Forex & commodities on July 7, 2017: thoughts & outlook


These are our sister fund’s thoughts on the currency and commodities markets. They trade gold/silver using a discretionary approach. We trade the S&P 500 using our quantitative models.
*Go to our homepage for their latest thoughts. We update this webpage throughout the day.

Thoughts

  1. At long term reversal points, look at gold and not silver.
  2. USD bulls are losing the bull-bear fight.
  3. Putting silver’s flash-crash into perspective.
  4. Gold/silver keep following the weaker market.
  5. The U.S. dollar’s decline is completely normal.

6 pm: Ignore silver.
After yesterday’s flash-crash, silver has retraced 38.2% of the bounce. Silver is also capped by its 50 hourly moving average resistance. Worst case scenario: silver will retrace 61.8% and fall to $15.

Our sister fund thinks that this crash is the work of 1 large trader who wants to shake out some weak longs and scoop up silver. A lot of retail traders are bearish on silver – they’re looking at trendline breakdowns. Trading silver using support/resistance trendlines is an ineffective strategy in the commodity markets. Too many false breakouts/breakdowns.
Gold/silver/oil still have an inverse correlation with the USD. Commodities fell from 9-11 am when the USD went up.
If you look at gold/GDX and ignore silver, the picture is a lot less bearish than technical analysis would have you believe. At big bull/bear inflection points, gold is more useful than silver because silver can be easily manipulated by 1 large trader.
As you can see in the following chart, GDX is at a solid support.

Gold and GDX massively outperformed the S&P today. This is a short term bullish sign.

Based on the latest COT report, smart money hedgers are becoming more and more bullish on gold/silver. Keep in mind that this is as of Monday – before silver’s crash. Expect hedgers to be even more long as of today (Friday).


Meanwhile, copper is still stuck at its $2.7 resistance.

The bottom line for gold, silver, and oil is simple. As long as the USD is in a bear market, commodities are in a bull market. The USD’s price action is clearly bearish.
5 pm: USD bulls are losing the bull-bear fight.
96 is the last level that USD bulls can try to defend. It is the post-Trump election breakout level.
On today’s good jobs report, bulls tried to push the USD above this resistance. They failed. The USD’s previous bullish theme “strong economy = rate hike = bullish for USD” is failing.
Our sister fund still thinks the USD is in a bear market. Each of the USD Index’s successive bounces are becoming weaker and weaker.

The USD is in a bear market because Money Flow is moving away from the U.S. to Europe/emerging markets. The interest rate differential between the U.S. and Europe is shrinking.

The Euro is still supported on its 200 hourly moving average and is waiting to break out. Perhaps it will break out on Yellen’s congressional testimony next Wednesday-Thursday.

USDCAD is bearish too. USDCAD went down despite today’s oil rout! Canada’s economy is improving – their employment report beat expectations today.

6 am: Putting silver’s flash-crash into perspective. 
Silver flash-crashed yesterday, and that crash brought gold down. It was clearly the work of 1 large trader who dumped $540 million in silver futures at 7:05 pm, when volume is EXTREMELY low.

The flash crash brought silver to its March 2016 lows.

Gold fell much less than silver. This is because gold is a larger market, so it’s hard for an individual trader to crush gold. At the bottom of the crash, the gold:silver ratio was 85.
No other market moved on silver’s crash. The Euro didn’t fall (there is a modest positive correlation between Euro and gold/silver).
Our sister fund is not concerned by this flash-crash.

  1. Some flash crashes need to be retested, and others don’t.
  2. This seems like the work of one trader who is caught on the wrong side of the market (he’s short). If so, he’s trying to bailout his position by shaking out longs at a time of low volume.
  3. This is the second time in the past 2 weeks that someone has tried to crush silver on low volume. Somebody dumped silver on June 26 at 4 pm (after the market closed).

  1. We’ll see how silver reacts to today’s nonfarm payrolls.
  2. As long as the U.S. dollar is in a bear market, gold/silver cannot crater for an extended period of time. Any gold/silver weakness will be short term weakness.

6 am: Gold/silver keep following the weaker market.
Right now, gold/silver have a moderately positive correlation with oil and the Euro. Unfortunately, gold/silver are following whichever market is weaker (oil or Euro). When oil falls, gold/silver come under selling pressure. When the Euro falls, gold/silver come under selling pressure. This is a short term bearish sign for gold/silver.

  1. Oil went down from 7-8 pm last night. Gold/silver went down.
  2. Oil went down from 3-4 am this morning. Gold/silver went down a little. (The Euro was going up from 3-4 am).

5 am: The U.S. dollar’s decline is completely normal.
The U.S. dollar index has been unable to bounce on any support level over the past few weeks. This is completely normal for a USD bear market.

  1. A bullish theme – U.S. rate hikes – has completely failed to push the USD index higher. Hence, “U.S. rate hike” is no longer a bullish theme for the USD.
  2. The U.S. dollar is going down on a bearish theme – the ECB is about to tighten monetary policy. The ECB said nothing surprising on yesterday’s ECB minutes. The Euro still went up (and USD went down), which is normal. Everyone knows that the ECB will hike rates. It’s only a matter of “when”.

With the global economy picking up steam after a 2 year downturn (2014-2016), money is flowing from the U.S. to Europe/emerging markets.
Yellen will testify before the House Panel next Wednesday July 12 at 10am. There is nothing she can say that will surprise markets enough to reverse the USD’s bear market. (She testifies again next Thursday in front of the Senate).
The USD attempted a bull/bear fight at 96 two days ago. 96 was the beginning of the Trump rally. The bull/bear fight resulted in a victory for the bears.

The Euro is at a big resistance. Once the Euro breaks above this level, it’ll surge. See weekly bar chart below.

The Euro found support on its 200 hourly moving average yesterday. See below.

Bottom line

  1. Our sister fund thinks that the U.S. dollar is in a bear market (U.S. Dollar Index). Money Flow determines the U.S. dollar’s bull/bear markets. Right now, money is flowing away from the U.S. to Europe and emerging markets.
  2. Our sister fund thinks gold and silver are in new bull markets. Gold/silver surge when inflation is about to surge. Our sister fund is 100% long USLV (3x silver ETF). They make medium-long term investments.

Leave a Comment