Dark Days Ahead for Gold, Silver & Maybe Certain Stocks and Indexes Too
Over the last several months, we’ve all heard about is the reflation trade, whether or not inflation is taking hold in our economy, and if it's transitory. The markets have been gyrating in response to the associated prognostications.
Reflation means the Federal Reserve is trying to stop deflation by pumping enormous amounts of liquidity into the system. And to that end, we saw the biggest jump in inflation numbers last month since 2008.
But is this likely to be the trajectory going forward? Are we likely to see ever increasing prices on our store shelves as well as in the gasoline prices we pay?
Or is this transitory -- meaning it's just temporary?
Increasingly it looks like a transient effect. We saw that bond yields have already crashed from 1.7% to about 1.45%.
And then last week the Federal Reserve announced it's going to change its accommodative stance. They're going to do it very gradually, but they indicated they’re going to temper the recent huge increase in stimulus by stopping bond purchases later this year.
They also indicated a possible schedule for raising rates in 2023 (there are a lot of people who think they’ll start raising rates even sooner).
Based on those statements, we had a crash last week in gold and basic materials such as copper and lumber as well as certain financial stocks like bank stocks.
In this chart, I'm looking at XAUUSD (spot gold) where for the last several months, gold has been trading in a huge and volatile trading range with a lot of people thinking the yellow metal was going to spike a lot:
The solution to such hype (and whenever things get confusing with volatile trading ranges) is to put a boundary around prices. Then I can understand the structure and also try to get a handle on where the next big move might be.
To that end, I’ve been looking at gold within an ascending broadening price pattern.
This is inherently a bearish pattern, which is why I told members to get out of gold at the top above the $1,900 level a few months back. We’ve been going short gold on several occasions since then.
Gold did trace out a bullish double bottom recently. This bullish signal wasn’t far off the support line of the ascending broadening price pattern. And I did think it would drive a rally in the short term. That's exactly what we've seen, but I've been getting increasingly skittish as gold approached key resistance zones around $1,950.
That’s why I resisted the temptation to get long gold and advised members to sit on the sidelines.
Then last week I advised putting a sell stop right under last week's low at $1,861. If you did that, then it was immensely profitable as gold plummeted $100.
And so the question right now is where does gold head from here?
I think it’s headed back to the lower end of the ascending broadening price pattern with a target of $1,700 - $1,725. That level represents a major inflection point.
Either gold finds support and pivots much higher, or it take out the lower support line and drops much lower. If the latter, gold will likely drop all the way to the very bottom of the pattern around the $1,100 or $1,200 area.
So there’s a lot to keep an eye on here, but right now the path of least resistance is lower in gold.
Silver hasn’t fared a lot better.
Here’s XAGUSD (spot silver), which has been tracing out an ascending triangle price pattern:
In the last couple of weeks, silver hit a major level of resistance around $29 and while it looked enticing, I was very reluctant to chase those prices.
Now you can see why. I’m watching the lower end of the ascending triangle, especially the $24 and then $22 support levels.
If those get taken out, silver is headed a lot lower.
But if silver can stay within the triangle, it could very well turn around and pop out on the upside.
I'm on the sidelines for now as I watch to see how price behavior will play out here.
For most of the last six months, most speculators and analysts were also calling for a much lower dollar. Yet the dollar is turning higher, especially against the New Zealand dollar.
Here’s NZDUSD (the New Zealand dollar versus the US dollar):
NZDUSD hit a major level of resistance at the 0.74-0. 75 level a few months ago with a major key reversal. This was very bearish, especially when a subsequent rounding top appeared.
That’s why I advised members to put a sell stop just under the neckline of that rounding top. Prices have since crashed 160 pips, and the path of least resistance still seems lower.
NZDUSD is currently at a support level. That suggests it could gyrate above and below the 0.69 – 0.70 area, but it the next big move should still be lower.
As you know, one of the other dollar pairs that I’ve been keeping a keen eye on is USDJPY (the US dollar versus the Japanese yen):
For the last several years, USDJPY has been trading within a descending triangle. But recently it’s started breaking out the upside. Previously USDJPY broke down every time it hit the trendline of the triangle.
Yet right now price is consolidating at or above it.
So is this a bull trap where anybody chasing USDJPY above that line is going to be trapped when prices drop once again?
Or is this a good indicator that USDJPY is about to break out for much higher level?
I'm still a bit on the sidelines here. I want to see USDJPY penetrating above weekly highs at 111. That would indicate a massive breakout to the upside.
Alternatively, if USDJPY sags below the resistance line once again, a major turn lower is on the way.
That’s why I’m waiting for additional price history.
Having said that, USDJPY has been hugging a recent uptrend line with higher lows and higher highs.
That makes me more bullish than bearish, but I want to see a better signal before I go long here.
Frankly, all the Japanese yen trading pairs have been given me fits in the last couple of weeks as to whether they’re setting a new secular direction or if they’re reverting to their earlier trends.
Here’s EURJPY (the Euro versus the Japanese yen) on the monthly level:
EURJPY has been in a primary and secular downtrend from way back 2008 where it fell from 170 to 130 today.
Has the recent breakout indicated a breakout from that primary trend and a paradigm shift to higher prices?
Or is this just a bull trap before the earlier downtrend re-asserts itself?
While we’re only halfway through the month, note that EURJPY made a new high and is now trading on the low. There’s still time for prices to rally but this is potentially ominous for the bulls.
Again, I’m on the fence here. I need more price history to see where this pair wants to go.
The governing price patterns buried within the larger symmetrical triangle (the head and shoulders and the double top) suggest it will be very hard for EURJPY to cut through them.
This month’s price action so far suggests that will be the case.
However, it’s too early to definitely pick a direction just yet. Be patient and we’ll soon see a major trend one way or the other in EURJPY.
Despite the fact I’ve been trading for decades, the symmetry of the markets never ceases to amaze me.
What seems like a random or chaotic period of price movements often resolves itself into something more definable.
The monthly chart of GBPJPY (the British pound against the Japanese yen) is such an example:
We see that GBPJPY has turned back at a major level along a long-term trendline going back 13 years.
This was also an area of heavy resistance back in 2016, and typically price can’t cut through these areas like a knife through butter.
That’s why these historic areas of resistance can give us an indication there's likely to be headwinds and turbulence around certain areas. That’s why it's so important to understand the history of these charts in a way that you simply can’t see on a 10 minute chart, one hour chart, or even a four hour chart.
In contrast, this is a monthly chart going back to 2007. And without the understanding of this long-term chart, you can't know the cards you're holding.
So the question we have now is a familiar one: is this just a pivot from a long-term resistance line that’s about to turn back into the main trend? Or are we looking at a paradigm shift higher?
Again, it's a little bit early to tell.
With the recent uptrend line in place, GBPJPY could pull back to the lower edge of that line around 145 before moving decisively one way or another. That’s why we need a bit more time to see where this is truly going.
However, with the major trend being down and GBPJPY hitting a major roadblock on the upside, I would look for any rally as an opportunity to go short in anticipation of further short-term declines.
And I would be remiss if I didn’t mention another key currency pair: GBPNZD (the British pound versus New Zealand dollar).
Despite the fact we've had a lot of turbulence and carnival ride fluctuations here, I’ve been pretty steadfast in my conviction that this pair was going to head higher and probably much higher.
That’s primarily due to the plethora of bullish price patterns going way back in GBPNZD’s history.
Most recently there was a double bottom in 2019 – 2020 and I felt that marked a major low for GBPNZD and would be a catalyst for a turn higher and probably much higher. Since that time, this pair has also traced out an inverted head and shoulders.
Now GBONZD has broken out and closed above the neckline, which strongly suggests a clear path higher.
We might very well see a retest of the neckline before bouncing to take out the high, but we might also not see any retest at all.
An explosive move is on the way. I think we could see another 1,000 pips from current levels. Perhaps even more.
Now for the stock market …
With the Fed signaling a shift in their monetary policy, this is the first time we've seen a crack in the glass ceiling of the S&P 500 stock market.
Here’s the S&P 500 and its recent setback following the Fed policy change:
This index is trading within another ascending broadening price pattern, just as like XAUUSD (gold).
When gold topped out at over $2,000, it dropped all the way back to the lower levels of the ascending broadening price pattern. So will the S&P500 do the same? If so, that suggests a drop to around 4,000.
At that point, the index will bounce or crash through the lower trendline. It’s far too early to tell.
For now, let’s see if the S&P can recover from the key reversal.
The Dow also dropped on the Fed news.
Here’s the DJIA (Dow Jones Industrial Average) which represents a lot of the industrial or value stocks that were supposedly insulated from any shift in Fed policy.
Instead the Dow is the one that cracked the most. In fact, while the S&P and the NASDAQ made new highs, the Dow has been unable to do the same in the last couple of weeks.
So the DJIA has been stalling out at this major area for quite some time at the 35,000 level.
There’s also the by-now-familiar ascending, broadening price pattern here.
The DJIA could easily crash back to the 32,000 level -- the lower edge of that pattern. If that level is cracked then the index could retreat back to the start of the pattern at 29,000.
If so, that would represent a 20% hiccup, something I think is very feasible in the next couple of weeks.
So how about the NASDAQ, which represents most of the tech sector in the United States?
The NASDAQ closed at an all-time high and didn't show any indication of a reversal.
So we have a number of countervailing winds within the stock market. Every day it shifts from value to momentum to growth, but it looks right now that growth is still intact.
The NASDAQ has been trading within an ascending channel and right now it doesn’t look like it's going to turn lower.
Now here’s another key point …
With all the stimulus that’s been coming from the fiscal and monetary side within the United States, there’s been a lot of speculation as to whether this would cause asset bubbles.
Yet we largely haven’t seen that in the stock market per se.
There have been what I call these ‘bubblet’ crashes instead, where we've seen crashes in (for example) commodity stocks.
Here’s Freeport McMoran (FCX) which is a very popular gold and copper mining company.
During the talk of a reflation, FCX had a massive rise. But in the last couple of weeks, it’s crashed as expectations for this reflation trade start to change.
So it seems we're starting to see a change in perception and starting to see crashes in several different markets.
Last week we had a crash in the financial stocks too.
Here’s Goldman Sachs (GS) that went from a price level about $375 to $350 in just a short period of time:
While this could be just a pullback in a bull market, it indicates a readjustment of expectations.
There's also been a huge crash in SPACs (Special Purpose Acquisition Companies). Probably the best example is Quantumscape (QS) which rose to $130 and is now trading at $27.
All these are indications of what I call these ‘bubblet’ markets, where the bigger markets haven’t crashed, but there’s been plenty of mini crashes within certain sectors such as renewable energy, gold and other markets.
I define a bubble market as anything that's increased a 100% in 12 months and then pulled back 35% or more.
I think we're going to see continuing crashes in the sub-sectors of major markets like SPACs, IPOs, renewable energy, and certain other industrials.
And meanwhile we’ll likely see considerable churning in the major indexes at their all-time new high levels.
That’s it for the week!
I’m bearish on the precious metals, bullish on the dollar (for the short term, anyway), and still waiting for a bit more price history in the yen pairs before I hop aboard one way or another.
GBPNZD remains a strong buy.
And I’m bearish on the S&P500 and DJIA but not the NASDAQ at the moment. Look for the mini-crashes in certain sectors more than the broader indexes themselves.
I wish you a very healthy and prosperous trading week.
Mark "CrashIn"Bubblet"Markets" Shawzin