Written by Jim Welsh
Macro Tides Weekly Technical Review 02 July 2018
Gold Is Bottoming
As noted last week, extreme bearish sentiment and improved positioning in Gold futures suggests a good trading low is likely to form above $1245.00 soon. The percent of bulls in Gold has been hovering near 10% for two weeks, which suggests that negativity toward Gold is well entrenched. I expected Gold to decline below $1264 and positioning in Gold futures improved as Gold traded under $1260 on June 25 and June 26.
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Large Speculators are trend followers and typically are too long at highs and then sell near the end of a decline. As of June 26, Large Speculators (Green line middle panel) were holding their second smallest long position in the past 18 months. In the three prior instances Large Speculators were holding such a small long position, Gold subsequently rallied between 10.1% and 15.1%.
Conversely, the smart money Commercials are holding a short position that is smaller than at 2 of the prior three intermediate lows. Gold closed today at $1241.91 after trading under $1240 and down from its close on June 26 at $1257.86. The next Commitment of Traders Report will include the trading from the close of June 26 through July 3 when it is released on July 9.
Given the price decline since June 26, the positioning in Gold likely became even more constructive with Large Speculators further lowering their long position. Managed Money (Blue line bottom panel, CTA’s) is net short for the first time since December 2015 and just before a powerful rally in Gold. ($1050 to $1360 by July 2016).
Click on any chart below for large image.
I thought the bottoming process in Gold would include it falling below the higher solid trend line and the lower dashed line. The expectation was that as Gold broke below these trend lines Large Speculators would sell and they have. Gold has now fallen to the trend line connecting the December 2015 and December 2016 lows (lower solid trend line), which should provide Gold decent support. While it is certainly possible that Gold could dip under this trend line, the odds are growing that Gold is nearing a sharp reversal higher. The weekly RSI for Gold fell to 32.72 today the lowest since the December 2016 low.
Some of the weakness in Gold today was triggered by a sharp decline in Silver, which dropped by more than 2%. In the process Silver took out the solid trend line connecting the July 2017 and December 2017 lows. Bullish sentiment in silver is also below 10%, but Silver could fall to the lower trend line near $15.45 before a reversal develops. Positioning in silver is not as bullish as it is for Gold.
In the May 14 WTR, I recommended:
“Buying a 50% position in Gold or the Gold ETF GLD, if Gold trades under $1301.”
On May 15 Gold traded under $1301 and the Gold ETF GLD opened at $122.82. Last week the instructions were to add another 25% to Gold or the Gold ETF GLD if Gold traded under $1264, which occurred on June 26. GLD opened on June 26 at $119.28. I recommended adding another 25% if Gold traded under $1250. Gold traded under $1250.00 on June 28 at 8am when GLD was trading at $118.45. The average purchase price for the entire GLD position is $120.84.
Gold Stocks
There is good news and bad news about the Gold stocks. The good news is I’ve been waiting months for the relative strength of the Gold stocks to improve. Last week the relative strength improved significantly and convincingly broke below the rising trend line that has contained the Gold stocks since their peak last September.
If one is looking for a low in Gold, the improvement in the relative strength of Gold stocks is a good sign.
The bad news is that the relative strength improved so much because the Gold stocks as measured by the Gold stock ETF GDX refused to sell off despite the weakness in Gold and Silver. The net result is that GDX didn’t fall below $21.56 and its RSI failed to drop below 35, so the buying instructions from last week were not triggered.
“A 50% position is recommended if GDX trades under $21.56.”
The low last week was $21.77 and the RSI only fell to 39.0 on a closing basis, so I’m changing the instructions. A 50% position is recommended if GDX trades under $21.80 and a 100% position if GDX falls below $21.56, using a close below $21.16 as a stop.
Stocks
The price pattern in the S&P 500 suggests that the market could be vulnerable to a sizable decline that eventually pulls the S&P 500 below its February low of 2532 for wave C from the top in January. Last week I provided price levels to go short the S&P 500:
“A 15% short position is warranted if the S&P 500 rises above 2730. Increase it to 30% if the S&P 500 trades above 2740 and to 45% if the S&P 500 climbs above 2755.”
The S&P 500 traded above 2730 and 2740 on June 27. Increase the short position to 45% if the S&P 500 trades above 2746 using a close above 2783 as a stop.
Treasury Yields
As noted for the past 3 weeks:
“The 30-year Treasury yield is likely to at least challenge the 2.954% low on May 29 in coming weeks.”
On June 29 the 30-year yield touched 2.954%. That created the third low within .002% of each other, so this has become an important technical pivot point. The low in September was 2.651% and the May high was 3.247%, a range of 59.6 basis points. The 50% retracement of the increase from 2.651% to 3.247% is 2.949% very close to the 3 trading lows. This creates a trading opportunity to short the 30-year Treasury bond, using the recent trading lows as a stop. Establishing a 50% position in the inverse Treasury bond ETF (TBF) below $22.76 is warranted using a stop at $22.42.
In early May I recommended buying TLT at $116.50 in anticipation of a rally to $121.00. (TLT traded under $116.50 on May 17) In the May 29 WTR I wrote:
“I would recommend selling half of the TLT position tomorrow since it closed at $122.24 (on May 29) and has more than achieved the price target.”
On May 30 TLT opened at $121.00. Last week I recommended selling the remaining half if TLT trades up to $122.10. TLT traded above $122.10 on June 27. The average selling price was $121.55.
Dollar
In the March Macro Tides, I expected the Dollar to rally and provided an upside target:
“The Dollar chart suggests a rally to near 95.00 is possible in coming months.”
On May 29 the Dollar reached 95.02. In the June Macro Tides I wrote:
“The Dollar is likely to push to a modest new high after a modest correction of 1.5% or so.”
The Dollar dipped to 93.19 on June 14 and then pushed to a new high on June 28 at 95.53. Based on the price pattern in the Dollar it has completed a 5 wave rally from the February low and is now set up for a meaningful decline.
Emerging Market Bonds
I am establishing a 50% position if EMB falls below $105.00 is warranted. Increase it to 100% if EMB drops under $103.80.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The Sector Relative Strength Ranking is based on weekly data and used in conjunction with the Major Trend Indicator (MTI). As long as the MTI indicates a bull market is in force, the Tactical Sector Rotation program is 100% invested, with 25% in the top four sectors. When a bear market signal is generated, the Tactical Sector Rotation program is either 100% in cash or 100% short the S&P 500.
The MTI crossed above its moving average on February 25, 2016 generating a bear market rally buy signal. Based on the buy signal, a 100% invested position in the top 4 sectors was adopted. The MTI confirmed a new bull market on March 30, 2016.
The MTI remains well below its high from January and was far weaker when the S&P 500 completed wave (B) on June 13 when it traded up to 2792. If this pattern analysis is correct, the S&P 500 may be beginning wave (C) which would bring the S&P 500 below the low of 2532 on February 9. A close below the black trend line at 2630 would reinforce the pattern. Past performance may not be indicative of future results.
Disclosure
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Nasdaq 100 is composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. All indices, S&P 500, Russell 2000, and Nasdaq 100, are unmanaged and investors cannot invest directly into an index.
