Saturday, June 11, 2011

Gold, Silver, Miners, Stock Market and the US Dollar

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Today, June 11th, is the one year anniversary of The TSI Trader. Hooray! I started this website last summer when my summer vacation as a public school teacher began with utterly no clue as to what I would write about, other than my passion for the True Strength Index (TSI) indicator, and had no idea how many truly remarkable people I would be blessed to befriend. To all who have read and to all who have written to me I offer my deepest expression of appreciation for the contribution you have made to my life. I look forward to sharing a new year of adventure, conquest and conversation with you. May we all enjoy this journey together and be a selfless help to one another.
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As I have not posted anything for a while I guess the best place to start today is with an overview of where the various markets appear headed. For each investment instrument I have prepared a two pane chart - the left side being the daily chart and the right side is the weekly chart.
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Our first chart will consider gold.
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Click on any chart to ENLARGE
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Gold has held up remarkably well since reaching its all-time high of $1577 in early May. In fact, gold came close to regaining that high just this past week. But to be very blunt, the party for now is over.
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On the weekly chart we see that even if gold had been able to regain the all-time high of $1577 the height of the TSI would have created a glaring negative divergence with respect to price. The counter rally of the past 4 weeks was doomed from the start and now it is virtually over. A break of the TSI trend line on the weekly chart (green line) will confirm this. A ZERO crossover of the TSI on the daily chart will also confirm this. It is much clearer to me now that the D-wave of gold's ABCD repetitive wave pattern has begun.
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Next let's consider silver.
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This chart is fascinating and frankly, down right scary. On the daily chart we note that last Friday's action has just barely given us both a TSI trend line break sell signal and a bearish ZERO crossover. Not good news for silver.
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But what I find scary is the weekly chart. Silver price has formed a pennant and will break out of it, either upside or downside, in the next week or two. Pennants are quite reliable patterns that usually mark the midpoint consolidation price of a larger trending move.  In this case, silver began its bearish move at $50 with a now defined midpoint consolidation price of $36.  As the first half of this trending move has been a $14 drop in silver price, this projects a final completion of the pattern with silver reaching $22.
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The TSI on silver's weekly chart is sickly hovering just below ZERO. Any price movement at this point will send the TSI into an immediate downward trajectory and certain fatality. If one is interested in playing this setup with something like Proshares Ultrashort Silver ETF (ZSL), I suggest one wait to see how the price pennant breaks and keep an eye on the daily TSI to make sure it is continually falling below ZERO.
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Next up are the miners - Amex Gold Bugs Index (HUI--X). Forgive me for being so bearish today with my assessment of things, but this chart, too, just looks bad.
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First of all, the weekly chart reveals that the price uptrend line corresponding to gold's entire C-wave was tested last January but has now been decisively violated. The TSI for both the daily and weekly time frames is below ZERO - that's always bearish. A number of T1 patterns on the daily chart would suggest we are currently making a T1 pattern and only half way to it's completion. (A T1 pattern, btw, is identical in concept as the pennant pattern we discussed in the silver secion above. The difference is that price in a T1 pattern does not make a pennant). And finally, there is no TSI trend line break BUY signal likely for weeks and weeks into the future.
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An aggressive way to play this setup would be to buy the Direxion Gold Miners Bear 2X ETF (DUST).
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The SP-500 has not been doing so hot for the past 6 weeks, as we observe a string of recent red candles on the weekly chart. However, I would caution that the time to play this aggressively has probably passed for now. On the daily chart the TSI is on the pavement indicating that price is oversold and there is a positive divergence in place (lower low in price, higher low on TSI) suggesting a bounce is forthcoming and very soon.
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The other thing on the daily chart that should make aggressive bears think twice is the 200 dma which is just 15 points lower. I seriously doubt price will be able to get below that on the first try.
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The weekly chart, however, gives us an idea of the bigger picture. If Ben does indeed discontinue QE2 at the end of this month, what will hold the market up then? Answer: nothing (in my opinion).
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The weekly TSI is below ZERO and for as long as it stays there there will be no rejoicing among the bulls. It would be better to have cash in a retirement account than stock. No matter what happens in the next year, at least you would still have all your money.
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And finally, let's consider a daily and weekly chart of the US Dollar (DXY0). The powerful bullish move that began earlier this past week gave us TSI trend line break and ZERO crossover BUY signals. Obviously a new 20-25 daily cycle has begun and we should expect the dollar to be generally higher over the next couple of weeks.
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This analysis is confirming my bearish thoughts on gold, silver, miners and the stock market, as they have tended to perform inversely in the recent past. I imagine the US Dollar will at least test the overhead price trend line, perhaps more than once, in the next couple weeks. After battering away at this trend line during this daily cycle, I view it as highly likely that in the following daily cycle US Dollar price will scream higher through this trend line - sending gold, silver, miners and the stock market to their knees. To put a general time frame on this I would suggest that the month of July will not be friendly to the bulls.
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30 comments:

  1. Hi There,

    Just wanted to say thank you for your indepth analysis. I hope you enjoy your summer vacation and provide us with many more writings!

    Cheers,

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  2. John, question,

    For silver instead of looking at it as a bearish flag... could we not be looking at a really big bullish flag?

    For instance, from Feb 2011 till first week of may price rose from 28 dollars to 49 dolllars. This 22 dollar rise can constitute our pole. Now, the correction that we have experienced may actually be our flag... if our break out does occur to the upside we may be looking at approximately 60 dollar silver. Just a thought

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  3. Thank you, John. Great article again. I have some July SLV 35 Puts so it was encouraging to hear your target price for the white metal. I'm just hoping the move will be quick i.e. before 16 July :o)

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  4. ILUMPMS - first of all, thank you for your encouragement and for sharing your thoughts.

    You raise an interesting question that I decided I should run over to www.stockcharts.com to see what the veteran John Murphy has to say about bull flags before writing this response.

    In all examples of the critter I could find, the bull flag makes a slightly descending price channel that begins directly from the very top of the initial upleg.

    My guess would be that if silver had made this pennant beginning at $50, that would be one thing. But the pattern does not begin until much lower - like $32 or $33 (see daily chart).

    The other thing is that the general slope of this consolidation price movement on the daily chart is generally *upwards* like a bear flag as opposed to the expected downwards slop of a bull flag.

    I guess we'll soon find out.

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  5. Hi Eamonn -- well, if silver does not at least test the 200 dma just below $31, and soon, I will start believing in Martians.

    There is still a lot of hot money positioned inside that pennant/bear flag in whichever direction proves to be the *wrong* direction.

    I picture an orange sliced in half. Nothing happens until it finally is squeezed. But when it is finally squeezed, the status quo is no longer the status quo. Those folks sitting safely within the pennant/bear flag positioned in the wrong direction are going to know something has changed and they will be motivated to act as quickly as mice run from cats.

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  6. Anonymous, great comment. Wonderful imagery to support your points. I sure hope it gets moving south soon. If silver goes to $21, I will make extraordinary profits.
    I imagine there are plenty of folks trapped inside that collapsed parabola, hoping to wait it out, waiting for silver to rise up again. The question is, how much of a squeeze can they take before reaching the point "to hell with this I'll take what's left of my money and run"?
    As always, time will tell.

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  7. Thanks for the great analysis. I must say you have helped me to make the most profit in my life last year! Thank you for that. I am now 90% in cash. Look forward to more of your analysis in the near future. Keep up the good work!

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  8. John,you say : 'suggesting a bounce is forthcoming and very soon' regarding S&P,would the miners not bounce as well?

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  9. John, could you kindly explain how you derive a 20 to 25 day cycle for the dollar?

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  10. John,

    Any comments on crude oil?

    Thanks

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  11. Fung - did I pay you to write that?

    Thanks.

    Anon - miners should bounce if the S&P bounces, yes.

    Anon - without a chart it is a little tough to answer your question about the dollar daily cycles.

    But the concept for figuring it out is as follows: cycles are measured from one low to another low. When a new cycle begins price therefore always rises. When a cycle nears its conclusion price is always falling.

    Exactly how many days it will be until price ceases to rise and then begins its descent to the next low is not known.

    However, when one is in a bull market the cycles peak after the midpoint day. When in a bear market, the cycles peak before the midpoint day.

    There will be several daily cycles that comprise an intermediate, or sometimes called weekly cycle. In a bull market each cycle will peak after its midpoint day (Day 13 of a 24 Day cycle, eg).

    However, when an intermediate cycle is about to draw to a close it's last daily cycle usually peaks before it's midpoint day.

    This subtle change is what alerts us that an intermediate cycle is about to come to a conclusion and that there will now be a more significant correction.

    I did not answer your question as directly as a chart would. But if you want to figure it out, look at a daily chart of the US Dollar and start counting days back from one low to the preceding low. Observe the number of days. Observe whether the peak day was before or after the midpoint day.

    Every once in a while cycles are shortened to, say, 17 days. And likewise lengthened to say, 31 days.

    But hey, if it were cookie cutter simple everyone would be rich, right?

    I hope my answer helped you.

    cbritton - crude oil, huh? wow, I never look at that. But I did just a minute ago, since you asked. :)

    Looks a lot like silver. Huge drop May 1st and since then a pennant pattern. The daily TSI suggests there will be a decisive breakout this week and my hunch is that it will be to the downside.

    FWIW, I don't listen to the news, watch TV or do a lot of reading. What I see on the chart is what I see on the chart and what everyone else *knows*, well, I have no clue.

    Anyway, once oil and silver break out, it is going to mean something. That is, the break out will not stop there but instead will develop into a sustained move. And of course, they will both break out in the same direction.

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  12. Thanks for the great analysis as always!

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  13. Eureka!!!! I check every day to see if you have posted and today I shouted "hooray!"
    I hope you've enjoyed a well deserved week of relaxation since the end of the school year.

    This was a great report. I sure look forward to reading as many reports as you feel up to posting throughout this summer. Can't tell you how much you've helped me learn. Many, many thanks!

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  14. Thank you John, silver started the week with a negative change. At what level do you think it is safe to say it will move south further? (When is the pennant definitely crossed -> time for ZSL?)

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  15. Hi John,

    First day on your site and am very impressed.. I follow cycle theory at Smart Money Tracker and The document.com.... thanks for your terrific charts and analysis...

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  16. john,
    How did you learn about cycles? Did you read a book or did you just pick it up sort of on your own? I'm still not a believer but it's quite interesting.

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  17. Thanks for the analysis a really great article. While long term I am bullish in gold and silver the short term looks very bearish (which fits in nicely with seasonal trends). I was looking at the CCI against silver after Friday close which also just passed below zero. I have gone short on the Asian open last night. Hope it holds.

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  18. John do you follow extorre gold (XG)? This thing just keeps chugging along like nothing in the world is wrong!

    James

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  19. ckpc - you made my day. thank you!

    Verra - I guess we got our answer today. (Like it was a big surprise).

    I am considering buying ZSL as I think I have seen about enough to believe it reasonably safe.

    The way these things often work is that there is a retest back up to the break out price ($18ish). I will probably wait for now and see if that happens. If I miss the move by doing this, that's fine.

    The most important thing, IMO, is to keep an eye on what the TSI is saying. If after buying ZSL the TSI says it's time to go......well, it's time to go.

    For now, anyway, this looks to be a very favorable setup and it could well prove to have been an incredible opportunity.

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  20. Hi John, your comment on oil was very interesting as I bought oil Puts last week when I saw that its intermediate cycle trend line was under pressure. Given silver made a move south today, its nice to hear your suggestion that oil will follow its direction too :o)

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  21. Its not the "D-wave" - not yet -, it cannot be price and time wise.

    I was able to get back in GOLD yesterday at $ 1514. I waited 7 days for that set up. Next stop around $ 1600, not later than next month July.

    Sunmaker

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  22. Sunmaker,
    I think it is the D-wave, reason I say this is because I think a lot of the money that normally went into Gold went into Silver. That's why you didn't see the highs you normally would see.

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  23. Hi John,

    As I am new to the site, is there a simple way to follow the TSI? I have not found it in the trading software I use (Interactive Brokers). Thanks in advance.

    Mike

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  24. Good question Mike!

    www.FreeStockCharts.com
    www.ThinkorSwim.com

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  25. John
    The Bollinger Bands show XSLV at the bottom. Does that concern you that it may signal a near term bottom?

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  26. Hey Duke - nah, this condition does not necessarily signal a near term bottom.

    The Bollinger Bands are a measure of volatility, usually calculated so that the upper and lower bands are 2.0 standard deviations from the mean price of the past 20 days.

    Translation - when price goes sideways for an extended period of time, the Bollinger Bands contract. As they contract there is an increasingly smaller area in which price may move around without touching either band.

    This is precisely want one expects to see at a major breakout. Namely, Bollinger Bands contracting and narrowing the range of price movement.

    Then - one side wins and the other side loses - the Bollinger Bands begin to expand again as price either screams higher along the upper band OR screams lower along the lower band.

    Thanks for the question.

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  27. John:
    Do you think it's time to buy ZSL now? Silver were down big for 2 days and rebounded a little today. ZSL is sitting at the bottom for about a week now, and TSI is almost cross over 0. Thanks

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  28. Be careful with leveraged ETF's like ZSL and AGQ: never hold them overnight. The difference between the open and close can be so big that all your profits are instantly gone - or worse - that your stop loss is skipped and you are facing a big loss. Just trade intraday with good money management.

    An usuable indicator is the extended hours price. Check cnbc.com This is however on low volume, so only use it as an indicator.

    It is like John said: try to get as much odds in favor as possible when you trade.

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  29. USD up is not bring metal down. It seeme that people like find precious metal a safe place to avoid risk. Should I take loss for my DUST and ZSL?

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  30. Anon - I do not own DUST or ZSL. Honestly, as a short term trade it is very difficult to say what to do with either.

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