Weekly Market Wrap: 5 April 2013 – One more rally & stocks are done (for now)

This regular column reviews the condition of several different markets including: stocks, commodities, currencies and precious metals. This week focuses on the Dow Jones Industrial Average, WTI, the US dollar, and silver.

Stocks

Dow Jones Industrial Average

On Tuesday 2 April the Dow Jones Industrial Average made a fresh all-time high of 14,684.49. However, having rallied in early trading, the index began to slide and the selling continued on Wednesday.

As the chart below shows, the selloff took the Dow below its price channel (blue line), and many analysts have noted the “weak internals” of the market which may well be about to put in a short, or intermediate-term top.

Some of the negative factors for the market include the fact that both small-caps and the Dow transports have underperformed, the fact that the number of new 52-week highs is narrowing, and the fact that bank stocks and brokerages are lagging.

As Doug Kass points out, “It is an unusual market feature when defensive stocks are among the leading groups in a market moving to new highs”.

A 40 day (60 min) chart of the Dow Jones Industrial Average (Click on the chart for a larger version)

A 40 day (60 min) chart of the Dow Jones Industrial Average (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Some prominent technician’s that follow Elliott Wave theory are looking for the major US indices to push higher one last time which would mark the completion of a wave 5 up-trend. This move could push the S&P 500 to around 1,575 – 1,580, however it may then experience a larger degree 4th wave correction that will take the index down to around 1,480.

If this wave count proves valid it is likely that we will see a buying opportunity in May or June, followed by a rally that will potentially take the S&P 500 well above 1,600 by the end of 2013.

Commodities

WTI

During the past few trading sessions the price of WTI (West Texas Intermediate Crude) has fallen hard. The US crude oil benchmark peaked in September 2012 at $100.42 and since that time it has begun to form a large triangle pattern. This latest move saw WTI retreat rapidly from the upper resistance line towards the lower support line that comes in at around $91.

A 14 month daily chart of WTI (Click on the chart for a larger version)

A 14 month daily chart of WTI (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Sooner or later WTI will break out of this pattern in a move that is likely to have significant momentum, however the direction of the move will not be known until it occurs.

Currencies

The US dollar

Since interest rates in the US are so low, it has become profitable for institutional investors to borrow large amounts of US dollars and invest them in foreign currencies. They then benefit from the arbitrage between the higher yielding foreign currencies and the low yielding US dollar. However, as the chart below shows, the US dollar has strengthened in recent weeks forcing these investors to buy US dollars to repay their borrowings rather than absorb the losses associated with a rising dollar.

This carry trade has been extremely profitable, however the need to exit the trade has boosted demand for the dollar, and because commodities and US stocks are so closely correlated with the dollar, both markets have come under pressure.

A 12 year (daily) chart of the US dollar index (Click on the chart for a larger version)

A 12 year (daily) chart of the US dollar index (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Precious metals

Silver

Early in 2011 silver experienced what’s known as a parabolic blow off top, as it raced from $26.30 to $49.82. Since that time the price of silver has been in a long sideways consolidation during which it has repeatedly tested major support at around $26.

As the chart below shows, silver has recently broken out of a tight downtrend channel and is once again approaching the $26 area.

A 4 year daily logarithmic chart of silver (Click on the chart for a larger version)

A 4 year daily logarithmic chart of silver (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The bullish case for silver is that it holds above $26 until it attracts sufficient buying to begin an uptrend. However, as is often the case with technical analysis, the chart depicts another more bearish scenario.

Earlier this year silver broke below a trend line that has provided support since the late 2009 low of $8.40, and since that time the trend line has acted as overhead resistance. In order to gain serious upside momentum silver will need to break back above this line and reestablish it as support.

A 5 year daily chart of silver (Click on the chart for a larger version)

A 5 year daily chart of silver (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

As far as the physical market is concerned demand for silver is very strong indeed. In the month of March the US Mint reported a 32% jump in sales of silver bullion coins versus a year ago, and they are on track to break the record of 40 million coins sold in 2011.

It’s also worth noting that for some time now the value of silver being sold has matched the value of gold being sold. This is bullish for silver because it is a trend that cannot continue indefinitely without impacting the price. As James Turk, founder of GoldMoney explains, “If you put all of the gold in the world that is above ground and compare it to the known silver above ground, the ratio is 150 times more gold than silver. So if people keep buying silver at a 1/1 ratio with gold, which the US Mint data shows, obviously there is a time when the silver shortage will present itself.  You just can’t invest that much money in that product (silver). It’s a very small product when it comes to known inventory.”

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