- The purpose of the weekly Fear and Greed series is to analyze the health of the current gold trend and to identify possible signs of a reversal.
- This article explores the latest COT report and various technicals in order to determine the prevailing sentiment and if it’s weakening or strengthening.
- I provide an overview of recent events which are impacting gold.
Trump’s, or however you want to spin it, failure to deliver a health care bill that could pass in the House of Representatives has dampened the view that the Trump Administration will be able to deliver on Trump’s agenda. This is of course a big deal because the market is a discounting mechanism and it has eagerly priced in fiscal and regulatory policy measures, which Trump has promised. You may say to yourself, “I don’t think a failed attempt at healthcare reform means that various other legislative measures will necessarily fail”. Well, let’s take a look at two of the biggest items on the Trump agenda. Tax reform is perhaps the single hardest thing to tackle, besides entitlement reform. There are huge entrenched interests on both sides of the isle and a uniformed front of republican support is absolutely vital, but the party appears to be fractured as of late. Also, infrastructure seems less likely now because of factions like the Freedom Caucus. Factions like the Freedom Caucus and other budget hawks will likely see the much talked about “trillion dollar infrastructure bill” as unnecessary spending that will contribute to increasing the country’s deficit and ever ballooning debt. Originally, some political insiders saw the more conservative wing of the Republican Party going along with Trump due to Trump’s popularity in states and districts which these Congress members hail from, but it now looks like these individuals are not worried about the possible backlash. Perhaps the market took for granted that Trump would naturally be able to deliver on his promises because of the Republican majority that exists in both the House and the Senate.
The failed health care bill calls into question the promise of robust fiscal and regulatory policy being feasible. The markets began to price in political risk as it became increasingly clearer that the health care bill was going nowhere. The bill was seen as dead on arrival since March 20th, so you need to look at how markets have behaved since then and not just on Friday when Paul Ryan made his announcement. Firstly, the Dollar Index has continued its decline from the highs of December 20, 2016 and is now at 99.166. The DXY, Dollar Index, has lost 1.23% since the 20th. The US dollar weakened against both the Euro and the Yen all last week. Furthermore, the S&P 500 (NYSEARCA: SPY) has lost 1.33% since last Monday. The leaders of the “Trump trade”, also referred to as the “reflation trade”, led the move lower. Banks, transportation, retailers, and small caps were all hit the hardest. The main beneficiaries of the latest rotation has been gold and treasuries. Thus, anybody interested in gold should be monitoring the perceived effectiveness of the Trump Administration. Gold will become the preferred risk off asset, over the US dollar, as hopes of fiscal and regulatory legislation falters.
The stock market rally has largely relied upon the narrative that real structural change to the US economy is coming in the form of: tax reform, infrastructure legislation, increasing the allocation of funds directed towards national defense, financial reform, a health care bill that reduces the role of the government, etc. The market has priced in so much of the future that the rally is vulnerable. Markets often don’t fight toward price equilibrium, like we were taught in college, but rather equity prices often tend to act more like they do in an auction house. This means that one move begets another. This causes overshoots to both the upside and the downside. Trump needs to start delivering at some point or else the ever present optimism will change and the markets will head lower.
I don’t see the “Trump trade” falling apart given where we are currently, but it should be monitored closely by those who speculate in gold. If fiscal and regulatory policy coming to fruition starts to look more and more bleak then future cash flows of equities will get discounted more, which will mean that the indices will head lower. The US indices certainly appear overvalued on nearly all metrics and volatility has been scarce, so this could be a real catalyst for US markets to head lower. Gold would be the preferred destination for those fleeing for safety.
The COT Report
I think COT reports are much more useful when put into a historical context. Thus, I want to see how bullish or bearish the most recent reports are relative to the most bullish and bearish positioning over the preceding 5 years. A reading of 100 would represent a given group being more bullish than they have ever been over the past 5 years and a reading of 0 would mean that their current position is more bearish than they have ever been over the past 5 years. The prior report had both commercial producers and users in the 52nd percentile and speculators in the 41st percentile. The latest reading has commercial producers and users in the 47th percentile and speculators in the 45th percentile. These are middle of the road readings so they are not highly useful. Essentially, both commercial producers/users and speculators are saying that gold is neither particular cheap nor expensive. However, as I articulated last week, we need to remain vigilant of these numbers due to their predictive power when extreme readings and/or divergence of the two groups takes places. Extreme readings and divergence was witnessed in WTI crude oil futures right before the pullback below $50 a barrel occurred.
Ichimoku Cloud analysis
The GLD (NYSEARCA: GLD) has performed well with the confluence of the dollar/gold trade unwinding due to the latest rate hike and due to the risk off sentiment caused by health care reform failing. Overall, I see two out of three things I look for lining up. Firstly, the trend is bullish with the price above the Kumo. The Kumo is the green cloud area on the chart shown above. Also, the Chikou Span, which is the grey lagging indicator, is confirming the trend with it being both above previous prices and it’s outside of the cloud. The only thing that isn’t perfect has to do with the relationship between the Tenkan-sen, the fast moving average, and the Kijun-Sen which is the slow moving average. However, a bullish cross is imminent given the fact that the Tenkan-sen is just about to cross over. The Ichimoku cloud analysis is implying that we head higher. The only concern I have is knowing that much of the appreciation from last week was due to a risk off sentiment and that sentiment should start to fade, so gold could see some pressure in the week ahead as people move back to a more risk on sentiment.
Next level of major resistance- 120
Major support- 116.29
Minor support- 117.12
We have reached a critical inflection point the GLD closing in on that all important 200 day moving average, which is at 120.25. The chart depicts the bulls in control with the current price being above 6 of 7 critical moving averages. When it comes to the GLD, historically speaking, the 125 day moving average is short enough for you to get an early entry into prolonged moves to the upside yet is not so short that you get a lot of false positive entry signals. This analysis is used as a check on my Ichimoku analysis because it provides further context and sometimes I find contradictions. I find that both forms of analysis are painting the same bullish picture.
5 day moving average support: 118.89
9 day moving average support: 118
13 day moving average support: 116.92
20 day moving average support: 114.96
50 day moving average support: 112.24
125 day moving average support: 116.4
MACD & RSI Provided for Further Context
MACD: Looks very bullish with the signal line above the base line and both lines are above zero.
RSI: Is currently at 65.83, which means that the current move is fairly overbought. However, overbought reading are seen during prolonged uptrends.
The Bottom Line
Overall, the technical setup looks just about perfect. However, we are approaching the critical 200 day moving average and I want to see what happens. I don’t mind paying an extra buck per share in order to see if the uptrend has a real shot at going back to the 124 level, which would be the next major point of resistance. We very well could be setting up for a reversal at the 200 day moving average, which I think is a possibility given how last week played out. However, I think continuation to the upside is more likely. I’m looking for both an open and a close above the 200 day moving average. At that point I will get long the GLD and will utilize a stop loss that is 1.5% under the 200 day moving average in order to define my risk.
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Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in GLD over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.