Never Underestimate China

Global market sell-off begins with various scenarios that played out timely in August 2015 - growing fear and loss of confidence of a sustainable economic growth, escalating currency wars, threat of global deflation and many more. Going back to all our past weekly report, we remain adamant that the global recovery is a fragile one and over the last few months we have seen such complacency taken to a brand new level.

Pampered market such as this needs a hard landing every now and then but we have to take note that the previous equity sell-off in the US are saved with promises of more helicopter money (see chart below). With such precedence, one can only wonder if we will see the same setup for Great Britain, Japan, China and every other tom, dick and harry that have launched QE programmes of their own.

The stars are aligned that kick start the sell-off with early signs that the VIX and developed market equities initially remained utterly complacent and unabated. As they often say, sell-off does not happen in one flush – rather it was a build-up step by step distribution process. Last week, we have seen the VIX index exploding higher after a short span of docile period. Technically, it has a double bottomed and series of market event has certainly create the need to buy such insurance. There is no way of telling that it has reached a top – we do not have a crystal ball for that. In fact, the only observation that we can make it that often we need to see another high on the VIX – sort of a blow-off top formation.

Recent political tension between North and South Korea only increase uncertainty as shots were fired. Tsipras resigned and further uncertainty into Greece debacle will no doubt play an overcast role in the coming months. Turkey Lira plunged as Erdogan faced with internal battles and potential terrorist situation. Price wars in the global oil market continue, adding pressure on other industrial metals to suffer.

Producers are forced to consider limiting their investments, worries of potential cuts are looming while future earnings are revised lower to discount the recent economic and political situation at best. We cannot catch a break here on outlining what we would call a week of mayhem as it could not get any worse.

“Understandably, the global debt will and need to continue higher in the hope that it will “eventually” trickle-down to the rest of the economy. Central banks are fast running out of option and tools to revive the ailing global economy but the resistance must go on. It will not surprise us that during Miss Yellen tenure as the Fed chairwoman – that she will consider another quantitative easing AGAIN!”

Take heed of the last 2 graphs as they play a big role in explaining the divergence on what financial media portrayed of an economic recovery to the actual economic situation that we have been explaining for months. The world is oversupply, complacent, pampered and very much ignorant. Price crash such as the above means the industry has to change and such changes will happen over the next few years.

Dollar Technical Outlook

Post FOMC statement remains inconclusive of a September rate hike – dollar bulls run for the exit and there were practically no buyers. Sellers squeezed out of the tiny door that they can find. Escalating currency wars may have helped revived talks of a remote QE 4 if the global economy tanks (we think this is unlikely) but there is real fear in the market place so any sell the rumour could easily sparked more sell off. With the VIX running so high, there is no escape of further selling. However, we do note that there price action is fast reaching a confluence support zone. Failure here could means more trouble ahead on the dollar.

The AB=CB has played out to perfection and as per last week commentary (see below) we envisaged the dollar to have a dead cat bounce followed by a sell off to the following target of 11900. It has never been an easy read on the dollar index but someone is selling big and there is real fear that 2015 (take note we did not mention September or December here) may not happen after all. Technically, the dollar index should find some relief buying as it has reached an important juncture. Price action has spiked out of the megaphone pattern and this means more trouble ahead. A retest on the break out level may be the least of a dead cat bounce but never discount that it could revived IF talk of rate hike is back on the table.

“We may have buy the rumours and sell the fact scenario again – meaning that we could see the dollar kick off on a strong foot next week but a sell off could play out here. The bearish candlestick on the weekly is so dominant but we will wait for a retracement first to 12020 – 12040 levels before we see further selling to target the 50% Fib retracement where strong support are seen at 11900 area (see the weekly chart black arrow).”

Gold Technical Outlook

We are now looking for a pullback in the price of the yellow metal after an impressive run. Tension and uncertainty in the market with the selloff in the dollar index has certainly helped gold to rocket higher. However, we cannot ignore the fact that we are near resistance zones and potential reversal zone. If we do break out above 1200 and close above – then shorts are in heap of troubles (short covering rally will kick in then). Please take note that the bigger picture of a bear market in gold has not changed at all. Thus, we cannot discount another sell off. Only a close above the 20 WMA will get us excited again. We only highlighted one potential IHS formation but there are many possibilities lying around for IHS.

Silver Technical Outlook

Last week commentary was spot on though we missed the entry to long Silver at 14.70 by 4 points. The break above 20 DMA and retest of the breakout level was a healthy sign of a bounce. Buyers are ready to take prices higher but take note the price action remains volatile. We have seen the yellow metal has a 2nd green week on the candlestick – more often than not – pullback is due. Watch the daily Silver chart as the RSI is heavily diverging here and it could be an early sign that we see pullback both in gold and silver next week. Key level of support will be the 20 DMA again and we will not be surprise to see price break below and buyers need to step in then.

“Silver put in a positive week after closing above the 20 dma that is the signal to enter long. In the short term, we see pullback to retest for support at the breakout zone and potentially at the 20 dma again. Only a close below the 20 dma will changed our view – but this pullback could prove to be a buying opportunity. At the start of next week, we envisage weakness in silver after putting in a double top on the daily chart.”

Platinum Technical Outlook

Platinum prices may pullback too after an impressive run up to break past the psychological level of $ 1000.00. A test of support at 20 dma has given confidence on this bounce – while a break out of the Bollinger band and above 50 dma may well be sign of bull exhaustion. We may well see higher prices still but watch out for a deeper pullback.

Palladium Technical Outlook

We have the bounce in Palladium but the sudden gapped lower left many questioning about this bounce. Price action went close to our target zone but for now, we may well get to our previous weekly zone of 577 levels.

“Palladium price action played out as we envisaged and the weekly chart is showing a bullish divergence on the RSI with a potential double bottom formation. A short term bounce is expected initially to target 634 – 663 levels.”

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