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• EUR/USD has weakened after failing to break the resistance at 1.3140 (17/10/2012 high). Monitor the test of the key support at 1.2875. An hourly resistance is at 1.2973 (07/12/2012 high). Another support can be found at 1.2834 (intraday low).
• The underlying trend is negative (see the succession of lower highs since May 2011 peak). Therefore we expect limited upside potential given the strong resistance at 1.3172 (17/09/2012 high) and the overall overbought conditions.
My preferred wave count is similar to the idea I posted some weeks back on the DAX and that I suspect the SPX is inside a 5th wave for an ending diagonal so likely to chop higher into Jan-Feb period next year before a meaningful high. It would need a seriously strong break below the 200DMA on the SPX before I would switch to an alternative bearish idea, whilst this market continues higher I still prefer the bullish option over the bearish option.
Although I am certainly no perma bull and calling for SPX 2000 or anything like that, recent price action over the last few days suggests the market is simply correcting the advance from the Nov 2012 lows and likely to push higher once the correction has finished.
When you look at other US markets we can clearly see the same sort of shape, especially markets such as the NYSE. The last decline from the September 2012 highs was a 3 wave decline as we can clearly see the NYSE is pushing higher as I suspect it would, but is lacking the new high it needs to complete its idea.
The first week of the month is always the most interesting, with global purchasing managers indexes, U.S. ISM’s, and employment data released. Overnight we see continued weakness in Europe’s economic data and perhaps some more “green shoots” in China. Europe is sporting “beige shoots” at it is reaching the stage where things are so bad it is difficult to go down further.
Euro-zone manufacturing activity contracted for the ninth consecutive month in November, albeit at a slower pace than in October. Markit’s Eurozone manufacturing Purchasing Managers Index (PMI) rose to 46.2 in November from October’s 45.4, though it stayed below the 50 mark dividing growth from contraction for the 16th straight month.
The new export orders index was revised up to 46.4 from the preliminary reading of 45.9 two weeks ago, and it now reads more than a full point higher than the October reading.
Manufacturing accounts for around a quarter of the euro zone’s private economy and is dwarfed by a services sector that fared badly in November, the data two weeks ago showed.
China seems to be “recovering” not due to the private sector, but government led:
The final reading for the HSBC Purchasing Managers’ Survey (PMI) rose to 50.5 in November from 49.5 in October, in line with a preliminary survey published late last month. It was the first time since October 2011 that the survey crossed above 50 points, the line that demarcates accelerating from slowing growth.
An official PMI survey of China’s non-manufacturing sectors also ticked up, to 55.6 in November from 55.5 in October, led by expanded activity in construction services. But growth in air and rail transport and food and beverages both slowed.
Growth accelerated for large firms for the third month in a row, but medium and smaller companies saw a retrenchment, with the decline more pronounced for the smaller firms, the NBS said in a not accompanying its official manufacturing PMI survey. “The improving numbers are mostly because of government investment,” said Dong Xian’an, economist with Peking First Advisory, referring to the official PMI.
As for the U.S. we have ISM Manufacturing this morning at 10 AM; consensus for 51.7 – flat with last month. Construction spending also hits at 10 AM – expectation 0.4% growth.
Wednesday ADP employment which hopefully with some recent changes is “somewhat” closer to government data on a month-to-month data (before revisions) – expectations of 125K versus 158K. Sandy should be an issue. ISM Non Manufacturing, expectations of a drop to 53.6 versus 54.2.
Friday is the much watched (Jack Welch) employment report – expectations of only 80K versus last month’s 171K, again Sandy impacts here. Unemployment rate expected up to 8.0% versus 7.9%.
As for the technical picture, we have a gap up this morning on any myriad of “positive” news items – China PMI (despite China stock market falling yet again), European PMI not getting worse (European markets acting WELL), or Spain asking for bailout funds for its banks (no surprise, but algos read the headline and futures popped). Evidence continues to mount for a continuation of an inverse “head and shoulders” bottom move; if this continues there should be a move to the mid 143os to upper 1440s (depending on what you use for the head and neckline – up for some interpretation). Now if that happens this would create the first “higher high” in the S&P 500 since the correction began in mid-September, but if that is all the move has in it would be a particularly nasty spot to reverse since everyone would say “a new high” and the trend is changed. But we’ll see – this market has become famous since 2009 for “V shaped” moves that continue in one direction (not the boy band) without relent so the talk of “performance chasing” and “underinvested longs” and “repeatedly scarred shorts” should be relentless over S&P 1435.
At the time I write this the S&P 500 is gapping up to the 61.8% retrace of the entire two month correction. As posted Friday, the ability for the market to move sideways to consolidate gains was a positive – so the corrections in this move up have come mostly via time rather than price.
While things are never easy, the (quote-unquote) obvious trade in the major indexes has now played out, especially on the S&P 500. Of course most of it happened in an overnight gap up, but that has been par for the course. From here things get more complicated. Here are a few ways to look at the roadmap utilizing the S&P 500.
First the original S&P 500 chart that has been in play for months, looking at the June-Sep run, and pullback since. Two key points here – the index has bounced from the 61.8% retrace to nearly the original 38.2% retrace at ~1395. That number is also key in that it was support multiple times in August 2012. Support turns into resistance and vice versa so this 1395 level is a very obvious level to watch.
Second, is the chart I posted yesterday morning which is simply the same Fibonacci levels but focused solely on the September-November pullback. What’s the first number that sticks out? 1394 (call it 1395, close enough for government work). That is the 38.2% retrace of the two month correction.
If 1395 is vanquished, the next two levels are 1409 to 1424 which you can see was an area with a lot of traffic in late October to early November before the correction became much more ferocious. That second number also coincides with a falling 50 day moving average.
Last, on a very short term frame there is a potential for an inverse head and shoulders formation (which favors bulls) in the near term. The head being Thursday/Friday’s lows and the neckline being about “here” at 1390. If that does play out, it measures to a target of ~1430. That would be a 3% move from here.. and still not create a new higher high versus those early November levels. Hence all that could in theory happen and still bode poorly afterwards. But either way, one can see all the congestion and push pull in the areas overhead.
Of course all this coincides with positive seasonality, the constant negotiations re: the fiscal cliff, the next round of easing to be announced at December’s FOMC meeting (to replace Operation Twist), and a slowing corporate earnings outlook.
Anyhow enjoy the Thanksgiving holiday and we’ll catch you on the other side.
Earlier this year, Goldman Sachs’ Peter Oppenheimer said that compared to bonds, US stocks were the cheapest in 50 years.
If Peter is correct, that could be good news for your gold stocks, because there is an ongoing correlation between the Dow and most gold equities.
Unfortunately, Goldman also believes that the fiscal cliff situation could drive stock markets 8% lower by year-end.
You are looking at the daily chart for the Dow, and you can see that it made a small top in mid-September. It has declined about 8% from the high.
Gold stocks are more volatile than the Dow. GDX declined about 18%, during the period in which the Dow fell 8%. There is a lot of symmetry between these two charts.
If the Dow is set to fall another 8% from the lows of last week, GDX could fall another 18% from its recent lows. That would put GDX at about $37, and below the May-July lows.
Some of the largest gold companies are already trading near their summer lows, which is somewhat alarming.
If you own a home, it is wise to purchase home insurance. If you own gold stocks, carrying some cash and short positions is a form of insurance. That’s the daily chart of DUST, which is effectively a triple-leveraged bet against GDX. The performance is calculated on a daily basis. I’m a buyer, moderately, in the $28 and $22 areas.
What would happen to gold stocks, if Goldman Sachs is correct about the Dow falling another 8%, and then they called for an even harder fall, instead of a rally?
The situation could get quite ugly. A small position in DUST may help gold stocks investors to professionally manage fiscal cliff fear.
Gold recently sold off along with the other so-called “risk on” markets, but it bottomed quickly. The daily chart shows a nice head and shoulders bottom pattern in play.
The daily gold chart looks superb. The H & S pattern sits near the demand line of a beautiful rising channel.
HSR (horizontal support & resistance) at $1758 is the initial upside target, and then $1800. A “price pop” to the $1825 price zone could be a game changer for gold stocks.
Silver looks even better than gold. Yesterday’s price action was important, because it took silver above the neckline of a head and shoulders bottom.
At this point in time, gold has yet to rise above its neckline, so silver is clearly the leader.
Silver seems eager to race to $35.50, and if gold can rise above $1800, that could catapult silver into the $40 range.
There’s more good news. Ben Bernanke makes a speech in New York today, and he may give more hints about ramping up QE3. Currently, QE3 is being “diluted”, because the Fed is selling short term Treasuries.
There are rumours that the Fed may cut back on that practice, or even halt it, before the end of the year. If “Big Ben” speaks boldly about ending the dilution of QE3, gold and silver could spike higher, very quickly.
Most investors in the gold community like speculative resource stocks. If you are looking for action, my favourite play right now is the “Global X Gold Explorers” fund.
At about $8 a share, the GLDX ETF is something that is probably priced “just right”, for action-oriented investors. In contrast, GDXJ is trading at about $22.
It’s a lot easier to look down from $8, than it is from $22. Aggressive investors should considering accumulating GLDX on every 25 cent decline, inside the highlighted $7-$9.75 “price box”.
I like both GDXJ and GLDX, but there’s no question that GLDX is a lot easier to handle, emotionally.
A move above $1800 in gold could be the catalyst that takes GLDX above $10. From there, the target would be $13, which is about 50% higher than today’s price!
The love for gold has been reignited in India, according to the World Gold Council (WGC) in its Gold Demand Trends for the third quarter of 2012. India regained its title as the strongest performing market, overtaking the greater China area, as the country experienced a bounce-back in demand due to improved sentiment during the festival season.
Compared to the third quarter of last year, Indian gold jewelry demand grew by 7 percent while gold bar and coin demand rose 12 percent. Total consumer demand was 223 tons, compared to 205 tons this time last year. The second largest market was Greater China, which consumed 185 tons in the third quarter of 2012. This was less than the 201 tons consumed in the third quarter of last year.
Together these markets in the east made up 55 percent of the world’s jewelry and investment demand, according to the WGC.
Although India experienced a setback earlier this year when gold shops boycotted a proposed tax on the yellow metal, imports recovered by July “as inventory levels were bolstered (aided by a well-timed dip in the local price) and the market adjusted to the customs duty,” says the WGC.
The third quarter has historically been a strong seasonal time for the Love Trade to come alive in the east. Monsoon rains and the festival season in the fall are generally associated with the buying and giving of gold. Still, for the year, don’t expect the Love Trade in India to be as strong as it was in 2011, as gold demand remains subdued with the ongoing weakness of the rupee.
