04 april 2016 david kerly's gold-silver-shares and markets

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Gold – Silver – Shares Markets

David Kerly’s

David Kerly’s - Gold-Silver-Shares-Markets - Unique - Insightful - Independent 04 April 2016

Last Friday US non-farm payrolls beat analysts’

forecasts (what’s new) of 205,000 jobs by 10,000

for March. Another month of ‘good hiring

numbers’ will raise expectations of the Fed moving

closer to another rate hike, as foolhardy as we think

that will be. We know that the US economy is

definitely not firing on all four cylinders, more

likely one and a half, and is stuck in low gear.

Though US GDP for the last ¼ of 2015 was

recently revised up from 0.7% to 1.4%, which was

still pretty anaemic when officials and economists

would like to see something around 2.5% to 3.0%,

at least. A surprise though came from the

unemployment rate which rose from 4.9% to 5.0%,

catching “analysts” off guard.

WELL, NOT QUITE THIS BAD.....................YET!

04 APRIL 2016 A monthly newsletter on gold, silver, shares, and stock markets utilising chart and fundamental analysis Issue 10

NYSE Investor negative credit balances are beginning to reverse,

but that is very bearish for stocks.

The FTSE100 Index is struggling under a massive top area.

Gold and silver still a waiting game as ‘more froth’ must be

blown off before we get ‘the green light to pile back in’.

Donald Trump’s ‘popularity’ has stunned many, but reflects

working class America’s disgust with current politicians and a

breaking down of the capitalist system.

The US unemployment rate rise from 4.9% to 5% ‘surprises

analysts’, though a 6.5 year decline was ‘skating on thin ice’.

The NEXT PLC success story is coming to an end.

Complacency has returned to stock markets after the latest

and still ongoing bear market rallies.

We were early with our call on Oil, but the trend has turned up.


CHART OF US UNEMPLOYMENT RATE

Unemployment has been falling for 6 ½ years, the

third longest since the early 1950’s. Unlike the 7 ½

years to 1968 and the 8 years to 2000, when GDP

growth was much stronger at average rates of 6.7% and

5.8%, respectively, the current average of 3.7% is

justifiably a phoney expansion. This was financially

engineered by three bouts of Q/E and ZIRP (zero

interest rate policy). If not for this the US would be in

full blown recession by now. However, as we know, as

do the bank of Japan, the FED, the UK, and Mario

Draghi if he owns up to it, which he won’t of course,

such policies do not work. They might initially have

kept things afloat after the financial crisis, but their

effectiveness now has all but disappeared. The table

below details every fall in the US unemployment rate

since 1950:

Rank Years

Unemployment

fell

US

Unemployment

low

Years

between

lows

Low

point

1st 8.0 2000 9 3.8%

2nd 7.5 1968 11 3.4%

3rd 6.5 2016 9 4.9%

4th 6.25 1989 10 5.0%

5th 4.0 2007 7 4.4%

6th 4.0 1979 4 5.6%

7th 3.5 1953 n/a 2.5%

8th 2.5 1973 5 4.6%

9th 1.5 1957 4 3.7%

Turning to the chart of the unemployment rate we can

see that the MACD (bottom of chart) has begun to turn

up. This was virtually identical to that seen in 2007 after

the rate had bottomed at 4.4%. We do however, note

that the latest “buy” signal has begun from a lower

MACD level than 2007, so is arguably less bullish for

the initial upward move. That may mean more volatility

in the rate as a result of the FED’s constant

experimentation and tinkering with economic policy.

This is really like pushing on a piece of string, given

that they have run out of ammunition to deal with a

massive economic and financial “problem”. Perhaps

this is something akin to trying to halt an oil tanker two

miles away from the rocks, which ordinarily takes 10

miles to stop. They are running out of time.

GOLD

DAILY CHART WITH COMMITMENT OF

TRADERS INDICATOR (COT)

Gold has begun its correction lower after peaking

at just over US$1280 three weeks ago. The difference

between large specs (Hedge funds) and commercials

(producers) has reached an extreme, greater than some

five months earlier, very strongly indicating a trend

reversal. This is one of the best set up indications (COT)

and once again Hedge funds have been caught napping

with massive long positions at the top while the wily old

commercials have loaded up with shorts. The Fed's

comments which were gold bullish on 16 and 29 March

triggered the rallies shown on the chart, but those rallies

have been reversed. The technical conditions are not yet

right for gold’s bull market to extend. The market needs

to go lower first to blow some more ‘froth’ away.

So far the retracement has amounted to US$64 or about

27% of the US$236.40 rise from the December low.

This does not look enough. There appears to be a top

area of some 7-8 weeks duration that seems to be

building over an approximate US$1200 neckline. The

target from this pattern would be around US$1120 as


we have shown on the chart. We had a sell signal a few

days ago from the two shorter term moving averages,

though these can whipsaw as they did through last

September and October. However, the downside

pressure building now looks to be greater than then, so

once US$1200 breaks the move should be swift. Where

it stops and reverses from we don’t know. It could stop

at the 50% level or the 61.8% level. However, given the

still very wide COT gap, it’s going to take weeks not

days. As Willian Gann used to say, “When time is up

price will reverse”.

SILVER DAILY CHART WITH COMMITMENT OF

TRADERS INDICATOR (COT)

Silver has lagged gold since January and did not

become as overextended above its 200 day moving

average at the recent high as gold did. However, since

the beginning of March silver rose by around 8% to its

peak near US$16.10 while gold only managed around

4% and silver is still above its March starting level of

US$14.88, whereas gold is not. Silver should soon start

to follow gold lower beneath the early March low, a

view clearly shared by the wily old commercials

(producers) who were very recently massively net short

to the tune of 77,242 contracts, the largest in at least five

years. We note that that gap between these and their less

savvy counterparts, the large specs (Hedge funds), has

just started to contract from an extreme (the widest in at

least five years), longer than gold which should also

start to contract.

As far as the downside target is concerned, once again

that will be hard to pin point. However, we have to note

that silver has in fact already retraced more than 38.2%

of the advance from the December low and therefore is

now dropping more than gold. We wouldn’t be

surprised to see silver test and possibly exceed the

76.4% level (US$14.214) or perhaps even to beneath

US$14.00 again. The chart of the gold/silver ratio

continues to trend higher and this shows silver at risk of

further weakness against gold. Note the MACD at the

bottom which is just turning up as the ratio bounces

from close to the rising 50 day moving average. If the

ratio makes a new peak at say 84.0 and gold corrects to

perhaps US$1120 that would put silver at US$13.33.

CHART OF GOLD/SILVER RATIO

Ultimately the deferral of an interest rate rise is bullish

for gold, though as we have said, but not just yet as a

greater downside correction needs to occur first. The

FED was very cautious in its latest statement on 29th

March given at the Economic Club of New York. Janet

Yellen expressed the view that global developments

have increased the risks to the outlook with economic

and financial conditions still less favourable than when

interest rates were hiked in December. She considers it

appropriate for the Committee to proceed cautiously in

adjusting policy. That suggests that no rate hike will

occur later this month. Stock markets took that as a clear

signal to push higher again, though we suspect that this

advance is not sustainable.

Despite rates being close to zero, Janet Yellen said “the

Fed would still have considerable scope to provide

additional accommodation”. By that she means more

Q/E and promises by the FED, or what she calls

“forward guidance” on interest rates. Well, we know

that Q/E is not the answer. If they launch a fourth Q/E

the market should, if it has any common sense, realise

that further inflating the many financial asset bubbles is

a recipe for total disaster. It might help (if that is the

right word) Wall Street in the near term, but certainly

not main street, where Donald Trump has ridden

working America’s growing miss trust of the corrupt

(what’s new) political elite.

A move to negative interest rates, which is already a


feature in Japan, Sweden, Denmark, Switzerland and

the ECB, was not mentioned. Suggestions by Yellen

and others that the Fed would consider such a move

have generally been taken as a sign of desperation by

Wall Street. We agree completely with that! However,

the FED, we suspect, or at least some members of it,

have become pretty desperate already.

COMPLACENCY RETURNS TO STOCK

MARKETS

We show a chart of the VIX volatility Index. This is

known by some as the “Fear Index” due to its negative

correlation to the S&P 500. Basically VIX is calculated

from a weighted blend of prices of S&P 500 Index

options (puts and calls) and measures the market’s

expectation of volatility over a rolling 30 day period.

Currently VIX is swinging back into complacent

territory as the S&P 500 rallies higher. We know

already that the overall bias for the S&P500 is down as

the falling 40 week moving average confirms. The

falling resistance line on the above VIX chart reflects

the bull market in stocks from the 2009 low. The twice

upward break of this trend line in 2015 provided a

warning that the trend was changing as more fear crept

into the market. This occurred in 2006 ahead of the 2007

market peak and also the reverse of this in 2010, but

after the 2009 market low. A return to or just under the

trend lines was then followed by the dominant new

trend, up for the VIX in 2007/2008 (down for stocks)

and down for VIX in 2009-2015 (up for stocks).

So, the stock market rallies according to this indicator

are skating on thin ice and must be treated with great

caution and scepticism. The VIX is now testing the

shallow (less steep than 2007/2008) upward trend line

we have drawn from the 2014 low. It could break under

it for a while, but we suspect it won’t last and a fresh

bout of increasing fear should begin to return to the

markets. We note also that many US corporations are

buying back their own shares, some with borrowed

money (understandable given very low interest rates),

in an effort to boost earnings per share. Clearly, growth

cannot be found organically so they are resorting to

other means. This is unsustainable.

CHART OF S&P 500 INDEX

The S&P 500 reached, and slightly exceeded, the

2025-2050 target area we were looking for in our

previous newsletter, closing at 2072.78 on Friday. The

market is still rising, so, until it reverses the bulls are in

control. However, there is clearly a lot of supply in the

2075 to 2100 region which we show on the chart, and

the MACD, while still rising too, remains overall

bearish. It may push into the bullish half of the scale,

but we suspect an abrupt reversal before long. The

market was arguably in a better position back in

September, when it posted a double bottom, to advance

to new highs. However, it failed to do so, hitting and

reversing from major supply just over 2100. Also, it did

not have confirmation from the Transport Index.

The latest rally also emanated from a double bottom

between January and February, but we also note that the

Transport Index has already started to roll over after

hitting the mid-point of supply from the 8000 to 8300

October/November 2015 trading range. This rally looks

on borrowed time, but may go into a choppy trading

range as bulls and bears battle it out.


There are some Technicians who have noted that other

indicators such as the percentage of NYSE stocks that

are above their 100 or 200 day moving averages has

been rising recently. In particular the recent break over

resistance at the 41% level.

NYSE PERCENTAGE OF STOCKS ABOVE 200

DAY MOVING AVERAGE

The break over the 41% level has completed a double

bottom on the above chart. This is now just under the

55% level, meaning just over half the stocks in the

market are above their 200 day moving averages.

However, given that the 200 day moving average for the

Wilshire 5000 Composite, which is about 90% of the

market, is falling, that is perhaps not particularly

bullish. Note also that the RSI indicator has got as

overbought as in 2003, 2009 and 2012. In the first two

instances these were at the early stages of bull markets

and the latter following the market shakeout of 2011/12.

So, again, given the lofty and very mature levels that the

market now resides, we would treat this rally with

extreme caution and doubt its durability.

The chart at the bottom of the page, we first showed in

our August 2015 newsletter, but is updated till last

month and is well worth showing again. This excellent

chart is by Doug Short at Advisor Perspectives, the

quality of which as you can see is first rate.

Investor negative credit balances, which logically will

always be at their worst (or most) at market peaks, when

optimism is generally at its highest (what could possibly

go wrong!), has been reducing since the first half of last

year. The extent of these balances is eye poppingly

higher than at the tech bubble peak in 2000 and the

market top in 2007. Only when these balances return to

positive levels, i.e. go green, will the market reach a

bottom and that is clearly a very long way off.

CHART OF NYSE MARGIN DEBT & THE S&P

500 (ADJUSTED TO PRESENT DAY DOLLARS)

Margin debt on the NYSE reached a

record US$500 billion in 2015 but has

now turned sharply lower as in 2000 and

2007. The S&P 500 has also begun to turn

down, though the latest rally is not shown

on this chart which is to the end of

February and is again by Doug Short at

Advisor Perspectives.

Note also, that time wise we appear to be

due for another recession with the current

“economic expansion” if you could call it

that having run now for a historically long

period, now approaching seven years. The

signs are that we are very close to the

onset of the next one, which will take both

margin debt and the stock market lower in

the years to come.


CHART OF THE FT ALL WORLD INDEX

We revisit the chart of the FT All World Index that we

showed in our last newsletter. Then we were looking for

the Index to rally a further 5% to the 260 area. It closed

at 261.09 on Friday and has started to falter. However,

as with US stocks, there may be a bit more upside to

come before a significant reversal is seen. We have

drawn in on the chart a band of resistance in the 265 to

270 area which looks pretty strong and may begin to

reverse the market. The MACD, like the S&P 500

MACD is bearish overall, though is slightly more so,

being further below zero on the scale. The two year head

and shoulders top remains the dominant feature and the

right shoulder at 275 would need be cleared on a weekly

close basis to lessen the risk of a return to weakness.

US$ GOLD versus FT ALL WORLD INDEX

Gold demonstrated a major bullish reversal earlier this

year against the FT All World Index by breaking the

five year downtrend as well as a triggering a golden

crossover buy signal from medium and longer term

moving averages. This led to a test and subsequent

pullback from major pivotal resistance at the 5.25 level,

the July 2009 low and the March 2014 high. The MACD

confirming the bullish move by entering further into the

bullish half of its scale, though a near term sell signal is

almost upon us. That ties in with the need for gold itself

to correct further and a possible further near term bear

market rally in World stocks. We look for a higher low

to form on the relative chart once the respective

component moves have concluded. The key event to

watch for later will be a break over the key 5.25 level,

for that should trigger the next big upside move for gold

and corresponding fresh decline for world stock

markets.

HUI INDEX versus THE FT ALL WORLD

STOCK INDEX

Similarly, unhedged gold shares as measured by the

HUI Index broke their five year downtrend, but several

months earlier. The percentage gain was of course far

greater than for gold in absolute terms and also relative

to gold against the FT All World Index. The MACD

has unsurprisingly also gone positive and entered the

bullish half of the scale but, once again, a corrective

pullback is called for. The moving averages, while both

having turned up, are yet to see a golden crossover.


In absolute terms and relative to world stock markets,

gold shares have a long way to recover, and on a relative

basis their next major target is the pivotal resistance line

which sits at 0.98, or thereabouts. Such a move from the

current level of 0.69 (though we’d expect the next major

upswing to begin lower down, say around 0.55) would

give upside outperformance of 42%.

WHY HAS DONALD TRUMP BEEN SURGING

AHEAD IN THE POLLS?

Well could it just be that working class America is fed

up to the back teeth with the raw deal they have been

getting for decades from politicians and paying for

years of Wall Street mistakes, particularly 2008,

bankers salary cheques and bonuses to the cost of their

own meagre existence in many cases. Lord Adair

Turner, the former head of the Financial Services

Authority thinks that the advance of extreme politics in

the US and Europe is an “inevitable consequence” of a

breakdown in capitalism.

It’s certainly been looking a bit shaky recently,

particularly with plunges in world stock markets during

January and February, including banking stocks,

notably Deutsche Bank in Germany, and terrorist

attacks in Europe. He also pointed out that wage earners

on the lower end of the scale "have seen no increase in

the US for 25-30 years" and in the Eurozone wages "are

significantly below where they were" before the 2008

financial crisis. The political gains for far-right parties

in Europe, and Donald Trump's surprise success in the

Republican primaries, spring from voter anger on being

overlooked by the free-market.

Trump is controversial, but a lot of voters want change

from corrupt politicians and being short-changed for

years. However, they may be jumping out of the frying

pan and into a different sort of fire. Trump wants to see

America get back on its feet, but it sounds like he’d

bring in a whole raft of protectionist tariffs to goods

made outside the US that are sold in America. If he wins

the Republican nomination global markets are likely to panic and take a massive nosedive.

NINE YEAR CHART OF THE FTSE 100 INDEX

We have covered the FTSE100 Index several times in

our newsletters in recent months and for good reason.

As is clear from the chart, the uptrend from the 2009

low gave way firstly in 2014, then more spectacularly

in the autumn of last year. Between those two down

moves a classic false upward break above the key 6900

resistance took place which set up the subsequent

declines, so far back to the 5500 area for a drop of well over 20%, the markets definition of a bear market.

That false upward break is one of the key drivers for the

market decline, which has a lot further to go because of

it. A false break is a major emotional shift for market

participants caught the wrong side of it and will more

times than not trigger a move to the opposite side of the

trading range that the market was in when the false

break occurred. So, the 6100 area was the approximate

bottom of the range that was in force when the false break occurred, and that target was met and exceeded.

There is now another, but much larger false upward

break that occurred between 2013 and late 2015. A

massive three year top pattern. The lower side of the

range that preceded it sits around 4800, the 2010 and

2011 lows. That is the next big downside target, though

before it are the 50% and 61.8% retracement levels of


5290 and 4860, respectively. Between those two sits the

5000 round number level which will begin to be touted

by market commentators as that level is approached. As

if those were not enough, there is another false upside

break downside target of 3278-3460, the 2003 and 2009

lows. This was the bottom of a 20 year trading range,

the high point before the false upward break (which

reached 7122) being the end 1999 high of 6950. That

last one will most likely take some considerable time,

but potentially at some point during 2017.

NEXT - A STYLE INNOVATOR AND MARKET

FAVOURITE FOR SO LONG, BUT THE

CRACKS ARE STARTING TO SHOW

All good things must come to an end and so it seems

with Next. The company almost went bust in 1991 but

a new head, David Jones who joined a year or so before

had other ideas. Grattan its successful mail order

business was sold to Otto Versand of Germany which

wiped out its massive debts and left it with all of its

many stores, but which were all owned by the company.

It launched its own mail order business, Next Directory,

which went from strength to strength as did the high

street stores. However, nearly 25 years on and problems

began to surface last year. Though sales and profits are

still growing they are slowing down. Also, accounting

irregularities, though dismissed by the company have,

along with a slowdown, clearly rattled the market and

the chart of the share price unfortunately looks to be

paving the way.

There are five clear Elliott waves since the 2009 low

and these are labelled on the chart. The false upward

break came at the end of the fifth which set up the return

to prior trading range lows, firstly at 6750p, then around

5800p, near the bottom of wave 4, which has recently

been taken out. The four bear

divergence warnings from the RSI

would have alerted investors to the

danger, as would the fact that the final

fifth wave had been completed, of a

potential price decline and the signal to get out.

While we note that the shares are

oversold and approaching a potential

bounce point – the 38.2% level at

5209p, the fact that the MACD has

plunged so far into the bearish half of

the scale warns that a major downtrend

has just begun. We would use rallies to

get out if one is not already. We doubt

whether 7000p, or possibly 6500p, will

be seen again.

OIL POSTED THE BOTTOM IN

FEBRUARY AT US$26.05

We had said in our January newsletter

that oil prices would rebound strongly.

Well we were right about that, oil rose

by 60% from the February low of

US$26.05. However, we were 7-8

weeks too early in that call because we

thought the price had bottomed at US$34.25 in December.

There were five Elliott waves down

from the August 2014 high of

US$112.24 at that point but we misread

the extent that this final fifth wave

would travel. Also, very significant

bullish divergence on both the RSI and

MACD indicators was evident at the December low.

The low points for these indicators had occurred at the

end of wave three back in January 2015 when oil

reached US$43.56. So, a year of bull divergence before

the bottom was reached. Anyway, now the recovery is

underway, albeit having recently taken a breather near

US$42. We note the recent correlation of the oil price

with stock markets, but suspect that this relationship is

only temporary as the main direction of trend for the

latter has shifted to the downside, despite the recent


rallies, whereas for oil it has shifted to the upside. We

should see oil push higher again after dipping further

back, possibly to between US$32.00 and US$34.00,

close to 50% and 61.8% retracements of the recent 5-6

week advance. Upside targets are the October and May 2015 highs at US$50.92 and US$62.58, respectively.

CHART OF CRUDE OIL

FURTHER ON THE UK HOUSING MARKET

BUBBLE

From Cornwall The Observer:

Like many idyllic spots, St Ives is facing the gradual

decline of its community as local people are priced out

of the property market by outsiders buying up second

homes. With the situation approaching what many

residents see as breaking point, they have decided to do

something about it.

Next month St Ives will vote in a referendum to approve

a neighbourhood plan. If the plan is approved, there will

be a legal requirement to ensure that all new housing in

the area is for principal residence, with the owners’

status checked against the electoral roll and doctors’

registers. While out-of-towners will still be able to buy

second-hand houses as second homes or holiday lets, all

newly built property will be reserved exclusively for the

locals.

“When we were looking to buy we couldn’t afford St

Ives,” says Melanie Uys, who runs an art gallery in the

town. “There are no family homes at affordable prices.

My friends who rent are always in a vulnerable position

because landlords can bring in twice as much money for

the summer months, so they only get very short-term

lets. It’s steadily got worse. St Ives looks so perfect, but scratch the surface and it’s got a lot of problems.”

Andrew Mitchell a local councillor, says if you’ve got

the money to buy two houses, then I’ve got no problem

with that, but there has to be a position to say enough is

enough. The second-home market creates misery for

people in St Ives by pushing up house prices artificially.

It’s a ‘financial cleansing’ of the local people. My

concern is that in another generation St Ives will only

be open for the summer because the local population

will be living somewhere else.”

Cornwall County Council has been so alarmed at the

effects of second-home ownership that it has sought a

change in regulations to oblige anyone wishing to turn

their property into a second home or holiday let to apply for planning permission.

Finally, seen in the Sunday Telegraph this weekend:

The 4th best-selling book in the 4 weeks to 26 March

was – Ambition: Why it’s good to want more and

how to get it by Rachel Bridge with 2,452 copies sold.

…and the 3rd best-selling book was – The Big Short by

Michael Lewis with 5,167 copies sold.

So more than twice the number of people want

to go short than get long. Ironic really isn’t it!

And for those of you who were wondering…the

best-selling book was….. The Chimp paradox

by Steve Peters with 6,030 copies sold.

DISCLAIMER

Gold-Silver-Shares-Markets expresses our views and

opinions on precious metals, shares and other financial

markets and are subject to change without notice. Trading or

investing in stocks or any other financial market carries a high

degree of risk and it is possible that an investor may lose part

or all of their investment. The information in this newsletter

is expressed in good faith, but is not guaranteed. A market

service that is completely accurate100% of the time does not

exist. Please ask your broker or investment advisor to explain

the risks involved before making any trading and investing

decisions.

http://www.theguardian.com/uk-news/2014/nov/17/st-ives-cornwall-council-toys-with-banning-outsiders-buying-holiday-homes

04 april 2016 david kerly's gold-silver-shares and markets

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