Nothing Much Beneath the Surface


  • The game of dip buying is almost up
  • Bullish price action losing intensity
  • GOLD warns market still looking shaky

BLIND FAITH - We have seen some wacky price action this week, that probably has many out there scratching their heads. Of course, many others aren't surprised at all as this group continues to subscribe to the strategy of buying pullbacks in risk no matter what's going on. It's a kind of blind faith from this group, continuing to expect central banks and governments to pull magic out of their hats, supporting financial markets at each and every turn. 

REFLEX REACTION - But can this really be sustained? I don't believe so. Fundamentally, as I have said so many times, with global rates sitting near, at and below the zero lower bound, there is nothing left in the tank that really should be that much of an incentive to the market. So these rallies that we are seeing over the past several months feel more like reflex reactions than rallies driven on compelling substance. At some point, this reality will become more apparent to the market and we should then expect more pronounced risk liquidation. 

BEARISH SIGN - Technically, I've noticed something else rather interesting about the price action. The rallies that we do see are less swift in nature, while the pullbacks are more intense. So while it may look like this latest push in US stocks has been fierce, if you break it down and look at the hourly chart, it has been more of a slow and steady grind. To me, this is a significant development as it warns of a shift in the trend. It used to be that rallies were intense, while pullbacks were slow and steady. The reversal of this trend should therefore be taken as a bearish sign.

Risk markets have recovered but GOLD remains elevated.....definitely something to think about. Via @joelkruger

 RED FLAG - Finally, another red flag warning against this risk on reaction in markets this week comes from the price action in the GOLD market. If you didn't know where GOLD was trading this week and I asked you to tell me where you thought it was trading using other markets as a reference point, you would have told me it should be back under pressure. And yet, GOLD continues to consolidate off recent highs despite the seemingly improved sentiment. So with this in mind, this could be yet another sign that risk is about to come back off in a big way. Let's see. 


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