The prospect of a Donald Trump or Hillary Clinton victory in the U.S. election isn't seeming to induce any jitters in the dollar index. » Read More
The recent pullback towards 1.10 suggests that bearish pressure is building on the euro-dollar. » Read More
Gold prices are up 25 percent in 2016 while the surge in silver has seen prices rally 46 percent this year. Early in 2016, the silver price behavior stopped leading the gold price behavior. Silver reverted to its previous behavior of following the gold behavior but it has remained a very profitable trade.
Silver has an upside target of $26.00. That's 30 percent higher from the current price near $20.00. Gold has an upside target near $1580, which gives a 16 percent gain from the current price near $1360.
Silver is slower to move but it has more room for an upside and this delivers better profits. In March we suggested the smart trade was to look at gold, and then execute the trade in the silver market. It has been a good trade with silver replicating the strong breakout in gold prices.
The silver chart has 3 fan trend lines compared with the 5 fan trend lines on the gold chart. The fan pattern in silver is not as strong but the breakout gathers extra strength because it follows the gold price. (Note the silver price is shown in cents)
The British voters' decision to leave the EU has badly shaken markets– although the dollar remained relatively calm while investors rushed into the safety of gold. Gold prices reached the long-term resistance target projection level of $1,340 before retreating. This is a rally within the context of a longer-term uptrend breakout.
Technically, this breakout is strong and there is a strong probability gold will move above $1,340 and move towards resistance near $1,580. However, there are important changes in the structure of the gold market that make the move above $1,350 and towards $1,580 more hazardous and volatile.
U.S.-listed gold exchange traded funds (ETFs) now own massive amounts of physical gold. Only seven sovereign nations own more physical gold than the U.S. gold ETFs. Add to this the physical gold held by gold ETFs listed in the UK, Australia and Europe and we can see a significant shift in the way physical gold is held and traded.
This structural change in the market means gold demand is now also closely linked to brokerage account margin calls as ETFs are a derivative trading instrument. Such high exposure to margin calls is a great concern during periods of high market volatility. It means that the gold price may react much more quickly in either direction than the fundamentals might suggest. It means that price targets are reached more quickly, and that retreats are more sudden and severe.
The market has fully digested two events and learned to live with them.
The first event is Janet Yellen's history of indecision. It is inevitable that US interest rates will rise but the timing remains a subject of speculation. The only sure thing is that Yellen will continue to be indecisive and the muted market reaction on the dollar Index chart reflects this. Apart from some short-term and small gyrations there is no substantial impact from Yellen's statements. The real surprise will be when decisiveness overrides indecision but the dollar index chart suggests this is not a high probability in the near future.
The second event is Brexit. The damage has already been done no matter what the outcome. Markets have already factored in an exit so when the final result is announced there is unlikely to be a large and lasting impact. Again, the dollar index reflects this and has already baked the exit into the cake.
If Britain decides to stay with the EU it is most likely to be by a narrow margin. However, this in itself indicates a tenuous level of support and any recovery in the relationship will be slow and half-hearted. Britain as an unwilling partner is just as devastating as Britain leaving, so a stay result has a similar impact on the dollar index to an exit result.
Only a massive and overwhelming support for staying in the EU would be enough to shake currency markets in the long-term but this is a very low probability outcome.
The dollar index will continue to trade within a well-defined trading band. The first key feature on the chart are the support and resistance levels. The support level is near $0.93 and was tested multiple times in 2015 and most recently in May 2016. The dollar Index has dipped below this briefly, but usually rebounded quickly from this support level.
Janet Yellen used to be decisive but now she not so sure, and that's a gift to traders.
There are times when the market hands an opportunity to traders who use chart analysis. This is one of those times, when markets develop consistent patterns of behavior that can be used to set a profit target and a stop loss, creating a high-probability trading situation.
The common and dominant pattern in today's market is the trading band, created by a well-defined support level and a well-defined resistance level. Each of these levels requires at least three touch, or anchor points. Our preference is to use the close on a weekly chart for positioning these lines, which can often be verified by studying previous support and resistance activity at the level in previous years.
These support and resistance lines also allow for setting good stop loss points to protect trades.
The 2130 level is a tough resistance level for the S&P 500 index and this offers traders three types of opportunities.
The 2130 region has acted as a resistance barrier multiple times since March 2015. It's not an exact figure, but when the S&P gets between 2050 and 2130 the market loses momentum, stagnates and then suddenly retreats.
So that's the first trading opportunity. Traders stand ready to go short as the S&P moves away from the 2300 region. The downside target is near 1870 and that has also been hit on several occasions since March 2015.
In a technical sense, the S&P 500 is trading in a broad consolidation band between 1870 and 2300. The index is oscillating around a central band near 2000. Analysis with a Guppy Multiple Moving Average (GMMA) indicator doesn't help traders identify a trend break or continuation. The pattern of GMMA behavior confirms this sideways oscillation.
The trend breakout in NYMEX oil, first signaled by the Guppy Multiple Moving Average indicator (GMMA), has been confirmed. This is a significant trend change. Oil established a pattern of longer-term trend reversal with price oscillation around the $38 level, which formed a base for the rally to the next resistance level near $48. The next upside target is near $58.
Two barrier features on the chart acted to slow the rally from developing into a trend change.
The first resistance feature is the historical resistance level near $48. This resistance feature was strengthened by the proximity to the upper edge of the long-term GMMA which is also near $48 when the rebound rally commenced.
Both of these barriers have now been overcome. The upper edge of the long-term GMMA fell to near $46 and price has now moved above this level. Price has also moved above $48. Traders are now watching for a retest of these two resistance features to act as support features for any retreat.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.