Shanghai breaches support

Copper is testing long-term support at 5400, suggesting weak demand from China. Breach would signal a primary down-trend.

Copper A Grade

The Yuan has enjoyed a respite, consolidating in a narrow line for several weeks. But this is likely to prove temporary, with further advances of the Dollar against the Yuan eroding PBOC foreign exchange reserves.

USDCNY

Shanghai’s Composite Index broke support at 3100, signaling a primary down-trend, but the long tail indicates buying support. Recovery above 3100 would suggest a false signal (or government intervention) while respect of resistance would confirm the down-trend.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

Yuan Warning

Our forex data feed shows a current USDCNY exchange rate of 7.4775, which matches Barcharts.com and Google Finance, but Bloomberg and NetDania show a far lower rate of 6.8681. We have asked our data suppliers to investigate the disparity. Please do not act on the rates quoted without verifying with your bank/forex dealer.

Gold weakens as interest rates rise

Interest rates are climbing steeply as the market anticipates more inflationary policies under a Trump presidency. 10-Year Treasury yields broke through 2.0 percent and are testing resistance at 2.50. Penetration of the descending trendline would warn that the long-term primary down-trend is weakening, signaling a test of 3.0 percent. Breakout above 3.0 is still some way off but would signal the end of the almost 30-year secular down-trend in Treasury and bond yields.

10-Year Treasury Yields

The Chinese Yuan has fallen sharply in response to rising interest rates, with the Dollar headed for a test of resistance at 7.0 Yuan (USDCNY).

USDCNY

Gold responded to rising interest rate expectations with a test of primary support at $1200. Narrow consolidation is a bearish sign, as is reversal of 13-week Momentum below zero. Breach of primary support would signal a primary down-trend with an immediate target of $1050/ounce.

Spot Gold

In the long-term, higher inflation and a weakening Yuan could both fuel demand for gold as a store of value. But the medium-term outlook is bearish.

Gold: Further weakness likely

US Treasury yields are rising, with the 10-year yield breaking through 1.80 percent to signal a test of 2.0 percent. Further rises are likely on the back of stronger GDP figures for the last quarter.

10-year Treasury Yields

The Chinese Yuan continues to depreciate against the Dollar in anticipation of another rate rise from the Fed.

USDCNY

Spot gold displays a weak retracement off support at $1250/ounce, with short candles indicating a lack of conviction. Another primary decline is likely and would test primary support at $1200.

Spot Gold

The ASX All Ordinaries Gold Index respected the descending trendline, suggesting another decline. Reversal below 4300 would confirm, offering a target of 4000.

All Ordinaries Gold Index

Gold respects support

10-Year Treasury yields are retracing to test the recent support level at 1.60 percent but the trend remains upward.

10-Year Treasury Yields

The Chinese Yuan is easing against the US Dollar, with USDCNY in a gradual up-trend as the PBOC manages the decline in order to conserve foreign reserves. This is likely to alleviate immediate selling pressure on the Yuan, both from capital flight and borrowers covering on Dollar-denominated loans.

USDCNY

Spot gold respected support at $1300/ounce. Breakout above the falling wedge (and resistance at $1350) would signal another advance.

Spot Gold

* Target calculation: 1375 + ( 1375 – 1300 ) = 1450

Rising interest rates and low inflation are bearish for gold but uncertainty over US elections, Europe/Brexit, and the path of the Chinese economy contribute to bullish sentiment.

Gold stocks serve as a useful counter-balance to growth stocks in a portfolio. If there are positive outcomes and a return to economic stability, growth stocks will do well and gold is likely to underperform. If there is instability and growth stocks do poorly, gold stocks are likely to outperform.

Gold, rising interest rates and the falling Yuan

Interest rates are rising. Upward breakout from an ascending triangle formation on 10-year Treasury yields indicates an up-trend.

10-year Treasury Yield

A rate hike from the Fed would increase pressure on the Chinese Yuan, leaving the PBOC with a dilemma. Either allow the Yuan to slide, which could panic investors and borrowers into a rout, or sell off more of its $3.2 trillion foreign exchange reserves to slow Dollar appreciation against the Yuan.

USDCNY

Long tails on USDCNY indicate buying at the 6.60 support level. Breakout above 6.70 would warn of another advance (decline for the Yuan).

Rising interest rates increase downward pressure on gold but a falling Yuan would boost demand as a store of value. Spot Gold is above the rising trendline on a weekly chart but expect a test of support at $1300/ounce. Momentum holding above zero continues to indicate a healthy primary up-trend. Respect of support at $1300 would confirm. Breach of support remains unlikely but would signal trend weakness and a test of primary support at $1200.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

Gold shudders on strong jobs numbers

Long-term interest rates surged on strong jobs numbers, well above the estimate of 180,000. From the WSJ:

Nonfarm payrolls rose by a seasonally adjusted 255,000 last month, the Labor Department said Friday. Revisions showed U.S. employers added 18,000 more jobs in May and June than previously estimated.

10-Year Treasury yields strengthened to 1.58 percent in response, from a record low of 1.33 percent four weeks ago. Expect a test of the descending trendline at 1.66 percent.

10-Year Treasury Yields

Gold fell to $1335/ounce on expectations of higher interest rates. Penetration of the rising trendline would suggest a correction to test primary support at $1200/ounce. Follow-through below $1300 would confirm.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

At present I don’t see much threat to support between $1300 and $1310. Especially with safe-haven demand for gold enhanced by European uncertainty over Brexit, the dilemma of US November elections (a choice between two equally undesirable alternatives), and a declining Yuan encouraging capital flight from China.

USDCNY

Gold, the Yuan & Donald Trump

China’s Yuan continues its slide against the Dollar, with USDCNY testing resistance at 6.70. The current retracement is likely to respect support at 6.60, offering a target of 6.80*.

USDCNY

* Target calculation: 6.70 + ( 6.70 – 6.60 ) = 6.80

A depreciating Yuan is likely to drive demand for gold as well as hard currencies. Rising political uncertainty — in Europe, the Middle East and the US — is expected to add fuel to the fire. Strong polling by Donald Trump alone could drive gold to its long-term target of $1550/ounce*. Expect retracement to test the new support level at $1300/ounce. Respect is likely and would signal an advance to $1400/ounce.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

Disclosure: Our managed portfolios are heavily overweight gold stocks.

Gold surges as the Pound and Yuan fall

The Yuan is sliding against the Dollar, with USDCNY breaking through resistance at 6.60. Expect further capital flight, both from residents and offshore investors. Borrowers will also seek to repay Dollar-denominated loans and replace them with facilities in the local currency, adding further pressure on the Yuan.

USDCNY

The PBOC has been encouraged by fading prospects of further rate rises from the Fed, with 10-year Treasury Yields falling to a new all-time low of 1.37 percent, compared to 1.40 percent in 2012.

10-Year Treasury Yields

….And the Pound falling to a 30-year low.

GBPUSD

Falling currencies and lower long-term interest rates are both good news for gold bugs, with spot gold surging to $1370/ounce. Expect retracement to test the new support level at $1300/ounce. Respect of the band of support at $1280/$1300 is likely and would signal another advance, with a target of $1400/ounce*.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1200 ) = 1400

Gold rises as the Yuan and interest rates fall

China seems to have given up on its policy of supporting the Yuan against the Dollar, with USDCNY breaking through resistance at 6.60. Depleting foreign reserves to support the Dollar-peg was always going to be a tough call for the PBOC. But the alternative of increased capital flight and rising counter-measures from trading partners may exact an even higher price.

USDCNY

Perhaps the PBOC was encouraged by fading prospects of further rate rises from the Fed this year, after BREXIT. 10-Year Treasury Yields are headed for a test of support at the all-time low of 1.40 percent in 2012.

10-Year Treasury Yields

Gold broke resistance at $1300/ounce and is now retracing to test the new support level. BREXIT, a weakening Yuan, and lower interest rates are all likely to fuel demand for gold. Respect of the band of support at $1280/$1300 is likely and would signal another advance, with a target of $1400/ounce*.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1200 ) = 1400

Gold: Should I BREXIT?

Odds of a BREXIT are drifting at the bookmakers, with REMAIN a firm 1 to 4 favorite. Fears of a BREXIT have been driving demand for gold and a REMAIN vote is likely to spur a sell-off.

Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

Breakout above resistance at $1300/ounce turned into a bull trap with a sharp retreat to support at $1250/$1260. A REMAIN vote on June 23rd would test support at $1250 and possibly $1200. But the up-trend remains intact if support at $1200 holds.

Political uncertainty is unlikely to fade before the November US election. And economic uncertainty, fueled by Chinese instability, is likely to last a lot longer.

USDCNY

Capital outflows from China continue, with USDCNY running into resistance at 6.60. This is a sign that PBOC sale of foreign reserves has resumed, weakening the Dollar and boosting demand for Gold.

Gold’s up-trend is likely to continue. And breakout above $1300 would offer a long-term target of $1550/ounce*.

Disclosure: Our Australian managed portfolios are invested in gold stocks.

Gold surges on BREXIT fears

Long-term interest rates continue their decline, with 10-year Treasury yields breaking support at 1.65 percent. Breach signals a test of the all-time (July 2012) low of 1.40 percent.

10-year Treasury yields

Gold broke resistance at $1300/ounce on fears of a BREXIT vote on June 23rd and expectations that the Fed will need to soft-pedal on interest rates. Breakout offers a long-term target of $1550*.

Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

Chinese buying of gold has been relegated to secondary status, at least for the next week. Sale of foreign reserves appear to have resumed, with the USDCNY running into resistance at 6.60. PBOC sale of foreign reserves weakens the Dollar, boosting demand for Gold.

USDCNY

Disclosure: Our Australian managed portfolios are invested in gold stocks.

Treasuries fall and Dollar strengthens on latest Fed minutes

Treasury yields rose and prices fell sharply after release of minutes from the Fed’s latest monetary policy meeting. The April minutes reveal that policy makers see a June interest-rate hike as appropriate if labor markets and economic growth continue to strengthen. The 10-year Treasury yield jumped 12 basis points, suggesting a rally to test resistance at 2.0 percent.

10-year Treasury yield

The Dollar strengthened against China’s Yuan, testing medium-term resistance at CNY 6.55. Breakout would force the PBOC to further deplete foreign reserves in support of the Yuan. The alternative of an uncontrolled descent would instill panic and encourage capital flight to gold and the USD.

USDCNY

Greenback finds support

The US Dollar Index rallied off long-term support at 93 but this looks more a pause in the primary down-trend, signaled by decline of 13-week Momentum below zero, than a reversal.

US Dollar Index

Explanation for the Dollar rally is evident on the chart of China’s foreign reserves: a pause in the sharp decline of the last 2 years. China has embarked on another massive stimulus program in an attempt to shock their economy out of its present slump.

China: Foreign Reserves

But this hair of the dog remedy is unlikely to solve their problems, merely postpone the inevitable reckoning. The Yuan is once again weakening against the Dollar and decline in China’s reserves, and the US Dollar as a consequence, is likely to continue.

USD: Chinese Yuan

Gold: PBOC makes its move

China’s PBOC made its move against the hedge funds on Monday, while many hedge fund managers were enjoying a long weekend in the Hamptons. With more than $3 Trillion of foreign reserves, this is a fight that the PBOC is likely to win, provided it stands firm. Hedge funds betting on a collapse of the Yuan can leverage their positions, but that makes them vulnerable to margin calls. Driving the Yuan below 6.50 to the Dollar may force some to cover their shorts, which would further strengthen the beleaguered currency.

USDCNY

China’s sell-off of foreign reserves has caused the Dollar to fall, in the midst of a flight to safety. Retracement that respects resistance at 97.50/98.00 would indicate a decline to test primary support at 93.00. Decline of 13-week Twiggs Momentum below zero warns of a primary down-trend.

Dollar Index

Flight to safety has spiked demand for Gold. Expect retracement to test support between $1150 and $1200/ounce. But respect of either level would confirm a trend reversal (after recovery above $1200 completes a higher trough).

Spot Gold

China goes all-in on the Yuan

China is betting that it can use its more than $3 Trillion of foreign reserves to stare down hedge funds betting on a collapse of the Yuan. Any sign of weakness in the Yuan would fuel further speculation and flight to safety. The caterpillar on the right of the daily chart reflects PBOC efforts to support the Yuan (prevent further appreciation of USDCNY).

USDCNY

But you need plenty of bikkies (chips) to stand firm against the market and China is depleting its foreign reserves to buy up Yuan. IMF figures to September last year show a substantial fall in foreign reserves (excluding gold) but the pace has accelerated and I suspect China must now be close to the $3 Trillion mark (from a high of $4.0T in June 2014).

China Foreign Reserves ex-Gold

China’s sell-off of foreign reserves has had an unusual impact: in the midst of a flight to safety, the Dollar is falling. Sell-off by the PBOC is driving the Dollar Index lower. Good news for US exporters (and manufacturers competing against imports) who would have been crucified by a rising Dollar.

Dollar Index

Flight to safety not only led to a sell-off in the Yuan but has spiked demand for Gold. If you can’t get your capital out of China to buy real estate in Vancouver or Sydney then the next best alternative is to buy gold. Spot metal prices brushed aside expected long-term resistance at $1200/ounce, reaching highs of $1250. Expect some retracement, but gold should find support at $1200. Completion of a higher trough would confirm a primary trend reversal.

Spot Gold

Global stocks

Dow Jones Global Index respected resistance at the former primary support level of 290. Breach of 270 would confirm another decline. 13-Week Twiggs Momentum peaks below zero flag a strong primary down-trend.

Dow Jones Global Index

* Target calculation: 290 – ( 320 – 290 ) = 260

Dow Jones Industrial Average is hammering primary support at 16000 but long tails on weekly candles (and rising 13-week Twiggs Money Flow) highlight committed buying. Expect another bear rally next week, but the weight of the market is on the sell side and is unlikely to change course. Breach of 16000 offers a target of 14000*.

Dow Jones Industrial Average

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

The S&P 500 also rallied Friday and recovery above 1850 suggests another test of 1900/1950. Rising 21-day Twiggs Money Flow reflects medium-term buying pressure. Reversal of the primary trend is unlikely and breach of support at 1850 would confirm a decline to 1700*.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) continues to range between 20 and 30, reflecting elevated risk.

S&P 500 VIX

U.S. equity and options markets will be closed on Monday, February 15, 2016, in observance of Presidents’ Day.

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Canada’s TSX 60 also retraced to test resistance at 750. Respect is likely and breach of 700 would offer a target of 650*. Declining 13-week Twiggs Momentum peaks below zero indicate a strong primary down-trend.

TSX 60 Index

* Target calculation: 700 – ( 750 – 700 ) = 650

–>

Europe

Dow Jones Europe index continues its primary down-trend. Breach of support at 260 would signal another decline. Declining 13-week Twiggs Momentum below zero confirms a strong down-trend.

Dow Jones Europe

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Germany’s DAX is testing primary support at 9500. Peaks below zero on 13-week Twiggs Momentum warn of a primary down-trend. Follow-through below 9300 would confirm.

DAX

* Target calculation: 9500 – ( 11500 – 9500 ) = 7500

The Footsie retreated below 6000, signaling a primary down-trend. 13-Week Twiggs Momentum peaks below zero further strengthen the signal. Long-term target for a decline is 5000*.

FTSE 100

* Target calculation: 6000 – ( 7000 – 6000 ) = 5000

–>

Asia

Dow Jones Asia breached support at 2400 confirming another decline. Declining 13-week Twiggs Momentum below zero confirms a strong down-trend.

Dow Jones Asia

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Support has given way on the Shanghai Composite Index, strengthening the primary down-trend signaled last August when 13-week Twiggs Momentum crossed below zero. Target for the decline is 2400*.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index is testing primary support at 17000. Breach is likely and would confirm the primary down-trend signaled by 13-week Twiggs Momentum below zero.

Nikkei 225 Index

* Target calculation: 94 – ( 106 – 94 ) = 82

Two failed swings on India’s Sensex (failing to reach the upper trend channel) warn of increasing selling pressure. Declining 13-week Twiggs Momentum peaks below zero confirm this. Follow-through below 24000 would offer a target of 22500*.

SENSEX

* Target calculation: 25000 – ( 27500 – 25000 ) = 22500

–>

Australia

The ASX 200 broke support at 4900 this week, confirming a (primary) decline. There are still buyers hoping for a reversal — illustrated by bullish divergence on 21-day Twiggs Money Flow (indicates medium-term buying pressure) — but the weight of the bear market is against them. Expect a test of support at 4600 in the next few weeks but the long-term target is 4000*.

ASX 200

* Target calculation: 4850 – ( 5050 – 4850 ) = 4650; 5000 – ( 6000 – 5000 ) = 4000

Banks are taking a hammering, breach of 75.00/76.00 signaling a decline to 66.00*. Now is not the time to go bargain-hunting. What looks cheap today may be even cheaper tomorrow.

ASX 300 Banks

* Target calculation: 7600 – ( 8600 – 7600 ) = 6600

The only sound reason for buying a stock is that it is rising in price. If that is happening, no other reason is required. If that is not happening, no other reason is worth considering.

~ Nicholas Darvas

Janet Yellen on financial market turmoil

Federal Reserve chair Janet Yellen before the House Financial Services Committee:

Janet Yellen

“…..As is always the case, the economic outlook is uncertain. Foreign economic
developments, in particular, pose risks to U.S. economic growth. Most notably,
although recent economic indicators do not suggest a sharp slowdown in
Chinese growth, declines in the foreign exchange value of the renminbi have
intensified uncertainty
about China’s exchange rate policy and the prospects for
its economy.

This uncertainty led to increased volatility in global financial markets and, against the
background of persistent weakness abroad, exacerbated concerns about the outlook for
global growth
. These growth concerns, along with strong supply conditions and high
inventories, contributed to the recent fall in the prices of oil and other commodities. In
turn, low commodity prices could trigger financial stresses in commodity-exporting
economies, particularly in vulnerable emerging market economies, and for commodity-
producing firms in many countries
. Should any of these downside risks materialize,
foreign activity and demand for U.S. exports could weaken and financial market
conditions could tighten further…..”

…No rate rises any time soon.

Batten down the hatches

Batten down the hatches, the storm is here.

Nymex WTI Light Crude futures (March 2016) are testing support at $30 per barrel. There is no indication that this is the bottom and breach of $30 would be likely to test $20 per barrel.

Nymex WTI Light Crude March 2016 Futures

* Target calculation: 30 – ( 40 – 30 ) = 20

Long-term interest rates are falling, with 10-year Treasury yields headed for another test of primary support at 1.5 percent. Breach of 1.7 percent would confirm. The flight from stocks is driving up Treasuries (and yields lower).

10-year Treasury Yields

Flight to safety is (normally) synonymous with a strong Dollar, so the weakening Dollar Index is a surprise.

Dollar Index

China must be selling off Dollar reserves to support the Yuan and restore confidence.

USDCNY

Too late, I’m afraid. That horse has bolted. Loss of confidence in the Yuan is driving demand for gold, with the spot metal rallying to $1200 per ounce. Resistance at the former support level makes retracement likely, but a trough that respects $1100 or narrow consolidation below $1200 would suggest reversal (to an up-trend). Breach of $1200 would offer a target of $1300*.

Spot Gold

* Target calculation: 1200 + ( 1200 – 1100 ) = 1300

After forming a lower peak at 18000, Dow Jones Industrial Average is testing primary support at 16000. 13-Week Twiggs Momentum peak at zero warns of a primary down-trend. Breach of support would offer a target of 14000*.

Dow Jones Industrial Average

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

The S&P 500 displays a similar pattern, testing primary support at 1850, with a 13-week Twiggs Momentum peak at zero. Breach of support would offer a target of 1500*.

S&P 500 Index

* Target calculation: 1850 – ( 2150 – 1850 ) = 1550

A monthly chart shows VIX rising for another test of 30. Oscillation between 20 and 30 flags elevated market risk.

CBOE Volatility Index

Australia’s ASX 200 retreated below primary support at 5000, signaling a primary down-trend. A 13-week Twiggs peak below zero already warns of a decline. Today’s close at 4832 confirms, offering a short-term target of 4600* and a long-term target of 4000*.

ASX 200 Index

* Target calculation: 4850 – ( 5050 – 4850 ) = 4650; 5000 – ( 6000 – 5000 ) = 4000

Investors who plan to hold stocks through a possible down-turn should stop watching daily prices and listening to news reports. It will only weaken your resolve. I am comfortable with holding stocks with strong dividend streams, but wary of holding growth stocks as they normally suffer the biggest losses.

For traders this is a time of dangerous opportunity. Either shorting sectors likely to be worst hit or waiting for opportunities to buy gold stocks.

Northern Star (NST)

Only when the tide goes out do you discover who’s been swimming naked.

~ Warren Buffett