The Dollar Down Under

To my surprise, the US Dollar (USD) failed to hold its longer term uptrend and broke down through a 2 ½ year consolidation last month. Its swift decline set up a rally in other currencies, including the Aussie Dollar (AUD) as you can see in the chart below.

Since the breakout, the AUD has rallied to just under prior resistance. If the USD continues to remain weak and the AUD can break out above current resistance, the upside target (which I have labeled as T1 on the chart) is near the 2014 highs, a compelling 12-15% upside from where it closed yesterday.

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Australian sovereign bonds tend to pay a healthy premium to their US counterparts so those looking for yield could investigate them for a fit into their portfolio. Along with the higher yield, investors, by way of exchange rate risk, would be able to receive not only the out-sized yield but the potential of the capital gain if the upside target on the above chart were met. Of course, that same exchange rate risk can be a headwind if the USD were to reverse its lower trajectory and push other currencies, including the AID lower so it is critical you have a well scripted management plan if you elect to venture ahead.

The final months of 2017 should be very interesting for those playing in the currency markets as the USD (and by default its relationship to all other currencies) will be dictated by not only our Federal Reserve policy changes and whatever the current administration can enact. While no one assumes the current administration will be able to accomplish anything, I am very wary of accepting this position as I have learned that when the majority are on one side of an opinion, it is best to be on the other, especially when it comes to investing since the majority are almost always wrong.

August 2017 Charts on the Move Video

For those who were lulled to sleep with August's market action, seasonality says it time to sit up and pay attention since September is historically the weakest month of the year for stock returns. Weak or not, we are in the midst of a powerful bull market so plan accordingly.

August's video link is below.

https://www.youtube.com/watch?v=0PfC6I2wVE4&t=6s

 

Breakout or Fake Out?

After bottoming in December of last year gold went on to make a series of higher highs and higher lows through June, the sign of a possible new uptrend. Since June though, it has chopped sideways, stuck in a well-defined range, where $1210 acted as support while $1300 as resistance.  That all changed on Monday as gold broke out above both the 2017 range and November 2016 high. Yesterday, gold gapped up at the open but ended the day near the lows, forming a gravestone doji, and two legs of a 3-legged bearish shooting star reversal pattern.

There is no question how Wednesday closes will be critical for both gold bulls and bears alike. A close higher will likely invalidate the shooting star and put gold back on the path to retest 2016 highs near $1375. On the other hand, if gold closes lower and below the breakout level, there is nothing more bearish than a failed breakout which puts the nail in the “new uptrend” coffin and warns of a retest of this year’s lows.

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Sometimes breakouts are event not market driven (could Monday's big move be caused by the fear trade brought on by North Korea’s missile launch or the fact on the same day a breakdown of the dollar occurred?). And when they are, they are susceptible to reversals as they turn in to “fake outs”. With that in mind investors need to be aware of this possibility and react to insure the protection of investment capital.

Nothing Good Rhymes with August

For regular readers of this blog the name Tom McClellan requires no introduction as I am a big fan of his technical work and repost it regularly. With the dog days of summer upon us and the market a jumbled mess awaiting an impetus, I thought I would use Tom’s most recent work to add a little spice. Today’s post is a look at the seasonality patterns in play and their historical impact.

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Everyone knows about annual seasonality, and has heard of “Sell in May and go away”.  That slogan persists even though actual seasonal strength typically peaks in August, but nothing good rhymes with August.  There is also a strong tendency of the market to show regular patterns on a 10-year basis, now known as the Decennial Pattern.  And years ending in the number 7 have an ugly surprise for the bulls. 

In year 7s, the stock market typically peaks in August and bottoms in early November.  And thus far the DJIA seems to be following the pattern very closely.  The real decline comes after a peak due Oct. 3.

The worry in following this pattern is that it might be overly influenced by the huge decline that the DJIA experienced in 1987.  So in the chart above, I show two versions of the Decennial Pattern, the lower one leaving out the data from the entire decade of the 1980s.  This allows us to see that it was not just the effects of the 1987 crash that are pulling down the Pattern in year 7s.  It is a persistent effect. 

The strong correlation that we are seeing this year between the DJIA and the Decennial Pattern is pretty impressive, and it is worth noting that the DJIA had not been seeing such a strong correlation earlier in this decade.  Here is a longer term comparison:

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The market strength which is a normal feature of years ending in 5 did not appear this time.  I would argue that having the Fed doing $85 billion a month of QE earlier in the decade pulled forward the normal year 5 strength.  Then shutting off that free money pushed the market into withdrawal symptoms, like a heroin addict trying to quit cold turkey.  Now that we are farther along into the post-intervention era, the market is more free to follow its normal tendencies and we are seeing better correlation to the Decennial Pattern. 

If the stock market keeps following the Decennial Pattern with the strong correlation we are seeing now, then we can expect prices to bump along gradually lower, and then accelerate downward once October gets here. 

The following chart was added by me (Chuck) to provide a look at the DJIA performance for each and every year ending in “7”. The months of August through November have been outlined by the red dashed box. Note, only 1927 was the only year in which November ended higher than August. Will 2017 be the second?

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My Precious

Palladium, Pd46, is a rare and luxurious silvery white metal. Without wanting to start the next world war by bringing up this topic (I will leave starting WWIII to Washington, DC), there are some that view palladium as a precious metal right along with gold, silver and platinum.  While palladium was never historically used as coinage (and therefore the argument as to why it is not a “precious” metal), it, like the 3 other precious generals, has been assigned an ISO 4217 currency code. So, that’s precious enough for me.

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In the combination 9-year chart above, the price of palladium is represented by the candlestick bars while gold, silver and platinum are the colored (and labeled) lines. As you can see palladium is breaking out to chart highs while gold, silver and platinum are mired in investment purgatory. Interestingly, palladium has been priced higher only once before occurring in 2001 when traders went into a speculative frenzy pushing its price to almost $1100/oz, about $150 from where it closed yesterday.

I wish I knew why the divergence was occurring. Some will say it’s because palladium is an industrial metal and should be increasing as the economy grows. The good thing is in technical analysis we don’t worry about the “why’s” but rather focus solely on price.  With new highs on the radar (it has not been confirmed yet because this is a monthly chart and August is not over), once confirmed signals higher prices ahead with the next target being the 2001 highs