QE Drug Lords in Action

  • The path of least resistance for now is higher dollar but be prepared if it turns if Yellen turn very dovish!
  • Gold has support at 1158 and 1142 levels – a break below 1158 may incite more selling but also rooms for a potential bear trap.

Distribution of money flow from central governments is meant to be distributed equally to the society. In an “ideal” scenario is to then have trickle-down effect to kick in – further distributing additional income and benefits – from government to banks to the whole monetary system. To date, we have mentioned the benefits that additional stimulus (QE and rate cuts) have brought to the table. It is by far the most effective solution, simply by expanding money supply and hope the ideal scenario kick in.

Communist run government – China, which run in a capitalist mind set looks to have succumbed (or put it mildly) embraced the other side. Money talks and whatever they have come to now must not unravel but continue on – there is no turning back. Mindful that the economy will take time to transition from an industrial led economy to a service one – time, policy changes and additional capital are part of the essential tools to achieve this goal. Market expectation of a strong Chinese economy as the main driver in this global economic recovery is something that will be well supported in many months and years to come. Dovish central banks and easy monetary policy is the way forward as there is no other alternative for now.

This has set the foundation for a rosy quarter 4 and provides a buffer into quarter 1 of 2016. Stronger economic data is to be expected from here on while the Fed can either take this opportunity to normalise or simply join in the party.

The irony of easy monetary policy was the creation of oversupply and inflated good numbers which has been used to shore up what looks like a great economic recovery. Many economists and politicians knew about this and they have use whatever publicity to mask that this is true and we should all believe it. It is not so funny if we were to put it in way that we are all living in a financial time bomb that is about to set off (a matter of when not if!). With the courage to act, Ben Bernanke has created a legacy of no inflation via easy money and throw everything at the economy – leaving Janet Yellen and the rest of the Fed members rather “naked” on other options. Only time will tell if Miss Yellen will also leave an awe inspiring legacy of never hiking until she passed the chair to another member.”

In conclusion, the world central banks are basically fighting hard to inflate the economy simply because deflation is so much worse. However, what they fail to realise is that additional stimulus is not the only solution here and on the contrary. It is a double edge sword, as additional money supply increase complacency that current issues can and will continue to be swept under the carpet. Today’s problem can be solve tomorrow, let us oil the machine with whatever we have so it can keep chugging away as it is too expensive or painful in the short term. Why bother with the long term consequences when there is an easy option? Fighting fire with fire – yes we have debt problem but we will fight it with debt!

Dollar Technical Outlook

So far so good and some would say rather predictable as the dollar index hinges on the very next line that central banks will say. Yes, the dollar index take all the beatings as central banks are doing what they can to jostle with the other – in the name of currency war which they masked specifically as the normal way forward. It is rather clear that dollar strength has returned and there is no masking for another week of higher dollar but we have FOMC and BOJ to take into account. If the dollar continues to rise, Yellen will be pressed to do something about it. The path of least resistance for now is higher dollar but be prepared if it turns if Yellen turn very dovish!

The much needed support came in just in time as a doji candle is form right to the tick of the long term rising trend line. As long as price action stays within the rising triangle formation, we can only assume a rebound is in place for the next few weeks. We have mentioned a couple of times that as we draw closer to FOMC meeting, the dollar should get ideal support and buyers may return – thus the reverse rotation is at play here. Weekly chart shows how the Bollinger band and price action is fast converging for an imminent breakout.”

Weekly

Daily

Gold Technical Outlook

We have gold opened at 1177.9 and that is where we started the week with a short position. Two attempts were made to push it higher at 1181 and 1179 but found sellers. It is clear for now that the 50% fib resistance for 2015 high low is the main resistance for now and sellers keep pressing short for now. Hedge Funds been long for the last few weeks and profit taking at this stage is ideal but with all the whirlwinds in the currency market and a strong dollar, gold seems to stand strong. Support for next week comes at important 1158 and 1142 levels – a break below 1158 may incite more selling but also rooms for a potential bear trap. The real battle comes in if we get a good reaction of support at 1142 levels. A fake break is sufficient for the trap to work otherwise, expect a complete move to the lower end of this bear flag.

We went short far too early and learnt the hard lesson of being stopped out. Price action rose to retest 2015 50% fib levels and broke above 1191 before it found sellers. This key level should hold and considering the recent development, a pullback to retest support at 20 WMA could be in play for the next few weeks. Weekly chart also suggest that unless we break clear above 1205, price action could pull back to the lower end of the bear flag formation. One thing for sure, the overall trend has not changed in gold and it is time for the bull to wake up and smell reality.”

Position Valid Date Price Action Stop Loss Target Results
SHORT 19th – 23rd 1177.9 Live 1193 (moved to b/e now) 1133 (moved to 1153)
LONG 26th – 30th 1142 Order Placed 1136 1220

Weekly

Daily

Silver Technical Outlook

As long as 16.23 is not taken out, silver could head lower. Current price action and structure suggest that buyers are holding on and there is no real conviction to drive the white metal lower for now. However, the landscape is fast changing to favour the down side and risk reward has certainly pointed in that direction. A spike higher here could send prices a lot higher with target such as 16.25, 16.45 and 16.75. A clean break and close below 15.60 may give sellers room to roam.

Question to ask – the current rally in silver prices is sustainable? Clearly not since it benefits from the dollar weakness but as a semi safe haven and industrial metal, it is hard to envisage that the rally can be maintained. Weakness in Chinese GDP could easily send silver prices lower next week.”

Position Valid Date Price Action Stop Loss Target Results
SHORT 12th – 16th 1608 Open Moved to b/e 14.80

Weekly

Daily

Platinum Technical Outlook

Well short covering season run out of steam and the reversal should hold true given that the dollar strength starts to kick in again. Seasonality also shows that end of October and going into mid-November has not been a positive month. We envisage a pullback here before a potential Inverse Head and Shoulder move higher.

Impressive run higher with hordes of short covering all the way up to the psychological level of 1000 and we maintain the view that a pullback is due to retest previous low. Daily chart could indicate that a double top is in place soon at 1035 levels and a pullback could lead to an inverse head and shoulder pattern in the next few weeks. Platinum will be the metal to watch in the next few weeks as it has the potential for a breakout higher.”

Position Valid Date Price Action Stop Loss Target Results
Short 19th – 23rd 1020 Live 1040 975
Short 19th -23rd 1005 Live 1040 975

Weekly

Daily

Palladium Technical Outlook

Daily chart shows a potential bull flag formation and should price action fail, then we can see deeper pullback. Meanwhile, we will hold to the one short position and moved stops lower to minimise risk. Palladium price action can be erratic and fundamentals reasoning could move market.

Position Valid Date Price Action Stop Loss Target Results
SHORT 695 Open 746 moved to 729 600

Weekly

This article is written according to the author’s views and by no means indicates investment purpose. Opinions expressed at Sharps Pixley Ltd are those of the individual authors and do not necessarily represent the opinion of Sharps Pixley Ltd or its management, shareholders, affiliates and subsidiaries. Sharps Pixley Ltd has not verified the accuracy of any claim or statement made by any independent writer and is reserved as their own and Sharps Pixley Ltd is not accountable for their input. Any opinions, research, analysis, prices or other information contained on this website, by Sharps Pixley Ltd, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. Sharps Pixley Ltd will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. The data contained on this website is not necessarily real-time or accurate.

 

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