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China’s Shanghai Composite continues to struggle, despite fresh stimulus measures announced yesterday by the central bank and more following the market’s close today.  An accumulation of seemingly desperate, reactive and ad-hoc measures by Chinese authorities in response to the stock market sell-off and a slowing economy in recent months have not instilled confidence in many investors – not just in China, but across the globe.  Hence the volatility on world markets.

With some obvious difficulty, China is trying to manage the transition from an era of smokestack industries, massive exports and huge infrastructure spending – aided by trillions in state-backed debt – to a consumer-driven economy with more private entrepreneurship.  Today, debt has swelled to more than twice the size of the economy.  This is a communist government still on a major learning curve, and risks are substantial.  As one analyst commented, “The simple reality is that China does not have a grand master plan for economic reform that it is steadily executing step by step.”

Shanghai 2-Year Weekly Chart

The Shanghai has followed a very predictable pattern since its breakout in July of last year.  An important top was clearly forming in very overbought conditions in June, highlighted by an RSI-price divergence, and John correctly called the breakdown of the Great Run in late June when the Shanghai breached an uptrend line in place for many months.  Unsophisticated Chinese investors borrowed heavily to chase the market right to its peak at the encouragement of the regime.

The next critical breakdown came Monday below Fib. support at 3400.

Overnight, the Shanghai fell another 39 points or 1.2% to close at 2926, despite a 3% jump in the Nikkei average.

The Shanghai remains in the midst of strong “C” wave to the downside that may not be straight down but another 20% slide before a potential bottom is put in is certainly not out of the question – ultimately, a full retrace back to the 2000 chart support is possible before the year is out.

There will be rallies but the primary trend now is bearish.

A key area that this chart suggests will be tested is 2300 (Fib. support).  The ADX indicator shows a strong bearish trend, RSI(14) remains vulnerable, and the 200-day moving average (SMA) – not shown on this chart – could begin to roll over within a month or so.  Chinese authorities created a fixed-asset bubble and then a stock market bubble, and the affects of that fallout have had impacts across the globe.

Shanghai 2-Year Weekly Chart (through yesterday)

Gold has traded between $1,134, just above its 50-day moving average (SMA), and $1,156 so far today…as of 9:00 am Pacific, bullion is down $19 an ounce at $1,136…Silver is off 13 cents at $14.65…Copper has added a nickel to $2.30…Crude Oil has gained $1.18 a barrel to $39.42 while the U.S. Dollar Index has jumped by more than a full point to 94.61 after touching Fib. support just below 93 yesterday…overall, however, the Dollar Index is still looking vulnerable entering September with resistance at the now declining 100-day moving average (SMA) at 96.30…that’s supportive for Gold…

China’s net Gold imports from Hong Kong rose in July as a decline in prices and a stock market rout spurred some investment demand…net inbound shipments rose to 40.7 metric tons last month from 22.1 tons in June and 21.1 tons a year earlier, according to data compiled by Bloomberg from the Hong Kong Census and Statistics Department today…

A positive reaction in North American equity markets this morning to China’s stimulus measures announced following the close of trading on the Shanghai which plummeted another 245 points or 7.6% overnight to close at 2965…China’s central bank cut interest rates for the 5th time since November and lowered the amount of cash banks must set aside, falling back on its major levers to stem the country’s biggest stock market rout since 1996 and a deepening economic slowdown…the 1-year lending rate will drop by 25 basis points to 4.6%, while the 1-year deposit rate will fall a quarter of a percentage point to 1.75%…the required reserve ratio is being lowered by 50 basis points for all banks to cover liquidity gaps, the PBOC stated…

What China’s Real GDP?

While Chinese authorities reported 7% GDP growth in Q2, other estimates have come in much lower…London-based Capital Economics looks at freight activity, electricity, property development, passenger travel and sea shipments, and concludes that China’s economy expanded much more slowly in Q2 than the official Chinese estimate…Lombard Street Research, also a London research outfit, uses another approach, including a different measure of inflation, and comes up with just a 3.7% growth rate…

An economic slowdown in China (as opposed to a more serious broader financial system meltdown and civil unrest there) is not likely to drag the U.S. into a recession…U.S. exports of goods and services to China are equal to less than 1% of U.S. GDP, and just 2% of S&P 500 company revenues are explicitly attributable to China, according to Goldman Sachs…one benefit to the U.S. of a Chinese slowdown is lower Oil prices – that puts more cash in the pockets of consumers who account for 70% of economic growth…

Perhaps the Fed’s biggest problem with China is what will developments there do to a pace of U.S. inflation that already isn’t anywhere close to its 2% target…

Yesterday’s North American Market Meltdown

The S&P 500 Index came within 34 points of setting off a marketwide circuit breaker yesterday that would’ve shut down trading for 15 minutes to restore order (or create more panic)…more than 2 billion shares changed hands in the first 30 minutes, almost one-third of what usually trades in a day…

Meanwhile, more than $50 billion (U.S.) of market value was erased from the world’s 10th biggest company, General Electric Co. (GE, NYSE), in yesterday’s opening meltdown (GE suffered its biggest intra-day loss since 2007)…at its worst, about $1.2 trillion of market value had been erased from U.S. shares before prices began to rebound…trading of U.S. stocks and ETFs was paused more than 1,200 times in the early going as the market experienced extreme volume and volatility…

For what it’s worth – they have made some excellent calls – Goldman Sachs  doesn’t think China, commodity prices and emerging markets are going to doom the U.S. equity market…

Tim Cook’s Strategic Email To Jim Cramer

Did a very strategic email from Apple CEO Tim Cook to CNBC’s  “Mad Money” host Jim Cramer help bail out the market yesterday?…some are speculating that it did, as reported in this morning’s Financial Post…rightly or wrongly, Apple is seen by many as a litmus test of the health of the Chinese economy…

According to an image of the note posted on Twitter by one of Cramer’s colleagues, Cook said that iPhone activations in China had accelerated during the past few weeks and that the last 2 weeks were the best for the App Store this year in China…

Volatility Index (VIX) Update

The “Fear Index” spiked to 53 yesterday before closing at 41 – the highest level it has reached since the 2008 Crash when it surged as high as 90…RSI(14) on this 10-year daily VIX chart even exceeded the 2008 Crash high as it closed at an extreme 89% yesterday…significantly, the 3 previous highs (summer 2011, spring 2010, and the Crash of 2008) in the VIX all corresponded with important market lows…

Today’s Equity Markets

Asia

China’s Shanghai Composite ended at an 8-month low today, closing below 3000…that was followed by the central bank announcement, so this battered market should see a turnaround tomorrow…meanwhile, the yuan has dipped to its weakest level against the dollar since 2011…

The latest market decline in China comes at an embarrassing time for the communist government’s leaders…the country has already shut down parts of central Beijing in preparation for a September 3 parade that will feature about 12,000 troops and nearly 200 aircraft. Marking the 70th anniversary of the end of World War II, the parade is meant to celebrate China’s achievements since then…the other big event, the world track and field championships, serves as a reminder of better days in China – held in the Birds Nest stadium built for the 2008 Olympics, it marks a time when the country was coming off 3 years of nearly 13% annual growth…

Japan’s Nikkei fell 4% overnight…meanwhile, India’s S&P BSE Sensex recovered 1% after its biggest single day percentage drop in nearly 7 years yesterday…for the year, India’s market is down 6.4% – its lowest point in 13 months…

Europe

European markets rebounded sharply today, though Goldman Sachs  reduced its 3-month recommendation on European equities from “overweight” to “neutral”….

North America

The Dow has recovered 342 points as of 9:00 am Pacific…improvements in the labor market gave a boost to consumer optimism which beat expectataions according to the latest data from the U.S. Conference Board this morning…its monthly Consumer Confidence Index rose to 101.5 from July’s reading of 91…this beat expectations as economists were expecting to see only a small rise to 92.8…

In Toronto, the TSX has jumped 294 points as of 9:00 am Pacific…

Below is a 6-year monthly chart showing how the TSX fell slightly below its still-rising 1000-day SMA yesterday, and then quickly rebounded as was the case in the spring of 2013…there is obviously strong support in the immediate vicinity of the Fib. 50% level (12829) which was an area of resistance for about a year-and-a-half during 2012 and 2013…

Venture “Awareness” Chart

The Venture is enjoying 1 of its best days of the year, adding 13 points to 531 as of 9:00 am Pacific…

Below is John’s updated Venture 4-month daily “awarenss” chart…again, a critical 1st sign of a reversal will come when the Index breaks above the EMA(8) – then, for confirmation, the EMA(20)…those are currently declining at 551 and 573, respectively…

Several encouraging aspects regarding this chart:

1.  Sell pressure peaked in July

2.  RSI(14) landed at previous support yesterday in deeply oversold territory

3.  DI levels are at extremes

4.  Estimated Fib. support at 515 held yesterday – the big test will be if it can hold through month-end

Garibaldi Resources Corp. (GGI, TSX-V) Update

As we’ve reported, there are many reasons to be excited about Equitas Resources‘ (EQT, TSX-V) upcoming drill program at its Garland Nickel Project near Voisey’s Bay…at the other corner of the country, in northwest British Columbia, all eyes may also soon be on Garibaldi Resources (GGI, TSX-V) which has an excellent opportunity in our view for an important new discovery in the emerging Sheslay district where the drill hole success ratio over the past 2 years, and historically, has been remarkable…

A drilling discovery at the Grizzly, which features many of the same geological, geophysical and geochemical signatures as those observed at the adjoining Hat and Star properties, would confirm just how important and “pregnant” this district is…

As reported by Garibaldi August 14, crews are now on the Grizzly to determine final drill targets at this 270 sq. km project…2 specific areas are the focus of this last round of surface exploration – the vast Grizzly Central region, and the newly acquired Golden Bear claims immediately to the south-southeast where an historical high-grade Gold showing is being investigated along the Golden Bear access road…

Below is a Google Earth map we’ve adapted from the GGI web site (it’s a view from the northwest – Grizzly West area – looking toward the southeast)…generally, on a regional scale, the Sheslay district is lining up as a series of NW/SE trending corridors of Cu-Au porphyry mineralization that already hosts 2 growing deposits and likely a cluster of them spread throughout a broad area…the Grizzly has yet to be drilled…as Doubleview Capital (DBV, TSX-V) made a grassroots discovery at the Hat that helped ignite the Venture in early 2014, so too could Garibaldi in the very near future…with a current market cap of only $4.5 million, GGI’s potential upside just based on speculation in the weeks ahead is significant…

While we’ve yet to hear from Doubleview since that illegal blockade at the Hat in early July, Garibaldi’s news plus the “rumor mill” suggest some excitement is in the works for both companies – and we could all use a good dose of that after the last couple of months…the Sheslay district has the potential to draw widespread market interest in the coming weeks…

GGI 2.5-Year Weekly Chart

This is clearly 1 of the more promising charts on the Venture at the moment…GGI has broken above both a price downtrend line and an RSI(14) downtrend line…the bearish trend has peaked according to the ADX indicator, and sell pressure has been replaced by growing buy pressure…strong support now exists at the downtrend line (6 cents) which also coincides with the 50-day moving average…that SMA has flattened out and is threatening to reverse to the upside…very bullish…

GGI is unchanged at 7 cents as of 9:00 am Pacific…

Canada Carbon Inc. (CCB, TSX-V) Update

Canada Carbon (CCB, TSX-V), with its Miller Graphite Project in Quebec, has been one of the top-performing Venture plays since the spring of last year, and (amazingly) has managed to hold its uptrend support line despite the 50% plunge in the Index since last summer…that, in itself, is quite a feat…

CCB has met very persistent chart resistance around 30 cents since the beginning of last year, so that’s the key level to watch…the duration and strength of that resistance will make any breakout that much more powerful…no news from Miller since mid-July…watching closely for potential developments over the next several months that could finally lift CCB over The Wall…

CCB is off half a penny at 27.5 cents as of 9:00 am Pacific…

Silver Short-Term Chart

After posting 4 straight weekly gains, Silver is again on the defensive and testing Fib. support at $14.50…the band of Fib. resistance between $15.30 and $16.60 is strong as demonstrated during this latest rally, which also indicates how the narrative of a slowing global economy has created some significant headwinds for this metal…

Silver Long-Term Chart

An explosive push higher (eventually) – is this actually a scenario that could unfold in Silver over the next couple of years?…quite possibly, given the look of this 34-year monthly chart, though at the moment it’s hard to understand all the factors that could come into play to generate the kind of “Wave 5” move that could develop…

It seems possible that the bottom of “Wave 4” came late last year when Silver briefly plunged to just above $14 an ounce, though it’s impossible to predict in these volatile markets if indeed that was a final low…RSI(14) has so far managed to hold support which goes back to 2001…

Sell pressure continues to remain very strong, however, as shown by the CMF – amazingly, at levels not seen in nearly 25 years since the low of $3.51…this intense sell pressure at the moment, which started modestly in early 2013, could continue for a while yet…this should be viewed in a larger context as a bullish contrarian indicator given historical patterns…it doesn’t necessarily mean, however, that Silver has found a bottom just yet…

Note:  John and Jon both hold share positions in GGI, DBV and EQT.

Gold has traded between $1,152 and $1,171 on this volatile day in global equity markets…as of 10:30 am Pacific, bullion is down $7 an ounce at $1,153…Silver is off 60 cents to $14.75…Copper fell as low as $2.21 but has since recovered modestly to $2.25, down 4 cents on the day…Crude Oil has retreated $1.35 a barrel to $39.10 while the U.S. Dollar Index touched Fib. support just below 93 and is currently off 1.25 points at 93.64…

China’s Shanghai Composite, which was looking increasingly vulnerable last week, led North American equity markets to the downside at the open today…the Shanghai suffered its worst single day percentage fall (8.45%) in 8 years as it crashed below support at 3400 and closed at 3211 for a loss of 297 points…Chinese authorities have been their own worst enemies with repeated acts of desperation like the move over the weekend to allow pension funds managed by local governments to invest in the stock market for the 1st time, potentially channeling hundreds of billions of yuan into the country’s struggling equity market…

It was bad enough that they encouraged their citizens to borrow money (margin lending hit record levels in China earlier this year) to buy an overbought market from 4,000 to 5,000…now they want to tap into their people’s pensions to prop up ailing stock prices…the communist government’s cheerleading of the market was a deliberate attempt to create a “wealth effect” at a time when the economy has been struggling and showing clear signs of not meeting a 7% growth target – now that wealth effect is working in reverse…that’s what happens when governments start screwing around with things they shouldn’t be touching (that reminds us, isn’t Ontario Premier Wynne proposing some sort of crazy provincial pension scheme that has Justin Trudeau’s full support and is going to cost taxpayers a bundle?)…

The Wall Street Journal reported yesterday that Chinese authorities are preparing to add liquidity to the banking system with a move expected to come before the end of the month…

China’s slowdown, at first glance, is a major setback for the world…the country accounts for 15% of world economic output and has contributed as much as half of the world’s growth in recent years…however, that does overstate its impact on a lot of countries…China exports more than it imports, so a slowdown in its growth has a limited impact on most of its trading partners (except commodity exporters of course)…exports to China amount to less than 1% of GDP for the U.S., U.K., France, Italy and Spain, 2.6% for Germany and 2.7% for Japan, according to BA Research, a financial analysis service…

WTIC 34-Year Monthly Chart

U.S. Crude is now nearly 20% below its opening price at the start of the month amid an economic slowdown in China and a continuing supply glut on global markets…multi-year lows in Oil prices have so far failed to trigger any action from the world’s biggest producers to rein in output…the market will therefore have to find a price level that brings demand and supply into better balance…

Technically, the $35 level is the next obvious support before a rally may set in…as John’s previous charts have shown, however, it’s not inconceivable that WTIC could ultimately tumble to the $20 area as a final bottom…

CRB Index 35-Year Monthly Chart

It’s critical to keep a close eye on the CRB Index as it’s nearing lows not seen since the period from 1999-2001…in 1999, the CRB Index plunged to 183…over the next couple of years it shot up nearly 30% before sliding back again to the low 180’s for a classic double bottom in late 2001…

Support around the 180 area should be very strong, especially considering the current oversold conditions (Crude, however, would have to hold support around the mid-$30’s considering its heavy weighting on the CRB)…

A really encouraging sign would be a bullish “W” (is it forming now?) in the CRB’s SS indicator as occurred just prior to the sharp move higher starting in 1999…note the 4 blue circles that John has highlighted near the bottom of the chart pertaining to the SS…we could be close to a turning point here which also coincides with the Venture’s 39-week cycle…

The CRB Index touched 185 this morning and is down 3 points at 188 as of 10:30 am Pacific…if the 180 support doesn’t hold, ouch…

U.S. Dollar Index

The U.S. Dollar Index is now trading below its 200-day moving average (SMA) for the 1st time since its big move started in the early summer of last year…the 100-day SMA has also reversed to the downside, but for now at least the Dollar Index is holding within its primary support band…

The conditions for the greenback are not nearly as favorable entering the final 4 months of this year as they were at this time in 2014…downside risks have increased substantially, and a Fed rate hike could very well be off the table until sometime next year…in addition, China is believed to be dumping dollar reserves and buying Gold…the dollar trade has been very crowded over the past year, and any major correction over the next several months would have to be considered bullish for Gold and helpful to commodities in general…

2+ Year U.S. Dollar Index Chart

Extreme overbought RSI(14) conditions persisted in the Dollar Index from last September through to early April this year with a 2015 high likely recorded in March at Fib. resistance just above 100…the surge in the greenback is 1 major factor that really put the screws to the Venture and the commodity sector, though Gold managed to weather the storm pretty good…

Gold vs. U.S. Dollar, Canadian Dollar & Euro

Speaking of Gold, despite all the negativity surrounding bullion from the North American mainstream media in particular, it’s down only 6.25% vs. U.S. Dollar terms over the last 20 months, and has performed extremely well against the euro and the loonie as you can see below (and against every other currency) since the beginning of 2014…

What’s significant at the moment is Gold’s emerging turnaround vs. the greenback…Gold’s RSI(14) is showing strong momentum, and the ADX indicator is almost near the point of a bullish DI cross…

Today’s Equity Markets

Asia

The Shanghai flu spread throughout Asia overnight…Japan’s Nikkei average fell nearly 5% to close at 18541…

Europe

European markets were off sharply today, roughly 5%, but expect a rebound tomorrow given market action in North America today…

North America

Panic-selling hit U.S. and Canadian markets at the open this morning with the Dow falling as much as 1100 points, almost hitting its rising 1000-day moving average (SMA) as it did in 2011, before a dramatic reversal…as of 10:30 am Pacific, the Dow is down just 241 points on a record swing day…volatility is likely to continue, leading up to next month’s Fed meeting…key U.S. economic data this week includes consumer confidence figures tomorrow, durable goods orders Wednesday, and the next preliminary Q2 GDP growth estimate Thursday which is expected to be much more positive than the initial reading…

In Toronto, the TSX found support this morning around 12750, as per John’s call, and is currently down just 154 points at 13319 through the 1st 4 hours of trading…the Venture gapped down to 522 at the open and fell as low as 509 before rebounding…it’s off 15 points – down for the 13th trading session out of 15 – at 522 as of 10:30 am Pacific…

The Venture successfully tested support at 515 this morning – it would be bullish if that level can hold through the balance of the week, and if the Index can close above today’s opening price…

Below is a 16-year Venture chart…the DI levels are at historical extremes at a time when the Venture’s 39-week cycle suggests a reversal within the next couple of weeks…

TSX Gold Index 5-Year Weekly Chart  

Last week, famed hedge fund manager Stanley Druckenmiller plunked down more than $323 million of his own money into a Gold ETF, according to 2nd quarter regulatory filings…Druckenmiller is the guy who consistently delivered 30% on an average annual basis between 1986 and 2010, the year he closed his fund to investors…he’s also responsible for making the call to short the British pound in 1992, which “broke the bank of England” because it forced the British government to devalue and withdraw the currency from the European Exchange Rate Mechanism…

Druckenmiller didn’t see John’s TSX Gold Index chart when he threw more than $300 million on a Gold bet, but this chart says he’ll enjoy another great return as Gold stocks are poised to move higher into year-end in our view – which means bullion may surprise a lot of investors before 2015 concludes…

The Gold Index, which climbed nearly 8% last week, hit the bottom of downsloping channel recently while RSI(14) conditions slipped into very oversold territory…a confirmed breakout has now occurred above 135…various indicators are looking highly favorable for a further advance that could ultimately challenge the top of the downtrend line…

The Gold Index is off a point at 139 as of 10:30 am Pacific…a test of previous resistance around 135 could certainly occur…the rising 20-day SMA, currently 128, provides secondary support…

7:30 am Pacific

The future is not for the timid or the faint of heart, which is why it’s so encouraging (and significant) to see Equitas Resources’ (EQT, TSX-V) step up to the plate during these unique market conditions to “swing for the fences” at their Garland Nickel Project 20 miles southeast of the Voisey’s Bay mine.

Yes, extending the baseball analogy, they could strike out, pop out, or otherwise disappoint.  Of course there are never any guarantees with early-stage, grassroots projects in particular.  But a very smart technical team is behind this, and importantly they’ve got not just 1 or 2 but at least a dozen or so chances (12-14 drill holes to depths between 250 to 350 m) at the plate to crank a home run and deliver a discovery hole that could literally breathe new life and confidence into the entire junior exploration sector.

Just the drilling itself, the fact they’re in the game and fired up to take some heavy swings, is going to generate some much-needed excitement and speculation in this market.

Major Nickel camps such as Sudbury, Thompson, Norilsk and Raglan comprise clusters of deposits.  To date, Voisey’s Bay stands alone and that doesn’t really make sense.  Is there a “rest of the system” in this area, and may it rest somewhere on Garland’s 250 sq. km land package?  Geologists and geophysicists have presented a powerful case for the need to drill-test several promising target areas at Garland.

At a time when so many companies have literally “given up” on the market, the Equitas group has pushed ahead aggressively to state their case and raise the needed capital, and that’s often how discoveries are made.  We saw the same determination with Doubleview Capital Corp.’s (DBV, TSX-V) Farshad Shirvani in late 2013.  In an extremely challenging market environment at the time, he beat the odds at his grassroots project and drilled 2 discovery holes (#’s 8 and 11) at the Hat Project in northwest B.C.’s Sheslay district as sudden Arctic-like weather conditions set in without a fully winterized camp.  DBV was literally out of money and on life support at 4 cents in December 2013 but results from those 2 discovery holes turned the stock into a 10-bagger during the 1st half of 2014, and the excitement sparked a district staking rush B.C. hadn’t seen for years (the story continues and the discovery is bigger than first imagined).  That was a great Canadian exploration event and an ongoing drama that could yet develop in a way that lands Shirvani in the Mining Hall of Fame.  History could also be in the making again in Labrador, more than 2 decades after the spectacular Voisey’s Bay discovery.

This is exactly what this market needs.

More From The Kyler Hardy Interview

As one of our wise readers (Jim) commented the other day, “This will be where Hardy proves he’s capable of driving the company.  Friedland, Pezim, Noront CEO at the time Richard Nemis, and ZEN CEO Aubrey Everleigh all proved to be masters at this…this is Hardy’s opportunity to make a name for himself.”

Indeed it is.  The Equitas President is driven by a strong belief in the potential for a 2nd discovery near Voisey’s Bay, and his energy level has been Pezim-like throughout 2015.  That’s a critical ingredient for success in this business.  Mix in technical expertise, wise strategy and some good luck, and that’s the right set-up for a home run.  Could it happen here?  It’s possible.  For everyone’s sake, let’s hope it does.

Click on the arrow below to listen to another short segment (2-and-a-half minutes) of Jon’s recent interview with Hardy.  He’s experienced at conducting programs in remote areas, and the camp at Garland has the flexibility to allow for drilling throughout the winter in the event of a discovery.  In this piece, Hardy discusses infrastructure and cost issues.

Note:  John holds a share position in EQT.

Below are updates this Sunday afternoon on 2 of John’s recent “awareness” charts that don’t exactly give comfort to momentum traders – unless you’re on the short side.

What got the broader equity markets in trouble recently was the sharply declining number of stocks trading above their 200-day moving averages (SMA’s).

John’s multi-year S&P 500 chart illustrates the problem very clearly.  The support band (shaded zone between 40 and 50) for the “SPXA200R” was broken at the end of last week, closing at 37.  That means the percentage of stocks on the S&P 500 trading above their 200-day SMA’s is now at 37%, the lowest level since 2011.   The violation of the support band heightens the risk of a deeper correction, with the downtrend in the SPXA200R strengthening as shown by the ADX indicator.

Best scenario in our view for the coming week would be an immediate further sharp sell-off in this index and other equity markets for “cleansing” purposes, and that could create some interesting opportunities.  The action in the VIX (Volatility Index) suggests something dramatic is building, so hang on to your hats as the ride could be wild.

From a fundamental standpoint, at Friday’s close the S&P 500 traded at 16.1 times analysts’ estimates of the earnings that companies will report over the next year, according to FactSet. This metric, known as the market’s forward price-to-earnings ratio, has fallen over the past 5 months and is now in line with its 15-year average.  It’s still modestly above its 10-year average of 14.1.

The backward looking last-12-months P/E ratio, which compares current prices to the earnings companies actually reported, is sitting at 17.5, above where it was a year ago according to FactSet.  The average trailing P/E ratio for the S&P 500 since the 1870’s has been about 16.6.

HXD S&P/TSX Bear Plus ETF

The HXD (double short ETF for S&P/TSX 60 Index) has broken out of a 3-year downsloping channel.  This is a powerful-looking chart with increasing momentum.  As we warned last Thursday, this is immediately problematic for the TSX which is being pressured by weakening commodity prices (with the exception of Gold, of course).

Look for the HXD to reach into overbought RSI(14) territory (above 70%) and challenge last year’s high around $6.  That would imply at least another 5% haircut near-term for the TSX Composite to about the 12750 level.

It’s Sunday afternoon, trading in China will begin in a few hours.  That market will be fascinating to watch as the new week begins – critical support on the Shanghai Composite is 3400.  Can the “rescue team” keep the Shanghai from breaking below that level?  If they can’t, down she goes – and hard.

TSX Venture Exchange and Gold

If it’s any consolation, the Venture actually slightly outperformed the NASDAQ last week.  A major selloff on the broader markets produced a 6.8% decline on NASDAQ, its worst weekly performance in 4 years.  The Dow and TSX didn’t fare much better as they tumbled 5.8% and 5.6%, respectively.

The Venture‘s 6.1% decline would have been worse if it weren’t for Gold’s biggest weekly advance since January.   Certain high-quality Gold exploration/development plays on the Venture bucked the general market trend, evidence of sector rotation.  Integra Gold (ICG, TSX-V) advanced 7.5% to 28.5 cents after announcing a $14.6 million private placement by Eldorado Gold (ELD, TSX) which represents a major endorsement of ICG’s Lamaque Project near Val d’Or, and the team behind it.  Five drill rigs will be operational at Lamaque by the end of this month; Kaminak Gold (KAM, TSX-V) rose 14.7% for the week to 78 cents as it continues to prepare a Feasibility Study for its Coffee Gold Project south of Dawson City, Yukon; and Garibaldi Resources (GGI, TSX-V) shot up 25% to 7.5 cents as work began at the promising Grizzly Project in northwest B.C. while drill results are also pending from the company’s La Patilla Gold Property in Mexico where metallurgical testing has also shown exceptionally high Gold recovery rates.

The TSX Gold Index, meanwhile, has been a great place to camp out for the summer since late July.  It climbed 7.7% last week (vs. Gold’s 4.5% move) and appears poised for an exceptional August after historically extreme oversold conditions emerged last month.

Venture 39-Week Cycle Chart

Declining short-term moving averages continue to restrain the Venture as minor relief pulses since June have been unable to push above the 10 or 20-day SMA’s.  The 1st sign of a turnaround in this market will come only when the Index does climb above those resistance levels, and on increased volume.  Fib. support at 550 gave way Friday as all markets got hammered.  If there isn’t a sudden reversal Monday, the next estimated Fib. support for the Venture is 515.

Despite current downside risks, we do see a good possibility of this market stabilizing and then rallying within the next several weeks, simply based on its 39-week “cycle”.  Interestingly, this also matches with the timeline of the Fed’s next meeting in mid-September – a crucial one, indeed (we doubt the central bank has the courage to pull the trigger on its 1st rate hike in 9 years given the global growth problem and deflationary concerns which are even greater now given the Chinese currency devaluation).

Strangely enough, over the last 15 years, there has been a consistent pattern of trend reversals (in price and RSI) around the end of each 39-week period on the Venture – you can see it quite clearly on the fresh version below, through Friday, which is important to look at and understand.

What this chart suggests is that the Venture will stabilize around the end of this month or early September which could lead to a significant rally/turnaround.  That’s when the current 39-week period expires.

Keep in mind, also, that the Venture just experienced its 2nd-worst July on record. Major reversals occurred within 3-5 months following the 2 previous ugly July’s in 2008 and 2002.  We could be in the midst of a final capitulation, especially considering that 85% has already been wiped off the value of this market since its all-time high of nearly 3400 in May 2007.  This is no time to be panicking, just like it was a very bad time to be dumping Gold producers out of fear a month ago when the TSX Gold Index plunged to a 14-year low.

The vertical blue lines separate each 39-week period on the Venture.

The Seeds Have Been Planted (And Continue To Be Planted) For The Next Big Run In Gold Stocks

There’s no better cure for low prices than low prices. The great benefit of the collapse in Gold prices in 2013, and recent weakness with the drop below $1,100, is that it has forced producers to become much more lean in terms of their cost structures. Producers, big and small, continue to make hard decisions in terms of costs, projects, and rationalizing their overall operations. Exploration budgets among both producers and juniors have also been cut sharply. In addition, government policies across much of the globe are making it more difficult (sometimes impossible) for mining companies to carry out exploration or put Gold (or other) deposits into production, thanks to the ignorance of many politicians and the impact of radical and vocal environmentalists (technology has made it easier for groups opposing mining projects to organize and disseminate information, even in remote areas around the globe). Ultimately, all of these factors are going to eventually create a supply problem and therefore great opportunities in Gold and quality Gold stocks.  Think about it, where are the next major Gold deposits going to come from?  On top of that, grades have fallen significantly just over the past decade.

U.S. Dollar Index Update

Our contention for the last several months is that the Dollar Index put in its high for the year during March-April based on what has proven to be, so far at least, a very reliable 9-month daily chart.  Fundamentally, a runaway dollar would not be healthy for the U.S. or global economies, so one can be certain the Fed is keeping a close eye on movements in the greenback (the Chinese appear to be, as well, and recently of course fired some critical shots in the latest currency war).

The Dollar Index has now broken below 2 price uptrend lines as you can see in this chart, though the latter breakdown which also coincided with Fib. support at 95.4 requires confirmation Monday.

The dollar trade is still very crowded.  Many investors simply jumped on the bandwagon given the greenback’s momentum that was so powerful late last year into early this year.  So far, they’ve been relatively slow in jumping off but that could change in the not-too-distant future.

RSI(14) has continued to trend lower, as expected, and appears certain to test support this coming week at 30% (it’s currently at 34%, a week ago it was 45% and a week earlier it was 55%).

Nearest Fib. support ranges from approximately 92.6 to 94.  For now, the most likely immediate to near-term scenario is a test of either of those levels, a minor rally out of temporarily oversold conditions, followed by a fresh plunge that could lead to a new yearly low.

Ultimately, what we perceive as a growing possibility (though not a certainty) over the remainder of the year for the U.S. Dollar Index is a test of base support at 88.  That’s definitely not a mainstream view but the chart supports that kind of consolidation potential following the record advance that started during the summer of last year.

Gold

It was a bad week for equity markets but Gold glistened with a gain of $46 an ounce or 4.5% to finish at $1,160.  On Thursday, our separate post on Gold (“Gold’s Revenge“) featured John’s updated 2.5-year weekly chart for bullion which shows a real possibility for a climb up to around $1,250 within the next couple of months.  That particular and popular chart has been extremely reliable over the last couple of years, and it’s looking very bullish once again while the U.S. Dollar Index is doing just the opposite – its technical internals continue to deteriorate.

Gold 6-Year Monthly Chart

Below is a monthly chart for Gold going back 6 years, providing a broader perspective on what’s happening at the moment.  Again, note the very strong support at the bottom of this downsloping channel or flag, and the bullish engulfing reversal pattern in late July at approximately $1,070.

The SS indicator has reversed higher, also from support, and has plenty of room to advance further.  Same with the RSI(14).  Expect Gold to push above its still-declining MA(10) on this monthly chart, currently $1,183, as we’ve seen on several other occasions since the beginning of 2014.  We’ll see what happens from there – $1,200 will be a very important test.

If RSI(14) can overcome critical resistance at the 50% level, then Gold could gain some serious traction.  The RSI/price divergence is bullish – RSI(14) appeared to bottom in the spring of 2013 when Gold collapsed to $1,180, and has stayed above that level over the last 2+ years despite last month’s new low in Gold.  Something quite significant could be unfolding here.

Interestingly, open interest in Gold hit its highest all year on Friday, a sign that investors are nervous and looking for a place to put their money.

Silver edged another 11 cents higher to close at $15.35 for its 4th straight weekly advance.  Crude Oil, under continued pressure, fell $1.89 a barrel to $40.29 for its 8th consecutive weekly decline – the mid-$30’s, as John’s charts have been predicting, are likely on the way.  Copper shed 4 more cents to $2.29 while the U.S. Dollar Index tumbled more than a full point to 94.80.

The “Big Picture” View Of Gold

As Frank Holmes so effectively illustrates at www.usfunds.com, the long-term bull market in Gold has been driven by both the Fear Trade and the Love Trade.  The transfer of wealth from west to east, and the accumulation of wealth particularly in China and India, has had a huge impact on bullion and will continue to support prices.   Despite Gold’s largest annual drop in 3 decades in 2013, and fresh weakness now, the fundamental long-term case for the metal remains solidly intact based on the following factors (not necessarily in order of importance).

Note:  John and Jon both hold share positions in GGI.

Fear and greed rule the markets – China is the latest example of that old adage which is so very true.

And market “irrationality” (driven by emotions) should be viewed as the norm, not the exception.  As Jim Cramer wisely commented, “The worst mistake, the most common mistake you can make these days, is to say that because a particular stock or commodity trades at a given level, it therefore deserves to trade there. Often, that is just fiction now.”  In other words, market irrationality, such as the extreme negativity surrounding Gold that emerged this summer, is something we can all learn to take advantage of. 

Dow’s First 500+ Loss In 4 Years

Fear ruled the markets this past week as the Dow tumbled 1086 points, including 531 points yesterday, or 6% over 4 sessions, putting it in “correction” territory (down 10%) for the 1st time since 2011.  The last time the Dow closed more than 500 points lower in a single day was on August 10, 2011.  That proved to be a great buying opportunity, despite the panic at the time when the Volatility Index (see below) reached a high of 48.

China is struggling with a nasty flu and that country’s virus has spread to global equity and currency markets, and many commodities.  Gold, the most enduring currency of all, was the big winner last week as it climbed $46 an ounce or 4.5% while the TSX Gold Index surged 7.7%.

Stay Focused On The “Big Picture”

Who knows what Monday may bring, but the “Big Picture” we see emerging is an extraordinary, historical opportunity for speculative investors in high quality juniors and certain Gold producers who could be positioned for exponential gains over the next 6-12 months given the nearly 80% drop in the Venture since early 2011, the 70% tumble in the TSX Gold Index over the last 4 years, and the current global volatility.

The Venture’s 2nd-worst July on record – a drop of 11.4% – has been followed by a further decline of 9.4% so far in August.  The Venture is in the grips of a final capitulation, in our view, that will lead to much different conditions during the final 4 months of this year – there are historical precedents for this, and the current Venture long-term chart is a mirror image of the late 2010/early 2011 extreme overbought conditions that emerged following the Crash of 2008.   Those who can discern that “Big Picture” and don’t succumb to fear could reap a giant harvest from the seeds that have been planted to date and fresh seeds that can yet be planted in “productive soil”.  Incredible opportunities always emerge when the masses run in the same direction for too long.

Volatility Index (VIX) Update

In the context of the above, particularly the fear factor, look how the RSI(14) on John’s 10-year daily VIX chart (considered the “Fear Index”) has spiked to a level seen on only 3 other occasions since the beginning of 2008.  The VIX itself has been up more than 10% 3 days in a row, an unusual move that apparently has only happened twice in 21 years – March 1994 and October 2014.

The VIX needs to be watched closely – it hasn’t necessarily peaked just yet, but the “smart money” has always gone against the extremes in this index.  The straight-up move in the RSI(14), to above 80%, is extraordinary as the chart reveals.

The VIX closed at 28 Friday.  Stocks recover when the VIX retraces and stays below 25.    The VIX shot up as high as 48 in the spring of 2010, 48 in the summer of 2011, and 31 in the fall of last year (exceptional buying opportunities at those times).  During the Crash of 2008, the VIX spiked as high as 90, and that’s when many fortunes were born.

On a side note, one has to wonder what’s going through the minds of Fed members right now, and what sort of surprise China’s going to come up with next.

Gold has traded between $1,149 and $1,167 so far today…as of 10:00 am Pacific, bullion is up $7 an ounce at $1,160 as it attempts to finish a strong week above $1,150 resistance…bullion accelerated to the upside yesterday after pushing through its 40 and 50-day moving averages (SMA) around $1,130 and $1,140, respectively…that area should provide fresh support on any near-term pullback…Silver has retreated 26 cents to $15.32…Copper is off 2 pennies to $2.29…Crude Oil has slipped more than $1 a barrel to $40.16 while the U.S. Dollar Index has tanked nearly a full point to 94.91…

Assets in bullion-backed exchange-traded products expanded this week as equities tumbled, with the S&P 500 sinking by the most in 18 months yesterday…ETP holdings rose 0.2% yesterday to 1,518.33 metric tons, the highest level since Aug. 4, according to data compiled by Bloomberg…

Silver is attempting to post its 4th consecutive weekly gain (it closed last Friday at $15.24)…it climbed as high as nearly $15.70 overnight before retracing…as we showed in Monday’s regular Silver chart update, a major challenge for the metal over the coming weeks will be to overcome a band of Fib. resistance between $15.30 and $16.60…

Other Views

Yesterday, our separate post on Gold (“Gold’s Revenge“) featured John’s updated 2.5-year weekly chart for bullion which shows a real possibility for a climb up to around $1,250 within the next couple of months…this particular and popular chart has been extremely reliable over the last couple of years, and it’s looking very bullish once again while the U.S. Dollar Index is doing just the opposite – its technical internals continue to deteriorate…

Below are 2 other views on Gold that don’t jive with ours…1 of our assumptions is that the Fed won’t have the courage to raise interest rates next month and quite likely not until sometime next year…

Singapore’s OCBC (Oversea-Chinese Baking Corp.) was the most accurate official precious metals forecaster over the past 3 quarters, according to rankings complied by Bloomberg, and their the top-ranked forecaster (Barnabas Gan) says the Federal Reserve will still raise U.S. interest rates this year…that will hurt Gold, Gan claims, and he’s standing by his outlook even as bullion surged this week amid a global rout in stocks and commodities…

“The Fed rate hike story is the key reason as to why we are holding our bearish view for Gold at $1,050 an ounce at the end of the year,” stated Gan, an economist at OCBC.  “The Fed rate hike, if it happens either in September or December, will really be the factor that market watchers are actually looking for.”

Another group that expects a Fed rate hike this year – next month actually – is Capital Economics…Simona Gambarini, the research firm’s commodity economist, commented in a note:  “While we acknowledge that the Gold price could fall as low as $850 per ounce in a worst case scenario, our base case is that prices should find good support only a little below current levels (our end-Q3 forecast is $1,050) and will actually end the year higher, at $1,200.  We believe that demand and supply fundamentals remain solid and expect prices to recover further.” 

China Update – Huge Fire Hose Needed In A Hurry

An early gauge of China’s factory activity fell to a 6-and-a-half year low in August despite China’s efforts to reinvigorate slowing economic growth…the reading released today suggests Beijing will likely need to “double down” on stimulus to reach its goal for the year of 7% economic growth over 2014…it’s reasonable, given how the communist government is behaving, to expect some sort of a move by Beijing as early as this weekend before markets re-open Monday – 1 quick step would be to further cut the amount of money Chinese banks are required to hold in reserve, a move that essentially frees up funds to lend out…

Rest assured, China’s “rescue team” will attempt to pull out all the stops to prevent the Shanghai Composite from collapsing below critical technical support at 3400…however, the more desperate they seem, the more their actions are spooking sophisticated investors…below is an updated chart from John based as yesterday’s close (today, the Shanghai fell another 4%, losing another 154 points to finish the week at 3510)…

TIMBER!!!  Look out below – the Shanghai is in a “Wave C” phase that has the potential to get ugly on a close below 3400…Beijing needs to pull out 1 huge fire hose in a real hurry to prevent this fire from getting out of control…

Oil Update

U.S. Oil prices are headed for their 8th consecutive week of declines, the longest losing streak since 1986, after the sharp drop in Chinese manufacturing increased worries over the health of the world’s biggest energy consumer…this has added to concerns about lower consumption of Crude by the world’s 2nd-biggest Oil user…

Today’s Equity Markets

Asia

While China tumbled 4%, Japan’s Nikkei average lost 600 points or 3% overnight to close at 19436…Japanese Finance Minister Taro Aso said today that recent moves by China to allow its currency to depreciate are a concern and could pose problems for Tokyo.  “Chinese factors are a big part of this, without a doubt,” Aso said at a regular news briefing, referencing the drop in the Nikkei…a further devaluation of the Chinese yuan could put Japan in a “tough spot”, he was quoted as saying by media outlets…the currency wars are heating up…

Europe

European markets were down sharply today, generally near 3%…

North America

The Dow has plunged another 355 points as of 10:00 am Pacific, taking losses over the last 4 sessions including so far today to 910 points or 5.2%…the U.S. manufacturing sector is once again under pressure as it continues to hover just above contraction level, according to the latest flash PMI data…private research firm Markit said its August PMI estimate fell to a level of 52.9 (the lowest reading since October 2013)compared to July’s final reading of 53.8….according to consensus reports, economists were expecting to see a reading at 53.9…

In Toronto, the TSX is off 214 points while the Venture has slipped 9 points to 540 as of 10:00 am Pacific…

Venture Updated Chart

Venture support around 550 is now under threat, though we caution that any close below 550 today would require confirmation Monday when it’s quite possible the market could suddenly reverse higher out of deeply oversold conditions…in any event, the next Fib. support level below 550 is approximately 515…

Encouragingly, the latest sell-off on the Venture has come on low volume and has been related of course to weakness in the broader markets and Oil…overall sell pressure on the Venture has been in decline since late July, as the chart below shows, and keep in mind that the 39-week Venture “cycle” points to a turnaround at the end of August/early September…the highest quality Gold stocks on the Venture, and other top exploration plays, are holding up well…we’ll update some of those situations by Monday…

Three TSX Gold Plays To Watch

Richmont Mines Inc. (RIC, TSX) Update

Richmont Mines (RIC, TSX) has earned 14 cents per share through the 1st half of 2015 and recently increased its production guidance to as much as 95,000 ounces for 2015 from as much as 88,000 previously…the substantial high-grade resource beneath existing workings at the company’s Island Gold Mine will be a game-changer for RIC as mining and development continue there…Richmont reported a cash balance of $78 million as of June 30, or $1.34 per share, and working capital of $73 million…RIC has long-term debt of only $6.2 million, and just 58 million shares outstanding…this Canadian-only producer is benefiting significantly from the low loonie and declining Oil prices…

Technically, there is superb support at the rising 200-day moving SMA (currently $3.87) and a major breakout could now be brewing above the downsloping flag shown on John’s 4-year weekly chart…

RIC is up 11 cents at $4.03 as of 10:00 am Pacific…

Klondex Mines Ltd. (KDX, TSX) Update

Klondex Mines (KDX, TSX) retreated almost exactly to Fib. support at $2.73 recently, where it was a very attractive opportunity technically as John pointed out…KDX then proceeded to march nearly 40% higher to Fib. resistance yesterday at $3.78 just before the company’s announcement that it has arranged a $26 million bought deal financing at $3.55 per share…the offering is expected to close on or about September 10…

KDX is off 21 cents at $3.51 as of 10:00 am Pacific…the 50-day SMA, at $3.30, has reversed to the upside and should provide excellent support moving forward…Klondex‘ high-grade Fire Creek Project and Midas mine in Nevada allowed the company to generate net income of $5 million or 4 cents per share in Q2…

Pilot Gold Inc. (PLG, TSX) Update

Pilot Gold (PLG, TSX) is beginning to recover out of deeply oversold conditions and could quickly accelerate if Gold takes off to $1,200 or higher…really looks like a bottom was put in here recently at 33 cents…sell pressure is declining significantly…

PLG’s immediate challenge will be to overcome resistance at its 50-day SMA, currently 49 cents…the stock is off 3 cents at 42 cents as of 10:00 am Pacific…

Note:  John, Terry and Jon do not hold share positions in RIC, KDX or PLG.