Weekly Report June 24
For new readers of the blog, I recommend reading the terminology page before the weekly reports.
From the last weeks Weekly Report:
What we want to see in the next two weeks is a failed daily cycle in the miners, extreme pessimism across the board in precious metals, a 3-8 day bloodbath phase in either gold or the miners and finally a daily swing which will serve as the best buying opportunity of 2018.
Miners (GDX) have formed a failed daily cycle and a daily swing low.
We have enough pessimism to generate an ICL. Silver has been outperforming gold in the past month or so and I believe that silver will drastically outperform gold in the next intermediate advance. Hence my rather large position in silver calls.
5 days of bloodbath and a swing low in gold.
As of Fridays close, we have all the requirements in place for an ICL to occur. We could have seen even more pessimism though, but at 27 weeks gold is due for an ICL already and I think that we got it on Thursday. The weekly chart in silver supports this as silver is set up to deliver a weekly swing low next week. The next confirmations of a completed ICL are as follows: 1) A weekly swing low in gold and the miners 2) a weekly close above the 10 WMA 3) break of the cycle decline trendline. It is possible that we could see all of these requirements get filled next week, but I think that that might be too to ask for and so a close above the 10WMA is more likely to occure the week after next week.
The best buying opportunity of 2018 is right here on the table. I’m personally fully invested in gold and silver with some GDX and GDXJ as well. I have enough cash to keep adding to my silver December expiration options position in case we make a lower low, which I think is at the moment quite a low chance scenario. But if that be the case, I’ll be willing to add to the options position. I think it’s not unreasonable to say that silver could test its 2016 high at little over 21 USD. That being said, I have large enough position already so that such a move will have a significant change to my living standards.
To quote some annoying gym mentoring quips “What’s your excuse?”
Stocks are acting as I expected, and we are most likely in the declining phase of the current daily cycle and the intermediate cycle as well. The S&P500 has formed a weekly swing high and I would give a decent chance that the intermediate cycle has topped. I expect stocks to form a daily cycle bottom in the next 4 to 10 days after which we are most likely going to get a left translated daily cycle and a decline to the final ICL in late July or early to mid August. All in all, stocks are still stuck in the consolidation which began in February.
Personally, I’m weighing the metals a lot at the moment since they are in the process of forming a yearly cycle low, which most often produces the largest rally of the year. The current setup in stocks would favor a short position but as I’ve said before, shorting the stock market is very difficult and frankly with the opportunity in gold, it’s a no brainer for me not to tie any capital to stocks at the moment. The time to go long stocks will come but patience is needed for now. I will be buying long at the bottom of the next ICL, but probably not the next DCL.
I haven’t addressed oil on the blog before, but there are a couple of bigger picture questions I’d like to discuss.
Since the 70s, a 100% or more rise in oil prices inside a year has proceeded every recession in the US so far. I’ll go to the extent to say that a 100% or more rise in oil prices inside a year has caused every recession in the US since the 70s. Why does a spike in oil prices cause a recession? Simply because oil is the most used commodity in the world. Oil is still a major part of energy production globally, oil is used in production of plastic and (sadly) most of our consumer and even a lot of industrial products are made of plastic. In addition, oil prices have an indirect effect on transportation costs as oil prices affect fuel prices. All of the above have a link to consumer prices and I’m not talking about the CPI which Mike Maloney craftly calls the CPLie, but the real cost of living. When the cost of living goes up dramatically in a short period of time, people consume less which ultimately leads to a recession. Thus, a major spike in costs in these key economical areas has been a good signal of an upcoming recession. All but one time in the past 50 years, this has led to a recession.
During the last year, we have seen a major rise in oil prices which has the potential to go 100+% during the next six months or so. Back in May, we had a 70+% rise at hand, but since then we have seen a way overdue intermediate decline in oil. On Friday however we saw a major rise in oil, which could suggest that the ICL was formed a bit prematurely. To fully confirm an ICL, price should break the cycle up trendline which we haven’t seen yet.
Saudi Aramco is planning an IPO for next year and since producers have the means to affect production output, I think that the Saudis have been artificially pushing the price up to lure in as much capital as possible to make the IPO a success. After all, dumb money is a momentum chaser and a good momentum in oil would suggest a great opportunity for them. Of course, this is not how we should think and a better way of seeing this IPO is that the Saudis want to get rid of their shares tied to oil as renewing energy sources are clearly the future of energy production. In addition to energy production, wood and pulp are currently quickly pushing through in areas which have previously been dominated by plastic products. These areas include packaging, consumer products and even construction goods.
As the current picture is much clearer in precious metals, I’m not considering positions in oil. If we could get a deeper push down, I might consider a long play.
Some people have criticized me in the past for monitoring lots of different markets where I don’t participate actively thinking it’s a waiste of time. I however think that it’s very important to monitor lots of markets at the same time, because then you can see the capital flows of the whole financial sphere. This of course is very important in order to see the big picture of where the world is heading. I would advise people to follow lots of different markets also because you never know where the next big opportunity might be hiding. Kudos to people who bought Bitcoin two to ten years ago.
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