Weekly Report September 29
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The euro hit a major resistance zone at 1,18 early this week and I believe that that marked the daily cycle top for the euro. As of Friday, we actually have all the condition in place for a daily cycle low to occur in the euro. The 10DMA is falling, 5 day RSI is oversold, we have broken and closed below the daily cycle up trendline and we have a nice reversal candle in the euro. A daily swing on Monday or Tuesday isn’t farfetched and that would do it for the daily cycle low. As I believe that the euro is in a bull market, we should prefer reading the euro chart instead of the dollar chart as euro should be leading the dollar and not vice versa.
We were looking at a daily cycle low in the dollar on 28th of August. The problem I had with this bottom was that the dollar just barely turned the 10DMA up after the bounce of the low on 28th. In my opinion there’s no chance that the dollar would have got another daily cycle low on 21st of September. 16 days is just way too short for a daily cycle since daily cycles in currencies have been running 50+ days for the past few years. A more likely scenario in my opinion is that the actual daily cycle low occurred on 21st of September and we now have potentially put in a top for the current daily cycle on day 5. If this is true, then the dollar should roll over next week and soon produce an actual failed daily cycle which we’ve been waiting for the past 4 or so months.
My original idea in April was that silver would make a run to the $20+ range during the summer. As we all know, that hasn’t played out so far, yet I’m not ready to scrap the idea because we now have a truly extreme COT positioning at hand. A lot of people are short the mirror metal as well as platinum, gold and probably some mining stocks and ETFs. I think that we are in position for an explosive short squeeze which might have started on Friday in silver.
We are already seeing a short squeeze in the palladium market. I suspect that if silver joins the club with palladium, that’ll soon drag other precious metals and gold miners to the short covering contest as well.
One of the reasons I wasn’t a seller in silver on Thursday was that I was simply asleep at the hours of attack. I’ve seen this too many times and as of Friday morning I saw that gold and silver where in perfect position for a stop run and so I decided to wait and see for the day. I also tweeted about this early Friday morning on my personal Twitter channel. As you can see from the picture below, silver has a high “tendency” to produce false breakout and breakdowns. These are to run stops and create liquidity to the market for big players to enter and exit positions. Silver being an even thinner market than gold and so it’s easy for even a slightly larger degree player to produce undercuts and marginal breakouts compared to gold.
I wanted to bring up silver to this weekend report because I’m about 99% sure that the gold to silver ratio has peaked and so silver should outperform gold for the years ahead as the ratio heads to another extreme. As you can see from the charts below being above 80 the gold to silver ratio (XAU/XAG) is at historically extreme level and lately has been retracing from the highs and is now in my opinion poised for a move lower.
Whether the banks are to quit the attacks on gold and silver is hard to say for now. As we’ve come to witness in the past four months, on this market there is always the possibility of a complete reversal and new lows. I think that the next two weeks are the make or break for silver, gold and the miners to start the explosive move higher. If that fails to realize over the next two weeks, it might be time to abandon ship for a while but for now I’m still optimistic.
Gold is the cyclical driver for the precious metals market and as of Friday gold is on day 31 of its daily cycle. This means that we are definitely on the latter part of the daily cycle which have been running for about 45 to 60 days for the past 3 years. In other words, we have two options. Either gold produced an early DCL on Friday and is now set for the second daily cycle of this intermediate cycle. Or gold is yet to form its daily cycle low and will continue lower next week to a daily cycle low. Personally, I’m leaning on the first option and trading accordingly due to my outlook on the dollar. Also, the moves in palladium, silver and GDX are quite convincing. If we are to have a short squeeze, that will leave a lot of people on the station in precious metals.
It all boils down to the dollar, I think that the intermediate cycle low for that dollar is still ahead and this should drive commodities including precious metals higher. If on the other hand if the dollar rallies hard next week I think that precious metals are in serious trouble.
Remember – Easier market are often followed by harder markets and vice versa. We’ve had one seriously tricky market in precious metals for the past four months.
The weekly chart is constructive and bullish for the CRB. As of Friday, many commodities are signaling that an ICL has passed and so prices should continue higher. A move higher in commodities is often fueled by lower prices in the dollar.
I believe that the FED has been raising rated far too slow and the QE policy will start to produce a lot of inflation in the following months and years. The FED has also signaled that they won’t be too worried about inflation exceeding the 2% target. I think that by the time inflation from commodities creeps into the CPI there will be nothing to do for the FED but to look at inflation climb north of 5% and beyond.
I’ve been bullish for oil for a long time now and I’ve been saying that believe we are going to see a bubble in oil either later this year or early next. A bubble would require about $110 crude oil by the end of the year and so everyone can do the math. Oil is starting to exhibit signs of a bubble phase in the making as even bearish news like the OPEC raising output and Trump trying to suppress oil in speeches have little or no effect on price or the effects are quickly reversed. As we saw on Friday, surprises come to the upside. That’s about it for oil this week. You can read more of my comments on oil from the previous weekly reports where I’ve mentioned oil.
I’m currently long volatility via some VXX calls as we have the conditions in place for an ICL to occur. If the dollar is to roll over and start heading down hard releasing the short squeeze in precious metals I think that stocks will produce a severe correction. Falling dollar is often seen as bearish for US equities. I’m wondering if the bears will win this year as last year they just got completely plowed away by low volatility and soaring tech stocks. Back then stocks had good managed money participation and the breath of the market was good. Now we have real estate and automakers in bear market territory and the general breath of the market really stinks. It’s not completely out of the question that we could begin the move down into the next 4 year cycle low in US stocks which is due in late 2019 or 2020. For now, I don’t know. We’ll get more confirmation once we reach the next ICL and see where it bottoms and where the first daily cycle rallies. We need to see a failed intermediate cycle before we can start making bear market calls and I highly doubt that the next ICL will signal a failed intermediate cycle below the February low. However, the next intermediate cycle could.
Now on a different subject:
I believe that the fact that I can’t follow the markets that closely from here in Hong Kong (since I’m asleep during most of the US regular trading hours) is actually a positive thing. I believe that this partially saved me from selling when gold and the euro sold off on Thursday. Once I woke up and saw the destruction I knew that the potential damage was already made so I was able to stay analytic. I also tweeted about this on Friday morning and as it turns out, the drop on Thursday was another stop run for gold and silver. Whether it was the last stop run, we’ll find out next week.
I’m actually starting a hedge fund here in Hong Kong rather soon. The fund will be a subsidiary to the parental company that will be called SKAL Capital and so I might need to migrate the website from ‘www.skalcapital.com’ to ‘blog.skalcapital.com’. I’ll let you guys know ahead of time if and when this is going to happen.
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