On top of the world, with an adoring crowd gathered below and indifferent law enforcement milling about…there is a bit of a parallel between a famous rooftop concert and the current market.
As stocks slink into the end of Q1 amidst a bevy of perils, there’s a sense of calm before the storm. Then again, SPX closed yesterday above its 3.618 Fibonacci extension – though just barely this time. Can the algos keep the music playing?
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We have multiple targets being reached this morning, and several more in the works. We’ll start with ES, which just tagged our SMA50 target in a backtest of the falling white channel from which it broke out two weeks ago.
The one we’ve been waiting on for what feels like forever, though, is silver. SI broke out of the falling white channel twice before it managed to tag our 30.35 target in January. But, as we discussed at the time [see: Hi Ho Silver]:
With the SMA200 crawling along toward current prices, we can’t discount the potential for a long overdue backtest.
We’re finally getting that backtest. But, given DXY’s breakout, we have to wonder whether SI’s backtest will hold.
We’ll update the prognosis for silver and gold and also sneak in a discussion of EURUSD, which officially reached our next downside target yesterday.
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Gold reached our primary downside target yesterday. As I posted at the time, this is incredibly important support for GC.
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Thinking of the late great Chick Corea this morning as I survey the sky-high equities market… Futures have regained about half their overnight losses, spurred by a timely dip in VIX and pop in 10Y yields (testing Monday’s highs.)
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We noted back on July 9 [see: Moment of Truth] that GC had reached our long-held 1823.60 target well ahead of schedule.
From a charting standpoint, it should reverse here at its .886 Fib retracement. From a fundamental standpoint, of course, the fiscal picture suggests plenty of additional upside. Remember, it broke out of two different rising channels in order to reach this price level well ahead of schedule. We have to wonder whether a reversal in GC would, as would normally be the case, result in a rally in the long-suffering DXY.
We were still bearish on DXY, so the potential for a reversal in GC seemed limited.
As it turned out, the fundamental picture won out. Though it took it about 9 sessions, it finally pushed above its .886 retracement, and then its former all-time highs – breaking out of rising channels in an explosion up to 2089.20.
We got a (quite violent) backtest of 1823 as expected, followed by six weeks of sideways consolidation while pretty much everybody waited for Congress to approve another round of stimulus. Unfortunately for GC, the stimulus never came.
Since then, GC has been settling lower in a falling channel which pointed to a rendezvous with the 200-DMA – which was breached on Friday. This is a significant breakdown which implies a troubled path forward. But, there are other factors at work.
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Sometimes I cringe when I place a target on a chart. Such was the case yesterday when ES reached our IH&S target at 3425. If it kept going, it was sure to backtest the intersection of the broken rising white channel at the falling channel top. Was that likely in the midst of election and pandemic turmoil?
Apparently so, because that’s exactly where ES ended up overnight.
Although I tire of saying it, this is an important threshhold for the overall market – which has benefited smartly from a rescue maneuver that wasn’t even really necessary.
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Our yield curve model is again sounding the alarm on overpriced equities. Unless the 10Y – which closed its June 8 gap this morning – declines sharply right away, the 2s10s spread signals a sharp equity downturn to finish the correction which began on Oct 12.
The bad news for equities? A sharp drop in the 10Y also portends a correction.
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Single-family home starts continued to gain from rock bottom interest rates and the exodus from urban, multifamily housing amid the pandemic. September residential starts grew 1.9%, while permits rose 5.2%, the fastest since the 2007 peak.
Single-family inventory dipped to 3.3 months, the smallest since 1963, while multifamily starts cratered by 16.3%.
It was a bright spot of economic news following an ugly day of losses across all indices yesterday that saw ES tumble to our next downside target.
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A new week, a new breakout in the after-hours for no particular reason.
And, just when the ramp job started to waver, a 5.6% smackdown on VIX – no news, just a reminder not to focus on the pandemic, the millions out of work, our dysfunctional Congress, the coming election battle, Trump’s tax troubles, etc.
Why? Because they can.
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ES is reaching our next downside target right on schedule.
Note that if ES hadn’t spurted past its February highs in late August, falling to our 100-DMA target would have involved a fairly shallow drop of 5.5% and would have preserved the rising white channel.
Instead, we have a 10.8% loss so far and face much greater technical damage if support isn’t retaken – all for the sake of completely unjustified higher all-time highs.
Fear and greed. It’s the same old story when it comes to markets, even in the age of algorithms and central bank interference.
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