AN INFLECTION POINT FOR TREASURIES (AND MAYBE STOCKS) -- GOLD TRACES OUT A BIG CONTINUATION PATTERN -- SILVER WALLOWS NEAR SUPPORT ZONE -- GOLD AND SILVER MINING ETFS BOUNCE NEAR KEY RETRACEMENTS -- SHANGHAI COMPOSITE EXTENDS SERIES OF LOWER HIGHS
AN INFLECTION POINT FOR TREASURIES (AND MAYBE STOCKS)... Link for today's video. This week could mark an inflection point for Treasury bonds because the Fed makes its policy statement on Wednesday and the economic docket is overflowing with reports. The fundamentals alone do not make for the inflection point. Rather, the reaction to these fundamentals could trigger a consolidation break in the 10-YR Treasury Yield ($TNX). Chart 1 shows the long-term picture with a large consolidation in the 2.4% to 3% area (blue rectangle). I view this as a consolidation after a sharp advance, which makes it a bullish continuation pattern. Within this large consolidation, there is a smaller, and tighter, consolidation taking shape since late January. Resolution of this smaller consolidation could have ramifications for stocks and gold.
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Chart 1
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Chart 2
In a nutshell, stocks and the 10-YR Treasury Yield are positively correlated and move in the same direction. Gold and the 10-YR Treasury Yield are negatively correlated and move in opposite directions. Chart 2 shows the three month consolidation with support in the 2.6% area and resistance just above 2.8%. These are the levels to watch this week. An upside breakout would argue for a move above 3% and this would be bearish for Treasury bonds. A downside break would signal a continuation of the January decline and could lead to a bigger support break on the weekly chart. Such a decline would be bearish for stocks. The indicator window shows the 20-day SMA of the 2-period Correlation Coefficient ($SPX,2). The moving average has been positive this year as stocks and the 10-YR Treasury Yield move in the same direction. Expect stocks to react and move in the same direction as the 10-YR Treasury Yield.
GOLD TRACES OUT BEARISH CONTINUATION PATTERN... Those interested in gold should keep an eye on the 10-YR Treasury Yield because gold is negatively correlated with this benchmark rate. This means gold moves higher when yields move lower, and gold moves lower when yields move higher. Mark Hulbert featured this phenomenon in his MarketWatch column on January 22nd as he referenced a paper by Claude Erb (here). Based on historical correlations (r squared), Erb suggested that gold would decline to the $800 area if the 10-YR Treasury Yield rose to 4% and gold would rise to the $1900 area if the yield drops to 1%. This makes sense because inflation expectations heat up and/or the economy expands when yields fall. Conversely, inflation expectations subside and/or the economic outlook dims when yields rise.
Chart 3 shows Spot Gold ($GOLD) within a long-term downtrend. Gold broke down in early 2013 and then formed a big descending triangle over the last nine months. This is a bearish continuation pattern that would be confirmed with a support break. Gold recently reversed in the 1400 area and is currently in the middle of the triangle. Triangle support is set in the 1180-1200 area and a break below this support zone would signal a continuation of the bigger downtrend. The indicator window shows the Correlation Coefficient ($TNX,2) to measure the degree of correlation between gold and the 10-YR Treasury Yield. Notice that I am using a 2-period Correlation Coefficient and then adding a 52-period moving average (one year). This moving average has been in negative territory for most of the last three years, which suggest a strong negative correlation with long-term Treasury yields.
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Chart 3
Even though my long-term outlook for gold remains bearish, there are some potentially bullish developments on the daily chart. Chart 4 shows the Gold SPDR (GLD) with a falling wedge retracing around 62% of the prior advance. Also notice that broken resistance turns into support in the 122-123 area. GLD firmed early last week and bounced with a move above 124. The ETF, however, remains within the wedge, which is still falling, and a breakout at 128.2 is needed to fully reverse this downtrend. If this were to happen, I would reconsider the long-term descending triangle and entertain the possibility of a double bottom (June to December 2013).
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Chart 4
SILVER FORMS BIG CONSOLIDATION PATTERN AND LAGS GOLD... Chart 5 shows Spot Silver ($SILVER) trading within a large triangle and testing the prior lows. While support is at hand, the bigger trend is down and a consolidation within a downtrend is usually a continuation pattern. A break below consolidation support, therefore, would signal a continuation lower.
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Chart 5
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Chart 6
As with gold, my current outlook for silver is bearish, but support is at hand and chartists should always be prepared for the unexpected. Chart 6 shows the Silver ETF (SLV) firming just above the December-January lows and bouncing last Thursday. This bounce is so far insignificant on the price chart because larger resistance in the 19.40-19.50 area has yet to be challenged. A move above 19.50 would break first resistance and this would provide the first sign that silver is going to ultimately hold support.
GOLD AND SILVER MINING ETFS BOUNCE NEAR KEY RETRACEMENTS... The next three charts show the Gold Miners ETF (GDX), Gold Miners Junior ETF (GDXJ) and the Silver Miners ETF (SIL) with similar characteristics. All three surged in January-February and corrected in March-April. The March-April declines could be mere corrections of the January-February advance. Notice how all three bounced near the 62% retracement lines last week. These bounces are indeed positive, but all three remain below their mid April highs, which mark key resistance. Follow through breakouts are needed to fully complete the reversal and signal a continuation of the January-February advance. Gold and silver should also confirm with breakouts of their own.
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Chart 7
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Chart 8
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Chart 9
SHANGHAI COMPOSITE EXTENDS SERIES OF LOWER HIGHS... With a 1.62% decline on Monday, the chart 10 shows Shanghai Composite ($SSEC) again testing a support zone that extends back to late 2012. As noted in a prior market message, I consider this support zone as "potential" support because the overall trend on this chart is clearly down. After a big surge above 2400 in early 2013, the index traced out a series of lower highs the rest of the year and remained weak into 2014. The index bounced off the 2000 area twice this year and is once again testing these lows with the decline over the last three weeks. The trend line zone and 2014 highs mark key resistance at 2200, a break of which is needed to suggest a bullish trend reversal. Chart 11 shows the Hang Seng Composite ($HSI) going nowhere since late 2009, which is when it first crossed above 22000. The index has not done well in 2014, but remains above key support at 21000.
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Chart 10
