold. I could come up with multiple economic reasons as to why. IF, and I say this again, IF we are entering a debt crisis 2011 scenario, then the upper end on gold is anyones guess but I want to be on that train. The reason being simple, we pushed to 1900 last time, and that was the treasury's 1st downgrade. Given that the downgrade came due to political stalemate more so than ability to pay (again, rating agency speak, soft defaults are recognized as payment in the mainstream which is all they want to see), given the results of the election, and given the fact there is more here than just a debt ceiling raise, stalemate cannot be ruled out.

Then game that out, a second downgrade looming (based on political gridlock), less money should theoretically run to Treasury's (although I admit a bulk still will as a safe haven-contradiction we all know). At the margin that leaves more money for gold relative to 2011, and in this market treasury money margin is massive relative to gold. Don't forget last fiscal cliff crisis the dollar did not get bid till much later, gold was a big winner in 2011, and we are starting from a higher base this time around.

If we don't fly over the cliff, then we have the extension of QE and what should be the continual rise of the fed's balance sheet. Harry Reid as of last week has been calling for a move up to 18+T on the debt limit, which says quite a bit about where the budget is heading regardless. I could see a can kick coupled with a debt raise as sequestration has easy outs for politicians if they can't agree on anything post this initial show they've put on to date (they made it highly punitive, but easily adjustable). I'd say that scenario could hurt gold on the news, but the real price driver is that debt limit and low to negative fed rates, neither or which appear to be reigned in anytime soon. This is not to say gold wins no matter what, but the further we get down this road it sure seems like it, especially now with the treasury market under both political and mathematical limitations. The real way gold loses in my opinion is if everyone loses (true deflation, true recession), and thats the outcome they are doing everything in their power to stop.

The final point before I enter miners on Gold is I believe we are retracing price here and consolidating. That means miners should have a longer term upside bias, but pullbacks should be volatile as they are correlated with the broad market more so than physical. Until I see breakdowns in gold back below the 50 week (1665+) and back into the triangle it is steady as we go for my work. This to me is no different than the past seasonal breakouts we've seen over the last x years and I intend on keeping that view until actual price action suggests otherwise.

MINERS

Here are some more key levels to keep an eye on. Unfortunately my last posts have been relatively quick but I want to spend some time here on the miners and related ETF's. It is critical to understand how the levered ETF's move vs the underlying components and indexes. One thing I want to make clear is how I use levered ETF's, that is I use them for trading vehicles for specific TIMING trades. I will trade them when I see immediate moves (within the week) on the underlying. They are NOT buy and hold instruments (much more correlated to volatility over long periods of time). The price patterns can be used for technical analysis, but I use them primarily as vehicles for trades with the underlying components technicals as the signal. For instance I tend to use the moving averages off the underlying component, not the levered instrument. I use the volume trends on the levered ETF's for insight however I don't have statistical backing for this, the rules I follow are generally the same bull/bear volume trends I've always used. Furthermore, construction of the underlying, with components weightings are critical. I will show here how I plan to use the ones in this space going forward, as well as what I see on the components.

LARGE CAP MINERS

From my last note I had said to take a look at NUGT the highly levered 3x miner etf with the very important caveat that the weekly was still challenged (as was true on the underlying).

First the daily which got hit. See the daily breakout bar that did not hold on the retest. I have moved a lot of my work to weekly charts specifically because of the inherent instability in daily's but NUGT is both a daily chart and levered etf so it has the volatility component which makes the price pattern less relevant (again, over longer times). That said I am still very constructive here when looking at the underlying components (coming up). First lets look at the levered.

NUGT daily,

http://stockcharts.com/h-sc/ui?s=NUGT&p=D&yr=1&mn=0&dy=0&id=p59338460551&a=281043956

Weekly, see the pressure from the downtrending MA,

http://stockcharts.com/h-sc/ui?s=NUGT&p=W&yr=2&mn=0&dy=0&id=p12700821901&a=281043995

Let's move on to the underlying the GDX. The GDX broke down this week but we held friday at a critical level, the 61% retracement level from the summer low and a past high volume up day. See fridays close

http://stockcharts.com/h-sc/ui?s=GDX&p=D&yr=1&mn=0&dy=0&id=p96027547608&a=283378925

One reason I am constructive here is because of the components.....

EGO-Outperforming, 38% holding, price consolidating, see large distribution day however

http://stockcharts.com/h-sc/ui?s=EGO&p=D&yr=1&mn=0&dy=0&id=p88139085813&a=283380985

AEM-Agnico has been trending up for months, see the prior base on good volume and the gaps. Price has closed below the 50 day ma however one great indicator for the GDX is if price can recover this ma quickly, which subsequently can create an opportunity in NUGT. I have circled twice prior when this has happened. The sooner the stronger on these dips below key moving averages.

http://stockcharts.com/h-sc/ui?s=AEM&p=D&yr=1&mn=0&dy=0&id=p92013132498&a=283381725

AU-Anglo traded right back to support friday, the daily has held. The 30.50 area is a key level on this component.

http://stockcharts.com/h-sc/ui?s=AU&p=D&yr=1&mn=0&dy=0&id=p51320455662&a=283381851

Gold-Rangold, see the inverted head and shoulders breakout, see the uptrend from lows intact. We are currently trading right at the 50% retracement level. Again I am looking for these areas to hold and confirm the breakout in the metal.

http://stockcharts.com/h-sc/ui?s=GOLD&p=D&yr=1&mn=0&dy=0&id=p09054349265&a=283381876

AUY-see the close below the 50 day, price still holding +17 level. See the bear Price/RSI divergence near term

http://stockcharts.com/h-sc/ui?s=AUY&p=D&yr=1&mn=0&dy=0&id=p36605010416&a=283381895

KGC-price holding the 200 day moving average. See the pullback to the large up volume hammer day on earnings. Again these levels need to hold and as of now are only on daily charts.

http://stockcharts.com/h-sc/ui?s=KGC&p=D&yr=1&mn=0&dy=0&id=p96470998077&a=283381922

NEM-Newmont has had almost a full retracement. Given it is the 3rd largest component at +8% it is a significant impact on the GDX and subsequently NUGT. See the 44.50 level holding as of now. This turning would be bullish price on the GDX and therefore NUGT.

http://stockcharts.com/h-sc/ui?s=NEM&p=D&yr=1&mn=0&dy=0&id=p43394884853&a=283382373

ABX-Here too price has been under pressure. Largest component of the GDX, look for stability here to turn the market.

http://stockcharts.com/h-sc/ui?s=ABX&p=D&yr=1&mn=0&dy=0&id=p07566723293&a=283382407

SLW-see the retracement levels. I have chosen the 25 range as my base as it has more legitimacy (more tests of that level). Under this view SLW is at the 38% retracement level. Under any technical scenario, SLW is outperforming the GDX on the current pullback.

http://stockcharts.com/h-sc/ui?s=SLW&p=D&yr=1&mn=0&dy=0&id=p26748633943&a=283381946

The silver miners have outperformed, a quick look at SIL, sitting at the 50% retracement level. This is bullish from the standpoint of the silver being more volatile, yet SLW and SIL are outperforming. Again we will have to see how this plays out.

http://stockcharts.com/h-sc/ui?s=SIL&p=D&yr=1&mn=0&dy=0&id=p52725396390&a=283382693

My point is above is I can see a scenario where the miners hold. I have made it pretty clear to move towards physical over the last few years vs miners, but when I look at the ratio charts its hard to ignore the opportunities. We all know the massive price divergence but here it is again.

LARGE CAP RATIO CHARTS

GDX Relative to Gold, again we are near 2009 lows

http://stockcharts.com/h-sc/ui?s=GDX:$GOLD&p=W&yr=6&mn=0&dy=0&id=p56788138045&a=278689772

GDX Relative to Gold, zoom, just see the possible downtrend breakout and retest

http://stockcharts.com/h-sc/ui?s=GDX:$GOLD&p=D&yr=3&mn=0&dy=0&id=p90604016645&a=283385007

Again I am looking here closely as we move into what I expect to be a retest hold and another leg higher in metal, which should push miners with it. That is my current outlook as of this writing.

SMALL CAP

GDXJ-similar to above, again my preference is larger caps

http://stockcharts.com/h-sc/ui?s=GDXJ&p=D&yr=1&mn=0&dy=0&id=p45721818691&a=283385165

CDNX

Again the ratio's here remain insane as well, but for my work I cannot be long this area easily. This weeks trade tightened up again, but we are still in a bear trend as the head and shoulders dominates until proven otherwise.

Long term, see price moving away from resistance....

http://stockcharts.com/h-sc/ui?s=$CDNX&p=W&yr=14&mn=0&dy=0&id=p90811114051&a=279196542

Zoom in 2 year weekly

http://stockcharts.com/h-sc/ui?s=$CDNX&p=W&yr=2&mn=0&dy=0&id=p34896864004&a=279197507

1 year daily, last week constructive, index needs a lot of work

http://stockcharts.com/h-sc/ui?s=$CDNX&p=D&yr=1&mn=0&dy=0&id=p21054789736&a=279197587

SMALL CAP RATIOS

CDNX:$GOLD-Below 09 lows. Again there has to be opportunity in here, it is not my current mandate to find it however I am not so rigid as to say the above head and shoulders pattern and the break of the 09 ratio low is reason to run. If anything it means there is serious opportunity here particularly if the secular bull in physical continues, which as of now I see as completely intact. I do have issues with the index as a whole, but I believe there are steals out there.

http://stockcharts.com/h-sc/ui?s=$CDNX:$GOLD&p=W&yr=12&mn=0&dy=0&id=p90106406417&a=251376073

CHINA

My last quarterly report looked at the Shanghai Exchange and the potential for a bottom. From that report onwards we saw a good bounce in Shanghai, a lot of which has been given back in the last few weeks. First something that seems to be slipping under the radar, the currency strength....

Yuan 5 year weekly-see the big breakout, market at a 5 year high. Inverted hammer this week as this is clearly overbought

http://stockcharts.com/h-sc/ui?s=CYB&p=W&yr=5&mn=0&dy=0&id=p52610596410&a=281137388

Yuan, 1 year daily, see the volume prior to the breakout.

http://stockcharts.com/h-sc/ui?s=CYB&p=D&yr=1&mn=0&dy=0&id=p07839214105&a=281138260

If this trend were to continue, this clearly would have economic implications for investment. The question becomes how much of China's economic growth can be transferred towards domestic activity vs its current mercantilist export model. I have heard both sides of this argument, but for my work from an investment standpoint it means to simply focus on the winners from a shift in these rates, and that should be Chinese companies doing business within the country. This is a process I am beginning to undertake however I do believe there is some time here as this process will be multi year.

Shanghai index...

20 year trend line. The monthly's have now gone negative after two good holds. The key level is the 1999 range which is still intact. If this were to break I would back up significantly to the 1660ish level.

http://stockcharts.com/h-sc/ui?s=$SSEC&p=M&yr=20&mn=0&dy=0&id=p59294448998&a=277649061

5 year weekly, see the test of the 1999 level. Will need to see if it holds

http://stockcharts.com/h-sc/ui?s=$SSEC&p=W&yr=5&mn=0&dy=0&id=p23271055898&a=278413176

1 year zoom in, see the lows. Watching close this week.

http://stockcharts.com/h-sc/ui?s=$SSEC&p=D&yr=1&mn=0&dy=0&id=p31125669814&a=277649999

ECONOMIC THOUGHTS

Final thoughts...

Here is how I am positioning going into the lame duck, and the subsequent policy negotiations. I see the global equity and credit markets as expensive. This can be looked at from a Wilshire price perspective, a high yield bond perspective (both absolute or spread basis), and a Treasury perspective (sub 1.6%) amongst other indicators. Meanwhile in the face of this the underlying currency (dollar) has a policy of devaluation overhanging it (Bernanke, QE, fed minutes), while at the same time it remains the global reserve currency with the potential for massive delevering if policy breaks. Very very few places to hide in my opinion, and this is to be expected after 3+ years after fly by the night monetary policy post a multi-decade credit boom. That means the reward side of a cliff deal doesn't seem worth the risk of a fail in my opinion. IF we were to get resolution, coupled with say the next leg down in savings rates, spreads, and stability in treasuries (prices hold or fall, yields steadily rise), then that is a different story. For now Id need to see at least the start of it to believe it.

I am however looking for a bounce going into this week as I think we may get some relief on the risk side (yields look oversold near term etc, see apple 44M trade Friday, key commodities at support) however as of now I expect an eventual breakdown in negotiations. Whether that leads to a simple can kick to mid 2013 (again sequestration has easy outs if politicians choose) or a public brawl right here right now is anyone's guess. I have my opinion which is they will fight right here right now but it is just that, my opinion. There are some serious unknowns here with frightening political leverage if either side were to use it, particularly because the laws on the books lead to real cuts and tax increases. If politicians try to use these against each other it could get dicey. I'd say for those worried more about the economic consequences than say political beliefs, Id say it is my opinion that both sides have real leverage (house gerrymandering in 2010 and tight popular vote vs senate gains and electoral college outcome), and both sides have significant differences. It wont take much to set off a conflict as they both could easily dig in. On this one, I'd lean away from real resolution as we move further into the actual negotiations. That is just my belief as of this writing, I will be watching close for areas of compromise or trend which suggest something other than a stalemate.

Take care everyone, hope readers find the above helpful as they navigate, and hope everyone here has a great and safe holiday season

BW


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Msg # Subject Author Recs Date Posted
105103 Re: Market Update Q4 2012, BW...congrats on your CMT..eom tgif 1 11/18/2012 3:34:38 PM
105105 Re: Market Update Q4 2012, Credit, Domestic Equity, Global Equity, Currencies, Commodities, Gold/Silver, Miners, China kilowatt8 19 11/18/2012 5:15:12 PM


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