Sunday, November 11, 2007

A Bearish Perspective on Commodities

For this past week, gold bullion tacked on another $26.20 and silver rose by 95 cents. This, however, was not enough to keep gold stocks afloat, as GDX fell .79% for the week. So, resource stocks are doing much worse than the price of the resources themselves. This is further evidenced by the fact that the TSX fell nearly 500 points this week on rising commodity prices.

This post will present further evidence to support a bearish viewpoint. The charts presented in the last two posts are still in play, and this post is meant to supplement this view. Let's get right to it by looking at a weekly chart of the XAU:

In the chart above, each candle represents one week of price action. Last week's candle is in the form of a shooting star. This means that the bulls pushed prices up intra-week, but then the bears stepped in and wrestled control away from the bulls, and closed the price near the week's opening price.

The chart above shows two other times this pattern happened. Now, I outlined this same candle pattern a couple of posts ago, and, although prices did retreat after this candle was formed, prices bounced back up again afterwards. The main difference between then and now is that the above chart is a weekly chart, and candle formations here tend to be more reliable.

The next chart is a weekly chart of the Canadian Dollar. Because the CAD is a commodity currency, if it begins falling, you know that gold and oil are likely falling too. Interestingly, the CAD is more overbought now than it ever has been in its existence. The chart below uses a 25 week RSI, which means that prices really have to move to register a signal.

Another point in the above chart is that the Canadian Dollar's advance seems to have been split into two waves, and currently both these waves cover the same amount of ground. That in on itself is not particularly bearish, but it is worth pointing out.

Like the weekly XAU Chart, the CAD chart also formed a bearish shooting star formation. The chart below presents an enlarged view. You can also see that the 9 week RSI has reached an extreme level:

Several posts ago, I showed a chart that divided the Yen by the Australian Dollar to get an idea on how nervous carry traders were feeling. If you have not read that article I would recommend that you do, because I think it explains last week's TSX sell off. Here is an update on that chart:

I know that the above chart looks quite busy, but there is a lot of value in it, in my opinion. The main thing to note is that the carry trade index in the top panel trends in the opposite direction of the TSX in the bottom panel.

What concerns me now is that the carry trade barometer is forming a potential triple bottom. If the Yen continues to appreciate relative to higher yielding currencies, it will squeeze out a tremendous amount of money from stock markets worldwide, including the TSX.

I have never released this next chart before. This chart shows a daily chart of the TSX on the top, and a new indicator on the bottom. This is related to an indicator called the McClellan Oscillator.

In a nutshell, what it does is take 2 moving averages of an index's Advance Decline line, and determines the distance between these 2 lines. In other words, it measures stock market breadth.

Unfortunately, does not have this indicator for the TSX, so I had to make up my own. In the chart above, I have highlighted only the areas where the signal line is below zero. These periods indicate times where there is additional risk involved in being invested in the TSX. The main point is that the line has just last week plunged below the zero line.

In this post, I have tried to look at the markets in several unique perspectives, using daily and weekly time frames. I hope it made sense. Thanks for visiting.

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