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Weekend Market Analysis 5 March 2017

Mar 5th, 2017

The ‘Divergent Top’ in the Gold market caused gold miners to drop sharply, and they need to break up through key resistance levels or potentially drop further to test 20 Dec 2016 lows.

A key indicator is the US Gold Miner Index chart (XAU) and failure to close above the 91 level within the next 2-3 weeks will lead to lower prices supporting a May low. In the meantime miners should partially recover in an attempt towards the breakpoint, but failure to exceed 91 will be the deciding factor.

The  rate hike in March could send miners below their December lows, so price behaviour in March will reveal critical supportive evidence.

Gold Price

The gold price has reversed down below its breakout resistance level at $1243, in response to the negative ‘Divergent Top’ with miners. In doing so it has penetrated the short term support trendline (see 3 month chart) although remaining well above the long term support trendline.

The oscillators have turned down away from the approaching overbought zone although with a slight uptick in volume.

The gold price has dropped below 10- / 20-Dema in response to the negative ‘Divergent Top’ with the miners but has also now started the process of voiding the divergence with the miners. It has dropped below the short term support trendline.

Just as Europe closed on Friday “somebody” sold over $2 billion notional silver futures, about 115 million ounces at one shot. Silver dropped 72¢ & gold dropped $17, but in the aftermarket gold surged to $1,234.00 and silver to $17.95, moves that strongly suggest scared shorts closing out the week’s positions.

Therefore despite the US Fed change from slightly ‘dovish’ to slightly ‘hawkish’ this week the inherent strength in the precious metals complex remains, probably due to the power of the 8 year cycle lows.

 

The US rate hike in March is a threat.

US Gold Miner Index (XAU)

The downturn in price extended further this week, closing below 10- /20- /50-Dema as it approaches the low reached on 20 Dec 2016. The oscillators are in oversold positions although yet lower lows seem likely. A turnaround here is required and the index needs to exceed resistance at 91 if the 20 Dec 2016 low is to be retained.

 

Silver price

Price has reversed down below its breakout resistance level just below $18, as well as back into the 8 month megaphone pattern, in response to the negative ‘Divergent Top’ with miners. In doing so it has not penetrated the short term support trendline (see 3 month chart) and therefore appears somewhat stronger than gold.

The oscillators are in neutral territory although with a slight uptick in volume.

 

The short term 3 month chart illustrates the price drop to below 10- / 20-Dema although still above the short term support trendline.

 

US$

The US$ continues to approach finally forming a very threatening ‘head & shoulders’ pattern stretching back to mid-Nov 2016. The US$ Index dropped on Friday (surprisingly) to close at 101.55 with the H&S neckline at 99.25, and the chart indicates a bearish ‘Evening Star’ candle formation at the end of the week. This all in spite of a pending rate hike in March and a more ‘hawkish’ US Fed.

US General Equities

US general equities remain elevated for now with every indication of continued strength. However, the continued fall in volume remains and the US Fed will increase rates in March with a more ‘hawkish’ stance which now indicates perhaps more than the 3 rate hikes for 2017.

 

The short term 2 month chart indicates the sequence of higher highs and higher lows has been interrupted, as the hectic price increases seem to have abated for now. The oscillators are all overbought and a correction is due anytime.

 

US Discretionary / Staple Sector Analysis

An interesting aspect to the US equity market is provided by an analysis of the Consumer Discretionary Sector / Consumer Staple Sector, which provides an insight of the demand for discretionary purchases over that of staple purchases. The theory is that in a recession or depression the likelihood of buying a new car or jewelry reduces while you continue to buy bread and baked beans. It therefore provides a view of ‘rising affluence’ over ‘falling affluence’ which in turn reflects in a rising or falling stock market. It is also said this indicator is never ‘wrong’.

Note that this indicator:

  • lost relative support in late 2007 as the ‘Global Financial Crisis’ kicked in;
  • rose in a broad band as positive support built up indicated in blue;
  • started to falter and fall towards the end of 2015 indicated in red, as the indicator turned negative;

 

A much closer look at this indicator in a 4 month chart shows the negative divergence against the Dow Jones Ind Ave which is intensifying. This is yet another indication that a strong downward correction in the general US equity market is due anytime soon.

Conclusion

Gold and Silver prices dropped sharply in response to the ‘Divergent Top’ with miners which are liable to drop further to test earlier lows unless they break up through resistance. The US rate hike in March may further negatively impact this situation.

Gold and silver prices have reversed down through breakout resistance levels to start the process of voiding the ‘Divergent Top’ with miners, although there still appears to be inherent strength in the metals despite the US rate hike in March and a more ‘hawkish’ US Fed. It remains to be seen whether metals weaken further or whether miners reverse up above resistance to prevent testing previous lows.

The US$ continues to approach finally forming a very threatening ‘head & shoulders’ pattern although the US rate hike may invalidate this in a stronger Dollar.

US general equities remain elevated for now with a correction overdue because of continued fall in volume plus a rate hike in March and a more ‘hawkish’ US Fed.

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