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TSX Venture Exchange and Gold

The roller coaster ride in the markets this past week was even more wild than Vancouver’s infamous roller coaster at the annual PNE currently in progress.  As we stated last Sunday, “the best scenario in our view for the coming week would be an immediate further sharp sell-off in this index (specific reference to S&P 500 chart) 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.”

Equity markets went into panic mode Monday morning with a “flash crash” following technical breakdowns the previous week, and the Venture followed the pack with a gap down and an intra-day all-time low of 509 before a hammer reversal kicked in.  By week’s end, the Venture was up 9% from its low with the strongest close above its EMA(8) in 4 months. 

For the week, the Venture was up 3.3%, even beating the Dow, the TSX and Gold, as it finished at 556.

Clearly, a pattern change has occurred here which is also consistent with the Venture’s cycle chart (scroll down further for that fascinating updated piece).

Here are the key takeaways from John’s 4-month Venture “awareness” chart:

1.  A confirmed breakout has occurred above the EMA(8) which has also reversed to the upside;

2.  Next key resistance is the EMA(20), currently 562.  A confirmed breakout above the EMA(20), and its reversal to the upside, would give the Index some fresh momentum – this would also help verify that a new uptrend is underway and gaining traction;

3.  RSI(14) has climbed out of oversold conditions which it had been trapped in since the beginning of July;

4.  Sell pressure (CMF) peaked in late July and has been declining steadily since;

5.  The recent bearish trend (ADX indicator) weakened dramatically this past week;

6.  Fib. support at 515 held – on a monthly basis, Fib. support around 560 may also hold.

These are all highly encouraging signs, though history has taught us that it’s too early at this point to declare an end to the Venture bear market (Crude Oil is just 1 of several significant challenges still facing the Index).  However, what certainly could be unfolding here is a very strong rally, the likes of which we haven’t seen since the end of 2013/early 2014.

If an important discovery is made somewhere, watch out.

Venture 39 Cycle Chart

It’s fun to at least imagine.  Look at the chart below and compare the end of the current Venture 39-week segment with the end of the 39-week period following the 2008 Crash (plus compare the ADX indicators).  A remarkable similarity.

Again, it’s premature at this point to suggest the Venture is about to enter a new bull phase, especially considering that the outlook for Crude Oil is simply not favorable (unless a major Middle East conflict suddenly erupts).  However, July and August for the Venture were very different than those same months last year, and it’s reasonable to believe – based on all the technical evidence at least – that the September-December period coming up for the Venture will also be much different than that same 4-month period last year when the Index took a beating.

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).

Dollar bulls were encouraged by the greenback’s climb out of temporarily oversold conditions last week.  Support was strong around the 93 level as expected.  However, the Dollar Index faces serious technical challenges in terms of moving higher, or significantly higher, from here (note the arrow in the chart pointing to resistance around the former uptrend line).

Ultimately, what we perceive as a growing possibility (albeit not a certainty) over the remainder of the year for the 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.  Such a drop in the greenback would be supportive of commodities and the Venture, the reverse of what occurred over the final 4 months of last year.

Gold

Gold disappointed some investors last week by not reacting more vigorously to the extreme volatility in the equity markets.  However, the more than $40 pullback during the week and then the recovery back above the $1,130 support area by the end of Friday’s session can be interpreted as healthy trading action.  Gold was down $26 for the week, closing at $1,134.  August should end a 2-month slide.

Fundamentally, it wouldn’t be surprising if China were to announce another update shortly (for August) regarding its Gold reserves.  Their pace of accumulation may have picked up even more from July and the period previously.

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 the downsloping channel or flag, and the bullish engulfing reversal pattern in late July at approximately $1,070.

RSI(14) is gradually moving up from support at 30%, and it appears a bullish cross is forming in the SS.

It’s reasonable to expect Gold to push above its still-declining MA(10) on this monthly chart, currently $1,180, 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 developing here, though it’s still a little early to tell.

Silver had a rough week after posting 4 consecutive weekly advances.  The metal plunged to a new 6-year low before bouncing back to close Friday at $14.59.  That was still a drop of 76 cents or 5% for the week.  Crude Oil snapped an 8-week slide by jumping $5 a barrel to $45.33.  Copper added 4 more cents to $2.33 while the U.S. Dollar Index gained more than a full point to 96.15.

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).