Aside from silver’s loss of support, gold is breaking down from what appears to have been a bear flag pattern defined as the lame rise from mid-May.

One would not think a lukewarm jobs report could do such damage.  But one might think that the sentiment bump we noted (ref. Sentimentrader graphic from NFTRH 241) on the gold bug sector could.  And it apparently has.  Gold is and has been in a down trend off of the big breakdown in April and the break from this flag will seek to continue that trend.  That is the short-term technical picture.

HUI daily

HUI is threatening to lose the EMA’s 10 and 20 today but 260 is the point that fills the gap and confirms or breaks the short-term up trend.

In a best case scenario, this could be the hit that teaches the gold bugs that they are wrong, are always wrong and will stay wrong.  In other words, in a best case scenario this would be the final shakeout that causes so much doubt we will not see sentiment spikes like last week again anytime soon.  Bottom callers may finally be reviled.  That would be a sentiment bottom.

I have not mentioned it much in the recent past because things have been so relentlessly bearish but it is best to be very careful when the gold “community” is frisky, giddy or chest thumping.  In the best case, this hit is fixing the little pop in gold community sentiment.

But gold’s technicals are short-term bearish and the miners, less so.  We should watch for the bullish divergence to remain intact or get eliminated.  Right now, the HUI-gold ratio looks pretty darned good in holding the moving averages.

HUI-Gold ratio daily

In NFTRH 241 we noted that silver was at an important support level.  The equivalent of this support is being broken today on the SLV ETF:

SLV daily

Despite the bullish precious metals CoT data, and despite heretofore over bearish sentiment data (which had gotten a bit frisky recently as we also noted in #241) the cold hard fact is that silver is losing a support level.  This was the spanner in the works when it was noted in #241.  It will now need to double bottom at or around the May low to avoid a date with our silver target in the 17-20 range.

So I am going to stay at high cash levels until things clear (80% as I write).  I hold several gold stocks that I consider ‘quality’.  I guess at this point it is a matter of just taking some more hits with a ‘is that all you got?’ attitude until/unless the HUI and individual charts break down.  That works for me personally.  We should all know our individual risk tolerances as events unfold.

Separately, the Model portfolio added back the SGF Singapore fund along with GOOG, AAPL and INTC and global bond fund GIM (all former model portfolio members).  This is probably for a trade only, but could go for longer considering my willingness to establish bear positions against the market as needed. I just wanted to note these so they are just not there on Sunday, with no explanation.  The equities were bought due to the recent knock down (SGF, GOOG), chart pattern (AAPL) and fundamentals (INTC).  The GIM global bond fund was bought back because it was hammered down to where its premium to net asset value was all but eliminated.

I want to be open to being a builder and not just a doom and gloomer considering the ‘carry trade’ scenario, but this needs more work and fleshing out.  If it is a valid macro play, things do not stand to get very bearish, pending a potential summer correction.

More to come in #242.

The HUI has clear parameters per the daily chart.

HUI daily

While still above the now upturning EMA’s 10 & 20, it is fine.  If it were to drop below these averages it would be much less fine, although there is a gap just above 260 that could be filled.  260 remains the limit on my personal level of risk tolerance.

Other aspects of the chart are the bullish divergence by MACD and RSI, along with the support just below 50 noted on RSI.  Finally, the daily is still in a downtrend by AROON.  When/if this crosses to up (0+) it would be another bullish factor.

GYX daily

The base metals index, which we have been watching in NFTRH for the last couple of weeks has gone AROON trend up (green) and now made a higher high.  The pattern targets the 200 day simple moving average.

A bullish base metals picture does not square with a bearish economic (see yesterday’s ISM contraction for example) and stock market picture.  But it does square with our developing ‘carry trade’ scenario under which signs of inflationary economic growth could emerge later in the year.

COPX daily

Yet the copper miners ETF is still just hanging around.  This is something I would consider for purchase under a ‘rising inflationary expectations’ scenario.

Bottom Line

The signals are mixed.  Perhaps the base metals are just on a quick rebound along with broad market relief (junk bonds, stocks, etc. are bouncing along with a hard bounce in Japan).  We will know shortly.  If Japan and global credit and stock markets somehow fix the recent damage and proceed bullishly, we will need to bring the ‘carry trade’ scenario into view sooner rather than later.

We would also need to evaluate the gold sector, which would not be a (fundamentally) favored one in an inflationary growth scenario.  Although the miners have risen strongly in the past under such conditions, it is for the wrong reasons and the miners would be a ‘sell the rally’ in that case.

The next few weeks are important for many markets.  Confirmations or failures should be coming along soon.  Right now, my plan remains to not step too far in any one direction until the situation clears.

This morning it looks like some predictable turbulence is hitting the precious metals.

HUI daily

The daily chart did what we wanted it to do yesterday and broke the EMA’s 10 and 20 to the upside.  This left a gap and brought the 60 min. chart to over bought status, short of the initial target of 290.

HUI 60 min.

We would want to see the daily EMA 10 hold as support (263) and this goes well with the 260/261 support view on the 60 min. chart.

So HUI is over bought on the very short term.  The last time it broke above the daily EMA’s 10 and 20 was at the end of December, as it promptly failed into a terrible bear leg.  Now here we are again, but with a bleak sentiment backdrop (contrarian bullish) and a series of rolling capitulations that led to a big in-day reversal a couple weeks ago.

If HUI is going to keep a trade-able rally (at the least) going, it needs to hold 260, worst case.  This time I am expecting it to do so simply because of all the bullish sentiment dynamics in play.  But the chart will guide.

I am still at 73% cash (after backing out current short positions against the S&P 500 and Russell 2000).  I would intend to put more cash to work if support holds at 260 or higher… or continue the seemingly endless regimen of risk management if need be.  The chart will decide.  But as of now, it is over bought and some gaps getting filled would not be a bad thing in and of itself.