Weekly Report July 7
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So far so good. Intermediate cycle lows in gold tend to be very frustrating as we’ve seen in the past two months. As with investing in general, patience is the key to success. If you have been patient enough during this intermediate decline and so you have been buying instead of selling, I think that your patience will start to pay off finally next week. It has started to pay off in the miners already.
As I mentioned earlier this week, the mining stocks have been diverging from gold, which is a sign of strength for the whole precious metals sector. As of Friday GDX and GDXJ have both formed a weekly swing low and both have closed above the 10 week moving average, both have also broken their intermediate decline trendlines. I don’t think it’s unreasonable to say that GDX and GDXJ could both test the 2016 highs before this intermediate cycle tops. Same applies to gold and silver.
Another strong case is that platinum got beaten up severely during this intermediate decline. Whilst this is not a case of strong positive divergence like in the miners, I believe that something bigger is brewing in the whole sector and so platinum is a bargain at these prices.
After looking through the charts over and over again, I’m still convinced that my silver call options for December will make a killing. I also added to my miners’ exposure last week since I believe that the miners could produce a similar rally to the one I’m expecting from silver by the years end.
I don’t have much to add for precious metals at this point. I’ve covered the sector extensively in the previous weekly reports. To sum up my thoughts: The precious metals sector is a steal at these prices.
I’ve noted before that the larger currency cycles tend to align with the metals cycles. This makes perfect sense since everything is priced in dollars nowadays and the two markets are negatively correlated and so when the dollar forms a bottom, the metals tend to form a top and vice versa. The oscillators have signaled negative divergence in the dollar for the past five weeks. This often signals that a trend is about to reverse and so we should see lower prices for the dollar in the upcoming months.
The bounce in the dollar has done its job as a bear market rally. The rally got the majority of analyst bullish for the dollar and now the cycle is about to turn back down. The dollar remains in a bear market making lower yearly lows for the third consecutive year. The cyclical bear markets in dollar have been running for six to eight years. We are due for a multi year bottom sometime in 2019 but I believe that the rally from that bottom will not come even close to the 100 range in the dollar index and so the multi year cycle will left translate and the dollar will sink to new all time lows.
The euro is facing a steeply falling 10 week moving average, but as can be seen from the previous intermediate cycle lows in the euro, the 10WMA hasn’t offered much of resistance in the past. We should see a nice move up next week in order to confirm an intermediate cycle low in the euro. I’ve been trying to call a bottom in the euro since mid May and like in the metals it sure hasn’t been easy going, but now the odds are deeply in favor that we have successfully completed a yearly cycle low. Yearly cycle lows are the best buying opportunities of the year and most often deliver the most powerful rallies of the year.
Stocks had two powerful up days late this week and it’s become clear that the bottom on 28th of June was indeed a daily cycle low adn not a half cycle low. As the intermediate cycle in stocks is on week 21 the odds are high that we are about to start an intermediate decline. I have two scenarios in mind. The first scenario is that the S&P 500 is forming a bear flag and will break down from that pattern next week, the daily cycle will left translate and prices will be driven lower over the next two weeks. After this we’ll get a great buying opportunity as I think that the next intermediate cycle will break out of the consolidation phase we’ve been in for the past 5 months. The second option is that we get a good rally which tests the all time highs in the S&P 500 after which we’ll get two or three week down and we complete the intermediate cycle low sometime in August. In both scenarios, the best risk reward will be found at the bottom of the intermediate cycle.
Either scenario be the case, stocks remain in the same trading range they’ve been stuck for the last 5 months. Trading ranges are difficult periods to make money and can drain important mental capital. I strongly believe that stocks aren’t ready to break out from the trading range since it’s too late in the intermediate cycle to get a sustainable breakout and so a visit to all time highs for the S&P500 would traditionally offer a nice spot for a short trade. However, as I’ve also pointed out previously in the blog, shorting stocks has been very risky during the FED rate hiking cycle as the FED wants the stock market at all time highs to provide justification to further rate hikes. “Strong stock market equals strong economy”. My plan for stocks is to wait for the next intermediate cycle low due in a month or so. This is what I’ve been doing with metals lately and we have a very nice risk reward scenario at hand. I now believe that this strategy will start to pay out rather soon in the metals.
If one wants to trade stocks this late in the intermediate cycle, be my guest. The cycle in stocks could potentially stretch a bit and therefore there might still be money on the table before the intermediate cycle tops. I’ll rather focus on something that has potentially just completed a yearly cycle bottom and so should deliver very nice gains during the next two months. Those assets currently are precious metals and the euro.
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