Friday's Trading Action Offers More False Signals
- False moves in the precious metal pits
- Outside day in silver tips the near-term balance to the bears
- More false breaks in the bond pits
Late last week I wrote that several markets had recently experienced false moves, known as whipsaws. It seems that Friday saw this disease spread to the precious metals and credit markets. To recap, a false move is one in which a price temporarily breaks through resistance or, in a bearish sense, briefly drops through support and then bounces back. Most whipsaws on the daily charts have an effect for a short period (2-3-weeks), and are usually followed by an above average move in the opposite direction to the whipsaw. In other words, if we see a false upside breakout that implies that the above average move will develop on the downside and vice versa. Because most of these misleading moves take place over the course of one or two price bars, it’s always a good idea to make sure that they are confirmed by some supplementary technical evidence, such as a trendline violation, MA crossover etc. Remember, in technical analysis we are dealing in probabilities, never certainties. That means that we need to gather as much evidence as possible in order to make a stronger case.
False moves in the precious metal pits
Gold, in particular intrigues me, because its recent price action is contradictory. Chart 1, features the price of the yellow metal on a weekly close basis. It is caught in a large trading range with a breakout point developing above the horizontal green trendline at $1350. On Friday, it closed slightly above the dashed green line marking the top of a potential inverse head and shoulder pattern. This action was also supported by a rising intermediate KST, shown in the center window. Offsetting evidence comes in the form of the long-term KST, which is slightly bearish. Being “slightly” bearish, means that it could easily be pushed to the upside, in the event that Friday’s reverse head and shoulders breakout turns out to be valid. Such action could well lead to a positive break above that key $1350 level. Here’s the rub.
Chart 1
Chart 2 tells us that Friday’s initial reaction to the employment report was a misleading one, as the $GOLD price rallied decisively above the green trendline and the 200-day MA. By the end of the session though, it was below both benchmarks. One day does not a trend make, so it will be interesting to see whether the price now drops below the dashed support line, say to $1239 or even the red confirmation line, which is currently at $1220. The rising daily KST in the lower window, says this may not happen. If it does though, that tentative upside inverse head and shoulders break in Chart 1 would itself be invalidated. Watch next Friday’s closing carefully!
Chart 2
Sometimes we can get a valuable clue as to future gold action by observing what the shares might be saying. Chart 3 shows the Van Eck Gold Miners ETF, the GDX. It too experienced a false breakout on Friday, this time with the opening taking place above resistance and the closing price below it. It’s not such a decisive whipsaw as that for the metal itself, but is nonetheless troubling.
Chart 3
These whipsaws certainly represent a negative overhang over the short-term. However, markets are a reflection of people in action, and people can and do change their minds. Consequently, if prices were to rally back and hold above Friday’s high, the situation would reverse to become a bullish one. Right now, the Friday whipsaw has the upper hand.
Outside day in Silver tips the near-term balance to the bears
Silver also experienced some negative price action on Friday (Chart 4). This did not take the form of a strong false upside breakout, but appeared as a wide bearish outside day. This type of one-day pattern is only expected to have an effect over a 5-10 session period. However, this particular outside bar has three strikes, which could give it greater fire power. First, it is quite wide relative to previous bars. That means a big battle between buyers and sellers, which went in favor of the sellers. Second, the outside nature of this specific bar not only encompassed the trading rage of its predecessor, but the previous nine days. That also adds strength to the signal, as does the fact that Friday saw the price drop back below its 200-day MA. Finally, unlike our gold examples, Friday’s volume for silver was exceptionally heavy. This again emphasizes the significance of the buyer/seller battle. It’s true that the KST is still bullish, but it is also true that it has started to flatten. That means that the negative forces attributable to Friday’s action may have the effect of pushing the KST to the downside. In turn, that would imply that the potential inverse head and shoulders would not be completed.
Chart 4
The two levels to watch are $17.5 and $16.25. A decisive move above the first would cancel the outside day and complete the inverse head and shoulders. Such action would likely be followed by a very strong rally. On the other hand, a decisive break below $16.25 would take the price below the confirmation trendline, thereby strongly suggesting that the inverse head and shoulders had failed.
More false breaks in the bond pits
Bond prices initially reacted favorably to the disappointing employment numbers, but quickly realized that this would do little to deter the Fed from raising rates down the road. As a result, the yields on shorter-term maturities rallied and those for longer-term experienced bullish (for yields) whipsaws.
Chart 5 shows that the 1-year yield has broken to a new high and its 2-year counterpart has bounced off support and violated a small down trendline.
Chart 5
Further down the curve, the 5-year series, in Chart 6, experienced a false break to the downside, not to mention a strong bullish outside day that took it slightly above its initial confirmation line. A further break above the dashed green line to 2.0% would confirm the reversal beyond a reasonable doubt, as that would undoubtedly also result in a KST reversal.
Chart 6
Chart 7 features the 7-10-year ETF, the IEF, where another whipsaw outside bar can be observed. In this instance the confirmation line has already been penetrated. This suggests that both the price and flattening KST will soon turn to the downside.
Chart 7
Finally, the longer-term Barclays 20-year Trust (TLT) features a more mild form of whipsaw. Confirmation would come from a drop below the red line at $120. Usually gaps are filled or a worthwhile attempt is made to do so. Friday’s action doesn’t look like much of an attempt to me to close that large one between $126 and $128, so that possibility is still holding out there once the bearish near-term effects of the false upside break are fully digested.
Chart 8
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.
