US Dollar Index: A Major Top?
The US dollar just extended its rally to a potential peak that could be completed by the end of this month. This period fulfills a two-month target that was anticipated in our earlier reports. This would also complete the three-week cycle that projected the early May high. If you look at the dollar, it has declined from the November/February period, and it has recovered most of that decline. The major resistance, the monthly resistance, is at the 94.50 to 95.00 basis levels for the June Dollar Index. As we come into next week, the US dollar is potentially getting ready to put in a major top, but to get the price confirmation, we need a close below 93.50 to confirm the basis June index.
Gold and Silver Cycles: Rebounding
The gold and silver markets have rebounded after testing the extreme below the mean levels that we published in our trading report on May 18, 2018. We recommended that if the market came down to B1 of $1276 and $1280 in gold to cover any short positions and reverse and go long, using $1280 as a stop level. This was the five-week low that we track in terms of identifying the cycle development for the gold and silver markets. For the next 30-day cycle it would take a new daily close above 1307 to give us a more solid confirmation that a multi-week low has taken place. Overall, over the next week, we see the market continuing to rally into the anticipated target on about June 15: plus or minus one week. This identifies for us the weekly cycle development that is taking place and what we want to see to identify the acceleration is the VC PMI average price as we come into next week, which gives us a measurement of when the reversion to the mean could unfold. As we come into next week, the cyclical energy of the market is beginning to indicate that the resistance levels are in the area of $1314 to $1338, if we use the weekly numbers. If we get a quick rally as we come into next week, we recommend that you lighten up and take some profits at these levels. This price action, if it occurs next week, could support some additional buying into early June. The acceleration phase would be validated if we were to get a close on gold above the $1325 to $1328 area. This is where the VC PMI has been able to identify where new supplies would come into the market.
Federal Reserve officials, including Jerome H. Powell, the Chair, have noted some potential risks to growth and this makes it possible but unlikely that the Fed will reflect more of those inflationary concerns in future statements. If we look at last meeting, the Fed held interest rates steady at the conclusion of its two-day policy meeting. It acknowledged rising inflation, but there is little indication that officials are concerned about inflation or a sudden slowdown in economic growth that could hasten interest increases.
As I have argued, I find it difficult to see how increasing interest rates could help economic growth. The inflation factors that have unfolded seem to lower expectations that inflation will increase, and there is no reason based on government data points to increase interest rates. We do not have runaway inflation. I continue to feel that with the pressure of rising interest rates, we are beginning to see throughout the world economy pressures developing, such as in the EU, especially in Italy, with rates potentially accelerating to uncontrollable levels, very much as we had back in Cyprus and Greece just after the 2008 recession. The Fed has been able to control the interest rates and provide a tremendous amount of cheap money, primarily to Fortune 500 companies who were able to borrow at record low interest rates a lot easier than mainstream firms, and use that money to buy their own stocks, adding fuel to the stock market fire that we seem to be experiencing. The stock market seems to be anticipating that interest rates won’t or can’t continue to go up.
Raising Interest Rates = Crippling the U.S. Economy
I am uncertain when we will reach the plateau of where and how high interest rates can go before we start to see fractures and wider divergences in the economy. At such a point, I believe the Fed will be forced to reverse this interest-raising strategy and potentially begin to lower interest rates. I feel that if you look at the world economy, I don’t believe there is any justification for this policy of raising interest rates. Raising interest rates could devastate the world economy, starting with the US economy. We are looking at US debt in excess of $21 trillion. A 1% increase in rates would put serious pressure on the US fiscal budget. Even if interest rates returned to an average or mean of about 4% or 5%, payments on sovereign debts would exceed many governments’ ability to pay, which will affect the overall bubble of the economy that has been built based on the policies of falling interest rates.
Rising Interest Rates Help the Dollar
The 10-year bond is trading right around 3% and an increase above 3% would be highly inflationary. Rising US interest rates has been the fuel that has driven the US dollar rally. We have to look at what the gold market is discounting, trading in the $1300s now, showing tremendous support under $1300, and we are beginning to see a different complexion in the structure of the US dollar.
Commodity Research Bureau Index: Long-Term Move Up?
One of the areas of concern that seems to be indicating a shift in the energy sector is the fact that we see crude oil trading at its highest point since May 2015. Although we are short-term overbought in crude oil, it has broken the downtrend when you compare it to the S&P500 as a whole. That downtrend has taken place since 2014. This leads us to believe that the CRB Index has broken through important resistance levels and that a potentially long-term move is unfolding. This might be one of the factors supporting the silver and gold market. If in fact we were to go into an inflationary period, which seems to be indicated by the breakout that is taking place in the CRB Index, we could see interest rates and gold move up sharply.
Gold and Silver Up
The gold and silver market have remained more or less range bound for a few years, but we are looking at the possibility that this may be shifting, particularly if you look at the gold/silver ratio, which is down at about 81 levels, indicating that silver has started to outperform gold. This is another indicator that we have that we might be looking at a long-term bottoming formation for gold and especially for silver. Based on the gold/silver ratio, the silver market is becoming potentially a very active market which could gain in appreciation substantially against the price of gold. Next week we’ll look at silver in our report, but I want to look at the report we published on May 14 and review what took place and what we can expect as we come into next week based on our May 25 report.
One way to follow gold and silver is via the Philadelphia Gold and Silver Index (PHLX). Since the start of the year based on the weekly chart, the high was made on January 24, at about 92.08. Since then the index has declined pretty much on an equal basis to the rally from December 7. By coming down to a low of 76.39 on February 9, the market completed this secondary bottom. What we have seen is the market continuing to revert to the upside making higher lows as we have built what appears to be a major consolidation since the bottom was made on February 9.
If we incorporate some Gann trend lines, we can see that the market has broken out of this trend line resistance as of the May 23, the signal came in on the 24th on the close at 84.38, and we expect that a little filling might take place possibly testing this breakout point of 83.21 and upon testing this, if the market is inclined, the target that has been activated is all the way up to 91 or 92.04.
These trend lines indicate uptrend/downtrend, either the minor or the main trend. For a market whose trend is up we use a green trend line. An uptrend is defined as higher tops and a higher bottom.
The target zone, if we incorporate the Fibonacci retracement is 89.42, which equals a 78.6% Fibonacci retracement all the way up to the 92 area, which is the top of the up-trend line resistance that started back on March 26, 2018.
In technical analysis, a Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.Apr 12, 2018
By connecting the highs of April 18, 2018, we can calculate and identify the target zone of this breakout that appears to be taking place, which is in the same area when we apply Gann trend lines and Fibonacci retracements. This confirms as we come into the next few weeks that the market regardless of any short-term corrections is recommending that we buy into this correction, as a result of this major consolidation phase or bottom that we have been building since February. Breaking above 85.97 would continue to validate the acceleration process taking place toward the target zone of 92 for the PHLX index.
Last Week’s VC PMI Gold Report
The structure that was published on May 18 for gold last week, let’s see what the trading instructions told us as we came into this week, ending May 25. Last Friday the price of gold closed at about $1291 and the report indicated that, based on the first filter, the 18-weekly moving average of $1328, the market was bearish. The VC PMI is also able to tell you that if the price closes above the filter, it would negate the previous trend momentum; in this case the bearish trend would be negated to neutral. So you can use this filter as your first indicator of the changes that take place in the trend momentum from neutral to bullish or neutral to bearish.
The second filter that the VC PMI AI uses is the price momentum indicator. With the market closing below the weekly price momentum indicator of $1299, it told us that the market is bearish. When it identifies the market being bearish, it activates where to cover these positions, which is at the B1 or B2 levels below the mean. But the VC PMI also tells you that if the price closes above $1299, it would negate this bearish price momentum to neutral.
One of the things that we teach our subscribers is the methodology to identify the trigger points of the reversion to the mean of the extreme relative implied volatility. It is done in real time in a live trading room. It is very difficult to, once we publish a report on Seeking Alpha, to adjust to the changes that the market can have made. For example, the price closing at $1291 coming into this week is bearish, but it also told you that if it closed above $1299, this bearishness would become neutral and a second close above it would activate a bullish uptrend. It would also identify the target zones and the extreme above this average price or the mean. Coming into this week it told you that S1 level of $1314 or S2 of $1348 could be activated when a close above $1299 takes place.
VC PMI Accuracy: What Did Gold Do Last Week?
The low last week was $1281. The high was $1307.2, closing at $1303.70. What happened here is that, by the market closing at $1291, it opened at $1290 and came down last week to make a low of $1281.20, almost activating the $1280 level. $1276 to $1280 were the levels it indicated to cover your short positions. The market came back up, and if you did not get activated because you waited until the market touched it, you had another opportunity to validate and confirm the reversion to the mean that when the market crossed back above $1299, it would neutralize this bearishness and a close above it would activate a bullish signal, which it did by the market making a high of $1307. You have to be aware of how the price action trades once it trades through the price, and the energy or direction changes. You need to understand what the AI algorithm is trying to tell you.
Let’s look at the supply and demand factors coming into next week. The report that we published May 25, 2018, clearly indicates that with the marketing closing at $1304, which is below the 9-day weekly moving average of $1323, is confirmation that the weekly trend momentum is bearish. If the price closes above $1323, it would negate this bearish trend momentum to neutral. A second close above $1323 would activate the weekly trend momentum to bullish.
If we look at the weekly price momentum indicator for the coming week, it gives us the average price momentum for the coming week. With the market closing above it, which is above $1297, it is confirmation that the price momentum is bullish coming into next week. But it also tells you to use this level as a protective stop to manage risk. If we close below it, you have the option to go neutral: a second filter that we use to identify the average price or pivot point.
Once we have these average price levels, we can anticipate that as we come into next week the S1 level is $1313: the first target. The S2 level of $1323 is your second target if you are coming in long, where you can unload and take some profits on your long positions.
The alternate is that if the price comes down below $1297, it activates the B1 level of $1288 or the B2 level of $1272. One of the questions I have been asked is how I am able to calculate this 95% of time we expect the price to revert. The algorithm, when the price reaches the extreme above or below the mean, it identifies a probability factor. If the price reaches the S1 level, there is a 90% probability that price will revert back to $1297. If it does not revert, then it could reach the S2, which is a 95% probability that the price will revert back to $1297. If the price closes above $1323, the VC PMI tells you that the resistance level of $1323, has now become support for the next higher price fractal and this is where the shift occurs in the VC PMI. It tells you that if the price closed above $1323, you can expect higher prices to come. This is the highest resistance level of the highest extreme volatility above the mean, and these are the entry and exit points we use to enter and exit for day and swing trading positions.
Using the VC PMI automated algorithm allows a trader to have a systematic structure for day, swing or position trading. It analyzes the relative extreme implied volatility of that time frame. For day traders the VC PMI analyzes a structure of five levels of supply and demand. It identifies the average price for the following trading session. Once we are able to identify the average, mean or equilibrium price for that trading session, then we can extrapolate the extreme of the relative implied volatility to where it meets our criteria for optimization. In this case, the VC PMI uses five levels.
Why five levels? Because it is a perfect Fibonacci number. The number five is a perfect prime number. In the mathematical structure that we use, it is a major component in creating the structure for artificial intelligence that goes into the algorithm.
Artificial intelligence is used to automate the algorithm. We can see that the basis of this structure of five levels relies on Fibonacci numbers. Using the Gann calculations to identify the supply and demand levels for the preceding day by using the previous day’s criteria, we can see where the supply and demand resistance levels can be identified.
The VC PMI artificial intelligence uses colors in charts to identify where the supply and demand levels so that they can be clearly shown. Within these levels, we can begin to see the structure of identifying the highest relative levels of the implied volatility of the extreme above and below
the mean. For example, the artificial intelligence system provides the sell 1 (S1) or sell 2 (S2) of the price range of the potential supply that it has identified. It instructs you that when the price is identified in red, it automatically means supply. The price levels of S1 and S2 give you the price levels where that potential supply can be traded. The actual energy of the market, where buyers move the price into the S1 level, depending on how much demand or buying power is able to absorb the selling pressure or supply identified by the S1 level, the price will react based on the basic supply and demand law of economics. If there is more demand than supply energy, then the price will rise and it will close above the S1 level. It tells you that at that point that demand is greater than supply and it will potentially test that range between the supply between the S1 and S2 level, and the market may reach the S2 level of supply.
In a mathematical sense, the S1 level represents the 1x1 relative implied volatility of the extreme above the mean. The S2 level is a 2x1 factor of the relative implied volatility of the extreme above the mean. The probability factor between S1 and S2 is between 90% and 95% probable, that if the price reaches the S1 level, it is 90% probable that the price will revert back to the mean from that level. When the price activates the S2 level by touching the S2 level, there is a 95% probability that the price will revert back to S1, and if it closes below S1, then there is a high probability that the price will revert back to the mean. When the price reaches the mean, it could revert back to B1 or the extreme below the mean of B2. If the price reaches the B1 level, there is a 90% chance that the price will revert back to the mean or that the price activates the B2 level, there is a 95% chance that the price will revert back to the B1 level or the mean, average or equilibrium price that has been identified for that trading session.
When you look at the VC PMI’s structure of five levels: the average price and two levels above and below the mean, which are the levels of extreme volatility for that trading session. The algorithm identifies the S1 and S2 levels, so when the price reaches those levels, the algorithm goes back to a neutral position and you allow the algorithm to identify for you the trigger points for the next movement of the market. The VC PMI adjusts itself when the volatility or trend of the market has shifted form a consolidation to an intermediate or long-term up or down trend.
If I am long coming into next week, which I am since the VC PMI told us to buy last week at B1 and B2, closing at $1304 activates the average price next week of $1297, and I can start taking profits at $1313 to $1323. When you do take your profits or the market accomplishes these targets, you go back to neutral. You then wait for the market to set up the next fractals and the VC PMI gives you new trigger points. This is what we teach our subscribers in our live trading room at the Equity Management Academy.
As we come in into next week, the VC PMI algorithm tells you clearly based on the third filter to look to take profits on shorts, if the market comes down below $1297, and you short into $1288 to $1272. It prepares you for those potential unexpected developments that could occur. If you are long, to go long from there, use $1272 to go long. It is identifying the highest probability to buy coming into next week. The market is coming into next week bullish, trading above the $1297 mean, so I am prepared to take profits at $1313 to $1323 next week. This is how systematic the structure identified by the VC PMI automated algorithm can be applied by self-directed individuals.
Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts. It is for educational purposes only.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.