Interesting setups in the markets.
The futures are positive this morning and though the markets have had a couple tough days the “drive to 5” remains on track. The very first hint that the SPX fade from the July high was anything more than routine would be a break of the daily EMA 20 (dashed line) and more importantly, the SMA 50 and the noted lateral support at 2950.
Now, just because we’ve projected another test of the upper line and are bullish on the micro-term, that does not alter a very negative risk vs. reward situation on US stocks. With respect to another tap of point #5 we have been operating more on gut feel than hard TA because the upper line was already struck at that July high.
The drive to 5 regenerated only because SPX broke through resistance (now important support, shaded green) after sentiment became too bearish over a jittery summer. It was a gut feel based on my experience of how markets always seem to push limits. So why not another FOMO-inducing run to a new high?
The US stock market continues to be two things; bullish and at increasing risk. Even if it is to register #5 (no sure thing), the situation appears opposite to that noted for the HUI Gold Bugs index in NFTRH 569. We noted that upside potential in HUI far outweighs downside risk. For the US stock market in my opinion, the situation is opposite.
Moving on, the Silver/Gold ratio (SGR) made a classic looking hold of a bull flag consolidation to the moving averages yesterday. It turned up hard and one wonders what it is looking ahead to. Well, one doesn’t wonder. One knows that silver has more cyclical utility than gold and so is more commodity-like than gold.
Another thing we know is that there is not likely to be a global reflation/inflation trade (commodities, resources, companies that process them, resource economies, Treasury yields, etc.) unless Silver/Gold plays ball.
Below the monthly SGR and CRB are shown. But many other asset markets could be inserted along with CRB. So, is the SGR setting things up for another failure and more intense deflation? This monthly chart says “could be”, while the daily chart above says “hey, let me play out before making firm conclusions”. Take out the monthly EMA 50 and the 2018 high and the ratio would be on its way.
Either way, the stock market is at risk and my guess is that any obvious inflation trade – if applicable – would play out after a stock market decline. We are trying to establish a blueprint for Q4 and especially 2020. If the daily chart of the SGR above is on a real signal, we will have that blueprint. But we should respect the monthly chart directly above as well until its forever downtrend is eliminated.