Are You Ready For The Next Rally?

Written by Craig Hemke, Sprott Money News & TF Metals Report

 

 

 

Each of the last three years have begun with gold rallies of over 10%. The stage is set for another such move in 2018. Are you prepared?

 

Many folks have written about how the current selloff in gold and silver was predictable. Whether it was expected due to tax-loss selling, seasonality, CoT-washing or the expected FOMC rate hike, the majority of analysts were expecting price weakness in November and December and, this time, the majority was correct.

 

But if this current selloff was so easily predictable, then why can"t the coming rally to begin the year be just as foreseeable and certain?

 

Below is a weekly chart of Comex gold going back to this time in 2014. Note the bottoms found in December of each of the past three years and then be sure to note the January-February rallies in 2015, 2016 and 2017:

 

 

At TFMR we have an old adage that applies here: "When trading gold and silver, you must always be prepared to sell a little when things look rosiest and buy a little when things look the darkest". I don"t think that anyone would argue that December 2017 feels like the darkest period in recent memory.

 

And this "darkness of sentiment" is reflected in the Relative Strength Indices for gold, silver and the shares. If you"re unfamiliar with this important technical indicator, you can read more about it here: https://www.fidelity.com/learning-center/trading-i...

 

Generally speaking, rallies exhaust and price begins to turn lower as the RSI exceeds 70. In selloffs, short-term capitulation is usually seen when the RSI drops below 30. For example, after 17 consecutive down days

for Comex silver last spring, price turned and rallied 10% in under four weeks from an RSI extreme low of 18.

 

 

A look at the current charts only serves to reinforce the view that prices are oversold, near a bottom and ready for the usual late-December rebound and rally.

 

Comex Gold is near strong support of $1220 and its 200-week moving average near $1231. Also note, however, that its current RSI is 31 and near the previous 2017 lows seen at the turns in May and July.

 

 

Comex silver is in its support zone of $15.50-$16.00 and its RSI is even lower at 26!

 

 

And the mining shares, as measured by the GDX, are clearly near a low, too. The price level of $21 has previously held as support on several occasions, tax loss selling in Canada will be finished by the end of next week and the RSI is at a 2017 low of 27.

 

 

Again, successful investing in the metals requires the ability to buy a little when things look darkest. To that point though, these buying opportunities don"t often clearly present themselves. The only question remaining for December of 2017 is...are you prepared to take advantage this time?

 

 

Questions or comments about this article? Leave your thoughts HERE.

 

 

 

Are You Ready For The Next Rally?

Written by Craig Hemke, Sprott Money News & TF Metals Report

 

 

Check out these other articles by our contributors:

Eric Dubin: Buying Into A Collective Economic Delusion - Rory Hall

 

Bitcoin Hyper-Deflation - Keith Weiner

 

Friday’s COT Report: A WTF Moment For the Ages? - Ed Steer

Eric Sprott Forecasts Status Quo Now, But Big Rally in 2018 (Weekly Wrap-Up, December 8, 2017)

The S&P Has Now Gone 36 Days Without A 1% Intraday Move: The Longest Streak In History

Heading into Monday"s session, the S&P had gone for 34 consecutive trading sessions in which it hadn"t experienced an intraday move greater than 1%: according to the WSJ"s Market Data Group, this was the longest such streak going back over two decades, to 1995. And, following the Monday close, the market made history when it ended yet another day by being confined to a 1% trading range. This made it 35 consecutive sessions without an intraday move of 1% or more. With Tuesday"s somnolent market action and virtually unchanged close, the streak extended to 36 consecutive sessions - the longest streak in history.

For those who have followed the market, the boredom - at least on the surface - is palpable, despite what RBC pointed out last week when it said that "it is CRAZY what is going on “under the hood,” when on the index level, it’s so optically calm.” However, with most market watchers looking simplistically at aggregate level data, the S&P gives a sense of calm that is at odds with the recently documented surge in political uncertainty. 

The recent calm is a sharp contrast with what was taking place in the market just a year ago: on this week in 2016, oil was $26/bbl, the HY spread was 900bps, the S&P was 1810, EPS was negative, inflation expectations were 1%, VIX 30. Today, oil is $54/bbl, the HY spread 400bps, and the S&P is just shy of 2300, EPS positive, inflation expectations are 2%, and VIX 11.

Some observations: the average daily range between a session’s intraday high and low over that stretch, dating back to Dec. 14, is just 0.54%, according to FactSet. That compares to the S&P 500?s average daily trading range in 2016, which was 0.96%.

As the WSJ further notes, despite the lack of sharp moves, the stock market has mostly been levitating higher "even though the daily moves have been soporific." Since the streak began in December, the index has climbed just 1% in total, but it’s still managed to set a new all-time highs along the way, most recently this week. Still, uncertainty about the future of Trump administration policies have worked in concert with record high valuations and the wait-and-see approach on the part of the Federal Reserve about when next to raise interest rates to hold stocks in check.

“The market is bobbing and weaving around new highs,” wrote David Rosenberg, chief economist, and strategist at Gluskin Sheff.

That’s a sharp contrast to how the S&P behaved just three months ago, in the immediate aftermath of the surprise victory of President Donald Trump on Nov. 8, when the S&P 500 shot up 6.2% from Election Day to Dec. 13, just over a month later.

Furthermore, the absence of a one-day move in the S&P 500 is consistent with other readings of ultra-low volatility. The historical volatility of the SPY ETF, a measure of how volatile that S&P 500 has been over two months, sits at 6.5, the lowest in at least two years, according to CBOE Livevol. Ninety-day historical volatility is barely higher at 8.1, also the lowest in two years.

Expectations for future prices swings in the S&P 500 over the next 30 days are scarcely higher. The VIX has been depressed to near record lows since the election. The VIX is currently at 11.3, well below its long-term average near 20.

Still, the doldrums may be ending soon. As Jason Goepfert at SentimenTrader, quoted by Art Cashin, notes the market is showing little enthusiasm to the upside despite the record highs in the S&P:

Negative momentum is picking up under the surface. Even as the major stock indexes hit all-time highs, or were close to them on Friday, stocks in the S&P 1500 index weren"t showing as much enthusiasm. Gauged by the Relative Strength Index, an abnormally low number of stocks have seen extreme positive momentum, and a rising number are seeing extreme negative momentum.

Indecision after a buying thrust. Friday"s surge at the open left an unfilled gap, as prices never neared Thursday"s closing price during the day. Then on Monday, traders showed indecision with an inside day, a lower high and higher low than Friday"s session. That has led to subpar returns, even during this bull market.

Ultimately it will be up to traders to force a break out to a new trading range, and since they have been unable to do so for nearly two months to the upside, perhaps it is time to revisit what a market drop actually means.