After Silver's brutal beat down on July 7, it looked like the bulls had finally lost their foothold and the bears would carry the day. Curiously, however, after a weak opening the following day, silver managed to claw its way back and finish in the green. Two more up days followed and here we are, at the end of the week, with silver sitting right back on 10 month support. I count 14 instances since last October where silver has found support here on a weekly closing basis. Something is going on behind the scenes to make this level so important. Maybe this is the price where the physical market decouples from the paper COMEX market? At $15.50, silver is already 10-15% below the cost of production for most primary silver miners, so how much lower can it honestly go before supply dries up? If it costs a miner $17/oz to produce something it can only sell for $15/oz, where's the motivation to keep production going, much less increase it? My point is that a spot price below $17/oz must be transitory in nature, or else a significant portion of supply is going to be withdrawn from the market. Yes, I know 70% of worldwide silver supply comes from base metal mining, particularly in copper. But given the commodity collapse we've seen in 2015, I'm guessing base metal miners aren't exactly expanding production at the moment. The sellers have been giving it all they got (take a look at the elevated volume of late) and yet $15.50 (more or less) is holding VERY strong. I would expect a rally from here - maybe a dollar or two - based on the strength of support this week coupled with a very bullish COT structure. From there we'll see what happens.
When the markets tanked on June 29, we saw a corresponding spike in the VIX - a measure of market volatility. I posted the following day that the breakout looked legit. Typically, there is an inverse correlation between the VIX and stock indices. As one rises, the other falls and vice versa. The breakout above the trading range noted by the green parallel lines should be concerning for stock bulls. The breakout was textbook from a technical point of view. First, there had been a well-defined trading range for several months, with multiple touches of both the upper and lower bands. Second, the breakout was forceful, leaving no doubt about its direction. Third, it immediately re-tested the upper boundary in the following days before resuming its uptrend. Lastly, momentum indicators are confirming the breakout. All of these elements suggest that the breakout is real and that we're seeing a meaningful trend change in volatility. At a minimum, I see the VIX re-testing its December 2014 highs of around 25, with a good chance that it makes a run for the October highs. As stated previously, a higher VIX implies lower stock prices. How much lower? Well, back in October when the VIX was 31, the S&P was sliding toward 1800 - a full 12% lower than current levels.
What does the transportation index know that the S&P doesn't? After peaking in December 2014, $TRAN has been suffering a slow death, down more than 12% in the last six months. Compare that to the S&P 500 which is less than 3% off its all-time high as of Monday's close. This kind of divergence does not bode well for the broader indexes. As Dave Kranzler points out in his post this morning:
"This index encompasses rail and truck freight shipping, UPS and Fed Ex, and other goods transportation companies. It directly reflects the relative amount of consumer spending and industrial activity in the U.S. economy. Year-to-date this index has diverged by a significant amount vs. the Dow and the S&P 500. This stock sector is telling us that the U.S. economy is tanking."
I made a couple annotations to the chart that I'd like to point out. First, the index experienced the dreaded death cross back in May. This occurs when the 50 day moving average crosses below the 200 day moving average and it suggests sellers are overwhelming buyers on the longer-term timeline. Second, momentum indicators are awful, having made a series of lower highs since peaking last December. Lastly, I've drawn what I expect to be the next significant levels of support. You can see that the first area is a full 4% below last night's close. Based on the chart, it's almost a certainty that we'll re-test the 7750 lows from last October. Beyond that, I see 7000 as the next logical support level. Not only is it a nice round number, but it also corresponds with the lows from early 2014.
So to sum things up, it's not looking good for the Dow Jones Transports and, by extension, the US economy. Trade accordingly.
It's no surprise that the dollar is catching a bid this morning on the back of all the Greek news over the weekend. We're clearly seeing a flight to safety, or more specifically, a flight from the Euro. Above is a weekly chart that captures the parabolic move from the second half of 2014 and the subsequent correction. Since February, it's been correcting in a fairly controlled manor, reversing every time it touches that upper trend line. This morning we find the USD right back against resistance so now the question is: Will it break out or break down from here? A breakout, in my opinion, would imply a rally to 110. We would then expect to see dollar-denominated commodities (copper, oil, gold?, etc) to see a corresponding drop. A breakdown in the USD, however, would mean a possible re-test of the lower channel and a corresponding bid for dollar-denominated commodities. If you're looking to take a position in gold or silver, you may want to wait and see how this plays out.
Today's chart is a long-term monthly look at gold. It has gone absolutely nowhere for the last two years and continues to bump along between $1150 and $1200/oz. The good news for bulls is that support continues to hold while volume has been slowly tapering. Also, the MACD has made a positive crossover for the first time since 2009. The bad news for the bulls is that the more price continues to test the $1130 level, the more likely it is to break below it. If that were to occur, then I believe we'll see a swift decline to $1000/oz. Not only is this the next logical support level, it also represents a nice round number and those tend to be price magnets.