Monday, March 28, 2011

Gold No Breakout So Far, Silver Hits Strong Resistance

There are so many news items affecting precious metals, especially gold, these days. The precious metals glittered in their roles as havens as euro-zone debt worries resurfaced increasing the anxiety among market participants already jittery about $106 oil, the fighting in Libya, protestors killed in Syria and the nuclear crisis in Japan.

What is the market scenario in precious metals at this juncture? Investors clamoring for safe places to stash their money sent gold futures to a record high and silver to a fresh 31-year peak. Prices turbocharged as gold futures overcame a weak start to soar past $1,440 an ounce, well on their way to setting a settlement record high.

With so much taking place in the world, let’s turn to the technical portion of this essay. This week we provide you with gold, silver and platinum charts. We will start with the long-term chart for gold (charts courtesy by

Gold has been struggling to move above the rising trend channel. No breakout has yet been confirmed above either the upper border of the trading channel or the 2010 highs. Only after these levels are taken out is a move towards the $1,600 target level likely to begin. Also, we can see that gold has corrected to its previous support line and the move above it appears to have been verified. RSI levels are no longer overbought as had been the case several weeks ago.

With the lack of recent price action excitement, it seems that there is plenty of capital still on the sidelines. This also makes an upcoming breakout quite possible. However, since a breakout above previous highs has not been seen yet, caution seems to be required in the days ahead.

While gold market is awaiting a breakdown, what is happening in silver market?

As in gold, long-term silver chart also suggests caution. In silver’s case however, there is another important factor/level which must be considered and that is the long-term resistance line.

As we’ve mentioned in one of our previous essays dedicated to gold & silver analysis, the $38 level is/was a valid target level for this rally and thus it’s likely to provide strong resistance, when it’s reached. This is what we have just seen.

Please note that $38 is the price that is right at the long-term resistance line created based on the highs seen in 2006 and 2008. These are two of the three most important tops in this bull market, so the resistance level is very important.

Similar situations in the past lead us to realize that if a decline is to be seen soon, then it is likely to be sharp. The recent rally has been much in tune with previous rallies. Only the strong rally seen in 2005 to 2006 was bigger. Although an upside move is possible from here, it might be the case that the top is just around the corner.

Overall, silver has recently seen new highs but a very important resistance level has been reached. All in all, this means that the current situation is very tense and caution is required.

Moving on, let’s take a look at the short-term chart for platinum.

While it does not have important implications for the following days, this chart is being included to clearly show the benefit that technical analysis can provide. Long–term readers of Sunshine Profit’s publications are confident in the validity of technical analysis but many opposing views are often seen in the financial pages.

This chart is a perfect example of an important and valuable technical signal (actually combination of two of them). The “bullish hammer candlestick” pattern touched the 200-day moving average and prices have immediately reversed. More importantly, other precious metals then followed. This clearly refutes the claims of those opposed to technical analysis as being useless. While it’s true that it is not perfect (no way to approach the market is), it works quite often and gives both positive and negative signals in advance of important market moves. Without it, Investors and Speculators simply cannot have the complete overview of the markets.

Amid the uncertainties associates with precious metals market, let’s have a look into the gold seasonality. our Premium Update posted on February 18th, we argued based on our forthcoming tool – True Seasonals (which – unlike other similar tools available on the Internet - presents seasonal price patterns adjusted for the expiration of derivatives and provides you with information about this projection’s quality) that the price of gold might decline in the second week of March. True Seasonals indicated a possible decline on March 8th and pointed to March 17th as to a possible end of the bumpy period. As a matter of fact gold did decline on March 9th and regained its momentum precisely on March 17th.

However, on February 18th, we did not know what the price of gold would be on March 1st and we assumed that it would be $1379 (the latest available price at the moment – form February 17th). Today the situation is different – we know what the price was on March 1st. Below you will find a comparison of the prices predicted by True Seasonals on March 1st and the actual prices of gold in March (up to March 24th).

Let’s take a look below to see what these (so far reliable) tendencies suggest for the end of the month.

The red line shows prices of gold that True Seasonals had predicted. The orange line presents the actual prices of gold in March. As we can see the actual prices of gold followed closely these forecasts. What is most important is the fact that the actual direction of price changes remained in line with the direction predicted by True Seasonals. All of this makes the seasonal analysis even more interesting for you at the moment.

At this moment the above chart suggests that the price might have gone a bit too high on a short-term basis, as it is visibly above what the tool would suggest. Still, the quality of projection is not too high at the moment and will decrease until the end of the month. Consequently, caution is necessary, especially if you are currently betting on higher values of gold. If you’re interested in viewing the True Seasonal chart for April, we encourage you to subscribe – this chart has been included in today’s Premium Update.

At this point we feel obliged to remind you – factors other than seasonality and expiration of derivatives might influence the prices of precious metals. Because of that, we strongly recommend you to keep track of the situation on the market and utilize other tools as well.

Summing up, the situation in metals is quite extreme at this moment. Silver moved to new highs but encountered a very long-term resistance level. Gold moved higher but failed to confirm the breakout above the previous highs. Given this level of uncertainty, it might be best of one to wait for additional (either bearish or bullish) signals before entering any speculative transactions in the precious metals sector.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Sunshine Profits


By Tom McClellan – McClellan Market Report

Crude Oil Leading Indication for Stock Prices

March 25, 2011

Just over a year ago, I looked at the 10-year leading indication that crude oil prices give for the stock market. It is time to take another look at that relationship, especially in light of the trouble that it suggests is coming for stock prices.

This week’s chart shows again how the price plot of crude oil prices has done a great job of giving us a macro view of what the trend should be 10 years later for the stock market. The periods when crude oil prices have moved sideways led to sideways periods for the stock market a decade later. And the periods when crude oil has trended upward were followed 10 years later by big bull markets in the stock market.

So the fact that crude oil prices have gone from a low of $11/barrel in 1998 to now above $100 is an indication that we should expect a persistent uptrend for stock prices in the decade ahead. But we should not expect it to be an unbroken uptrend.

When we zoom in closer, we see that oil’s price fluctuations can have important meaning for stock prices about 10 years later. The timing is not perfect, but the dance steps generally get repeated.

oil's leading indication for stocks since 1970

The one caveat to that principle is that oil price movements that are based on supply and demand forces tend to matter much more than oil price movements brought about by governmental or quasi-governmental forces. The Arab Oil Embargo in 1973 got the big oil price rise started, but stocks did not match the magnitude of that rise or the additional up leg caused by the Iranian revolution in 1979. And the oil price crash of 1986 that came about when Saudi Arabia abandoned the production quotas similarly did not bring stock prices down. The 1990 Iraq invasion of Kuwait caused oil prices to briefly double, but we did not see an exact echo of that spike in the stock market. When governments put a thumb on the scale and nudge oil prices away from where supply and demand factors would dictate, it does not show up as much 10 years later in the stock market.

Still, the background price pattern movements can clearly be seen as having been repeated in stock prices roughly 10 years afterward. And now we are into the 10-year echo point of the big oil price decline from Nov. 2000 to January 2002. So far, the Fed’s POMOs have kept the stock market going higher, so we have not yet seen the echo of that oil price decline being manifested in stock prices. But given the decades of correlation between stock prices and oil’s leading indication, it is hard to imagine that we will be exempted from seeing some kind of echo of that oil price drop. When the Fed stops doing POMOs in June, and when the stock market enters the part of the year when seasonality is much weaker, stock prices should finally be allowed to manifest an echo of that 2000-02 oil price decline.

The good news for long term investors is that later this decade we should see stocks echo the big rise in oil prices. The bad news is that the most likely way for this to happen is not from stocks being worth more, but rather that the dollars needed to buy stocks will be worth a lot less thanks to the Fed inflating the monetary base. So yes, in the late 2010s, your shares of stock will be worth more dollars. But those dollars won’t be worth as much.

If I Had To Buy Just One

I mentioned in an interview yesterday that if I had to buy just one junior resource stock it would be Sunridge Gold (SGC-TSX-V $.92)

I’ve used “Mama Mia” to describe recent results. I believe if not for two large previous private placements coming free trading recently, the share price would be substantially higher. I received a call from a key person at SGC after my interview thanking me for my comments and assuring me everything I’ve said is spot on as of that moment. He went on to note some 20 analysts, fund managers and money managers are traveling to a site visit in early April. I asked him about a rumor that a well-known person in the metals and mining industry has supposedly acquired just under 10% of the shares. He said he heard that too but the company can’t confirm or deny it.

It’s extremely rare for me to suggest one highly speculative stock for most speculators/gamblers to look at but SGC is in my bias opinion appears set to have an explosive growth path going forward. The risks include location of projects and overall market risks.

Peter Grandich

How to Avoid Dividend Cutters at All Costs Research shows it's best to sell after payouts are cut

Dividend stocks cut dividends when they either expect business to deteriorate to an extent where all cash might be needed to sustain the business or because they cannot afford to pay the dividend. When management expects losses that would drain cash in the near future, they are very likely to cut distributions. When dividends are cut, stock prices typically nosedive as the last investors who have held on hoping for better news leave the sinking ship. As a rule, I always sell when a company announces that it would be cutting dividends.

Over the past three years I have had four situations, where I have had to deal with dividend cutters and eliminators. In 2008 American Capital (NASDAQ: ACAS) suspended its dividend. In 2009 General Electric (NYSE: GE) and State Street (NYSE: STT) also cut distributions, in the middle of the financial crisis. In 2010 oil giant British Petroleum (NYSE: BP) suspended distributions, amidst pressure from the U.S. Government to hold onto its cash in order to be able to pay for the oil spill it had created. In all but one of the situations, I would have been better off simply holding on, without selling.

The reason why I typically sell after a dividend cut is that as a group, companies that cut and eliminate dividends have underperformed the market since 1972 according to a study by Ned Davis Research.

Another reason why I sell is that with dividend cutters and eliminators you have the risk that the company might be on the brink of collapse. If your strategy was to buy companies after cutting dividends, you would probably realize a lot in gains when times are favorable, like in 2009. However, during severe bear markets, such as the one between 2007 and 2009 investors buying after a dividend cut might experience losses that could lead to total loss of principal. And once investors lose their capital, they are no longer in the game. If you had a 50% chance for an opportunity to make a 100% gain in one year, along with a 50% chance for an opportunity to lose 100% of your capital you should clearly stay away from this investment. The goal of successful dividend investing is not only generating a rising stream of income, but also ensuring that principal grows over time as well.

Investors who purchased General Electric (NYSE: GE), State Street (NYSE: STT) and BP plc (NYSE: BP) after the cut were plain lucky. Investors who purchased Citigroup (NYSE: C), Bank of America (NYSE: BAC) and American International Group (NYSE: AIG) after the cut suffered severe losses. But those losses were nothing in comparison to investors who purchased Lehman Brothers, General Motors (NYSE: GM) or Washington Mutual.

The moral of the story is that in order to be successful in investing, one needs to be able to find a strategy that offers some edge and some positive expectancy. It is also important to stick to that strategy and to only exit the position when a predetermined condition at the time of position initiation is triggered.

Treasury Yields Update

The behavior of Treasuries is an area of special interest in light of the Fed's second round of quantitative easing, which was formally announced on November 3rd. The first chart shows the percent change for a basket of eight Treasuries since November 4th. Yields had risen dramatically since then. However, we've saw an accelerating reversal from mid-February until March 16th. But St. Patrick's Day was the beginning of a renewed rise in yields.

The next chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.

Here's a closer look at the past year with the 30-year fixed mortgage added to the mix (excluding points).

Here's a comparison of the yield curve at the time of the Fed's QE2 announcement and the latest curve.

The yield spread had been widening in November and much of December, then contracted, and now show renewed signs of widening. The next chart shows the 2- and 10-year yields with the 2-10 spread highlighted in the background.

The final chart is an overlay of the CBOE Interest Rate 10-Year Treasury Note (TNX) and the S&P 500.

For a long-term view of weekly Treasury yields, also focusing on the 10-year, see my Treasury Yields in Perspective.

Second Biggest Weekly VIX Drop In History

With the VIX closing the day and the week at approximately a 17.70 level, it marks a 40% decline from its closing print recorded on March 16, when it hit 29.4, just as the Nikkei was about to flash crash to the high 7,000 range. This represents the 2nd largest closing drop in the history of the volatility index, beaten only by the weekly VIX drop from November 4, 2008 (when the VIX dropped from 80 to 47.7). And stunningly, on an intraday basis, when the VIX dropped to the day's lows of just over 17, it briefly represented the biggest weekly drop in the VIX ever. Of course back in 2008 each and every day it seemed as if the world was ending and both stocks and vols moved around like electrons shuffled around in the LHC. This time around, with the apocalypse yet to be delayed (we will not list all the news that have hit the tape in the past month), one wonders: is the market so habituated by the Siren song of the Bernanke Put that it believes nothing can ever dent the smooth Russell 2000 upward slope ever again? And what happens when the Central Planner hubris is once again exposed as the hollow perpetuation of an economic fallacy backed simply by trillions of pieces of linen-diluted cotton? We shall find out soon enough.

IHS: Japan Quake May Cut Global Auto Output About 30%

Parts shortages caused by Japan’s record earthquake may reduce global automobile production by about 30 percent, research firm IHS Automotive said today.

If parts plants affected by the quake don’t return to operation within six weeks, global auto output may drop as much as 100,000 vehicles a day, said Michael Robinet, vice president of Lexington, Massachusetts-based IHS. The industry produces 280,000 to 300,000 vehicles daily, he said.

“Most vehicle manufacturers will be affected by this,” Robinet said in a telephone interview. “It will be very difficult for any major automaker to escape this disaster.”

Auto executives have refrained from forecasting lost production as their managers seek other sources for parts. If solutions aren’t found soon, most major automakers will experience disruptions by mid-April because supply networks are intertwined, Robinet said.

Automakers and parts suppliers around the globe are girding for possible shortages of key parts, especially electronics and transmission components, Robinet said. If carmakers can’t find alternate sources of parts, or if plants don’t come on line in eight weeks, as much as 40 percent of daily production may be lost, he said.

Honda Motor Co., which said today it will extend closings at its two car-assembly factories until April 3, is one of the most exposed carmakers, Robinet said. The automaker has 110 suppliers located in the earthquake zone, and about 10 of them can’t say precisely how long it will take for them to recover, said Ed Miller, a spokesman.

Toyota Plants

Toyota Motor Corp., the world’s largest automaker, has shut down all assembly plants in Japan until at least March 26. The company said it will resume production of three hybrid models in Japan on March 28.

General Motors Co. has idled two compact-car plants in Europe and a pickup factory in Shreveport, Louisiana, because of parts shortages.

GM executives sent out a memo on March 18 asking employees to limit travel and expenses to only essential business. The move was a precautionary measure, said Sherrie Childers Arb, a spokeswoman.

Ford Motor Co. hasn’t had any disruptions yet, said Todd Nissen, a spokesman.

Automakers can make up for one week of lost production with about six weeks of overtime, Robinet said.

A Solar Trade for 50%-plus Returns

In my recently article "The Perfect Way to Short Nuclear Power Stocks," I describe how the nuclear crisis in Japan is negatively impacting nuclear-power companies worldwide, providing potentially profitable trading opportunities.

However, another way to profit from the ongoing nuclear crisis is to invest in alternative energy stocks, especially solar-power stocks.

Because solar-power generation doesn't carry as many safety risks as nuclear, countries like Japan and Germany -- where nuclear plants have been shutdown while stress-tests are being performed -- may require greater reliance on solar energy to make up for lost nuclear-generated power.

As a result, there is potential for solar-power demand to spike in the coming months.
To find the top solar power pick, I conducted an in-depth technical and fundamental analysis, comparing the world's leading solar stocks.

Through this analysis, I've arrived at my top pick: ReneSola (NYSE: SOL). The China-based company is a leading solar wafer provider and manufacturer.

Although ReneSola is a relatively new company, founded in 2005, it's already established an international customer base, due to its competitive pricing structure. In fact, the company is one of the lowest-cost crystal and silicon manufacturers in the industry.

In 2011, ReneSola plans to aggressively expand production and capacity, expecting solar wafer and module shipments to rise by nearly 50% from 2010. Despite this expected growth, the stock appears technically strong and remains attractively valued, compared to its peers in the solar industry.

Technically, ReneSola is in a Major uptrend and appears close to breaking an Intermediate-term downtrend off its recent February high of $13.25.

Although the stock tested support near $8 in early March, it has recently bounced back and appears poised to bullishly break out of a small descending triangle, formed by the Intermediate trend line and support.

If ReneSola can break the descending triangle, the stock could easily test resistance in the $13-$15 trading range.

Fundamentally, ReneSola appears to be shining brightly.

Earlier this month, the company announced upbeat full-year 2010 results: revenue increased by 136% to $1.2 billion, compared with $510 million in the previous year. Growth was driven by strong sales of the company's popular solar modules.

For the full 2011 year, analysts project revenue will increase 11.3% to $1.3 billion, then another 4.1% to $1.4 billion, by 2012, as shipments and customer orders continue to increase.

The earnings outlook is equally bright.

Due to higher wafer and module shipments, full year 2010 earnings saw a strong turnaround to $0.97 in earnings, from a loss of $0.49 the prior year.

With the company expecting a 35% to 45% year-over-year increase in shipments, analysts project full-year 2011 earnings will rise 7.8% to $2.08. Growth is expected to stabilize by 2012, however, increased demand for solar power instead of nuclear generation may bump up future earnings.

In addition to growth potential, ReneSola shares are attractively valued. The stock has a low trailing price-to-earnings ratio (P/E) under 5. In comparison, competitor MEMC Electronic Materials (NYSE: WFR) has an enormously high P/E of about 80.

Shares also have a low price-to-sales (P/S) ratio of about 0.6. By comparison, MEMC's P/S is about 1.3. Additionally, ReneSola has a solid return on equity (ROE) of about 34%, while MEMC's is just above 2%.

Given that ReneSola is attractively valued, shows growth potential and appears technically solid, I plan to go long on the solar technology provider if it can bullishly break its current descending triangle pattern.

I will, therefore, place a buy-on-stop order at $9.76. This means if ReneSola does not hit or go above $9.76, I will not enter the trade.

My stop-loss is $8.03, just below historical support and the intersection of the Major uptrend line. My target is $15.34, resistance marked by the October 2010 high. The risk/reward ratio is: 3.22:1.

US Economic Calendar for the Week

DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From
Mar 288:30 AMPersonal IncomeFeb-0.2%0.3%1.0%-
Mar 288:30 AMPersonal SpendingFeb-0.3%0.5%0.2%-
Mar 288:30 AMPCE Prices - CoreFeb-0.2%0.2%0.1%-
Mar 2810:00 AMPending Home SalesJan-0.0%0.3%-2.8%-
Mar 299:00 AMCase-Shiller 20-city IndexJan--3.5%-3.3%-2.38%-
Mar 2910:00 AMConsumer ConfidenceMar-
Mar 307:00 AMMBA Mortgage Index03/25-NANA+2.7%-
Mar 307:30 AMChallenger Job CutsMar-NANA20%-
Mar 308:15 AMADP Employment ChangeMar-200K210K217K-
Mar 3010:30 AMCrude Inventories03/26-NANA2.131M-
Mar 318:30 AMInitial Claims03/26-370K383K382K-
Mar 318:30 AMContinuing Claims03/19-3700K3700K3721K-
Mar 319:45 AMChicago PMIMar-68.069.571.2-
Mar 3110:00 AMFactory OrdersFeb-0.0%0.4%3.1%-
Apr 18:30 AMNonfarm PayrollsMar-175K185K192K-
Apr 18:30 AMNonfarm Private PayrollsMar-200K203K222K-
Apr 18:30 AMUnemployment RateMar-9.0%8.9%8.9%-
Apr 18:30 AMHourly EarningsMar-0.1%0.2%0.0%-
Apr 18:30 AMAverage WorkweekMar-34.334.334.2-
Apr 110:00 AMISM IndexMar-59.061.461.4-
Apr 110:00 AMConstruction SpendingFeb--1.0%-0.7%-0.7%-
Apr 13:00 PMAuto SalesApr-NANA4.61M-
Apr 13:00 PMTruck SalesApr-NANA5.61M-