Not much happened on the markets yesterday as investors were waiting for signals from the Fed. Gold, silver and mining stocks moved slightly lower and the situation remained as it had been for practically all charts that we monitor.
Consequently, we will quote yesterday's comments as everything that we wrote yesterday to describe the current situation in the market remains up-to-date also today.
The Euro Index moved to the declining long-term resistance line without breaking it once again. Last week when we saw such move, the GLD ETF moved above $122. All GLD managed to do on Monday was rally to $120.77 after which it declined and closed the day only 0.26% higher, at $119.69. [It declined to $118.65 despite the euro's small rally on Tuesday.] Gold continues to underperform and this week's "strength" was not true strength. Gold remains below its long-term rising resistance line, so the outlook remains bearish.
We can say the same about mining stocks - they still underperform and they remain below key, strong resistance levels.
With the FOMC decision pending, we were asked what we think the outcome might be and if keeping short positions is justified. Beginning with the latter, we think it is, as metals and miners are below their long-term resistance lines and continue to underperform - refusing to move much higher even when the Euro Index moves higher. They are not looking like they are starting a big rally here. They are looking like they are still holding up, but if there's a spark igniting a move lower, they could fall substantially.
What's likely to happen? As Matt Machaj, PhD wrote in the latest Market Overview report, no real tapering (meaning: tightening of the policy) is likely to be announced soon. We could see some kind of fake tapering, meaning that it would be called this way, but the implications would be very limited. Quoting from the December Market Overview report:
"The likely candidates for tapering are therefore asset purchase operations performed on MBS [mortgage backed securities]. Here the Fed could actually reduce the holdings. Yet as all Fed representatives signal to us, these shall not be major changes, but minor adjustments."
Now, the market's reaction to such news depends on how it fits the expectations and how much people will believe that something has actually changed when this "weak" tapering is announced. If investors are expecting no tapering at all and they react to the word "tapering" like it is indeed happening, then the USD will likely soar and stocks, commodities and precious metals can decline. If the markets get another "no tapering" message while they actually expect tapering to be announced, then we will likely see a temporary move up followed by another slide - similarly to what we saw in mid-September.
The situation is complex and the outcome is hard to predict based on the above, however, based on the technical indications, the big surprises should be to the downside, so the bearish outlook still prevails.
As mentioned previously, "we might see a bounce when gold reaches its previous 2013 low, so we suggest closing the speculative short positions in both gold and mining stocks when gold moves close to this level (at $1,190), but not before that happens. We do not suggest making adjustments to the long-term investment capital when that happens."
To summarize:
Trading – PR: Short position in gold (half), and mining stocks.
Long-term investments: No positions.
Stop-loss orders for the speculative short position:
- HUI Index: 214
- GDX ETF: $22.80
- Gold: $1,272
As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Market Alerts on a daily basis (except when Premium Updates are posted) and we will send additional Market Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals from your Editor, and the automated tools (SP Indicators and the upcoming self-similarity-based tool). You will find more information by following links in the summary of the latest Premium Update.
As a reminder, Market Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
