Incessant Repetition

You’re probably tired of hearing it as much as I am of writing about it but It doesn’t seem to matter where I turn in the markets, most every asset class is in some sort of “hanging by a thread” moment. Stocks broke out to the upside and are coming back to retest that breakout. Failing would be a very bearish sign. Bonds broke to the downside and are coming back to retest the breakdown. Failing would be very bullish.  The topic of this post, precious metals or specifically gold, is no different as you can see in its daily chart below.  It’s pretty obvious the $1310 level is of critical importance as it has tested it 6 times (2 from the underside and 4 from above) and where it sits presently. In addition to price closing Friday’s at horizontal support, it also closed right on the (blue) rising trend line which has acted as support 4 other times. These, combined with the fact price is above a rising 200 day moving average is constructively bullish. On the flip side providing the bears some room for optimism is the bearish negative divergence in RSI momentum, a double top and most recently, lower highs in price .

Extending our look to the weekly time frame it becomes much clearer to see that the current weakness comes at a very logical place as this level had been a point of resistance 3 times in the past when gold was in its protracted downtrend.  After a strong 6 week uptrend that started in mid-May, a period of consolidation is expected and needed. Another feather for the bulls is recent action looks very much like a bull flag which, if it resolves to the upside, would provide a target up near the $1550 level.  

As is always the case, current chart signals are mixed providing fuel for both bulls and bears, supporting both arguments. Having no bias and using a weight of the evidence approach, my expected intermediate term outcome would be a bullish continuation. In the short term though, because the more times a price tests a level the higher the probability it will break it, I am expecting a break below the current $1310 support opening the door for a retest of $1295 area where there exists strong support a likely area to revers. The eventual break above the longstanding $1380 resistance (red horizontal line) opens up the door for the potential of big upside as there is little overhead supply until it reaches $1575 which is what I am favoring longer term.

I do not know what will happen next I am just laying out one possible scenario so please do not take these ramblings as predictions or advice. Regardless of what happens next though, I expect Wednesday’s fed announcement will be the “event” providing the catalyst for the precious metals sector’s next big move.

Brazil Has a Wedgie

If you had 2 mischievous and devious brothers like mine you might be wondering how a country can have uncomfortable, bunched underwear. You might also be in need of therapy to rid yourself of the scars of their pranksBut, alas, I digress. In this case the wedgie I refer to is the rising wedge pattern that has developed in the Brazil stock market proxy, EWZ.

As you can see in the daily chart below EWZ has broken down from a perfect 5-touch rising wedge and currently sits on important horizontal support. I think this has a lot more downside if we get a confirmed move below support as this breakdown has occurred after the formation of bearish momentum divergence. If you are short Brazil’s stock market like me, it is important to know ahead of time where likely reversals may occur, a logical place to exit your short position. The pattern’s conservative first target is the $28.50 area, some 11% lower than where we closed yesterday. If the market doesn’t find support in that area and gathers some steam to the downside, the next likely target is the $26 area. This sane area is a very important level as it represents a confluence both a pattern target and the 200 day moving average.

As of right now and because EWZ is still in a defined uptrend on both the daily and weekly time periods we need to give the benefit of doubt to the bulls and view this breakdown as nothing more than a normal corrective pullback. But future events can always change the tide and as such we always need to keep an open mind and adapt to what the market gives rather than what we want or expect.

If this pattern works out as expected and there is interest, I have saved a couple of other relatively unknown “technical” patterns the noogie and wet willy (my oldest brothers personal favorite) for later.

Leaving the Island

An Island Top, one of the most reliable patterns, occurs when a upward trending price "gaps" above a specific price range and then is confirmed when the price "gaps" down below to the original range. That “island” that is created can be made up from one day or a cluster of days (formed by several bars rather than one) which is a much more powerful signal. The island cluster would look something like this example:

With that in mind, below is the chart of the 20-year Treasury bond ETF, TLT. As you can see, TLT was in a confirmed uptrend and gapped up on June 27 and spent the next 58 trading days above the gap (encompassed within the red box). Last Friday, Sept 9, you can see price gapped below the box and through the up gap of June 27, creating an island.

Island tops have an historical success rate of 77% with an average decline from the successful formations of -21%. While nothing is guaranteed, this pattern's high probability outcome if validated with follow through in the next few days, the market’s concomitant rise in volatility and poor seasonality is a warning that bond holders are likely in for some near term pain

Gambling on Higher Prices

For those not aware, Las Vegas Sands Corp., LVS, develops, owns, and operates integrated resort properties across Asia and the US. A few of their more well-known are The Venetian Resort Hotel, The Four Seasons Hotel, The Plaza Casino, and The Sands all in Macau, the Marina Bay Sands in Singapore and The Venetian Resort Hotel Casino, The Palazzo Resort Hotel Casino, and Five-Diamond luxury resort on the Las Vegas Strip. The company’s integrated resorts comprise accommodations, gaming, entertainment and retail facilities, convention and exhibition facilities, celebrity chef restaurants, and other amenities.  

Their stock had a rough time of it after topping in early 2014. Notice that price and momentum diverged just before it peaked forming an overbought divergent high, the warning a correction was due. And quite the correction it turned out to be as it fell more than 55% peak to trough, bottoming almost 2 years later in January of this year. Notice during this time how price stayed below the 200 day moving average once it crossed in June 2014, testing and then failing it once in June 2015.

Like the bearish divergence that formed in 2014 warning of a price reversal, a bullish oversold divergence formed at the bottom of the correction in January of this year, again raising the warning flag of a potential reversal. Since that time, price has moved above the 200 day moving average which has just started to curl north. The bullish reversal was confirmed with the formation and breakout above the inverse head and shoulders pattern. While I am cautious here on equities in general as we move into a seasonally weak period, if the market wants to go higher the upside target for LVS is back up near the prior highs, above $70.

August 2016 Charts on the Move Video

August was about as much fun as listening to Rozanne Barr sing the National Anthem. Me thinks the next few months are going to make up for it. What do you think?

https://youtu.be/LqELoI7Yon8