Here is what top Citi analyst Fitzpatrick had to say, along with some powerful charts:  “I think you have to be fairly careful in these markets to get a breakout that looks fairly conclusive.  If you look at silver, what we do have, which is probably the best level to look at, we have a downward sloping trendline on the log chart (see below).

We look at these types of charts when we see large percentage changes, which occurred when silver dropped from $50 to $26.  Converging into the same area as the sloping downtrend line is the 55 week moving average, which is currently around $31.70.

If we get a weekly close above $31.70, that should open up for this retest of what we believe is the big level, the $37.48 level, which is the neckline of the double-bottom.  So we would look at a close above this $31.70 area in silver as being decisive.”

Fitzpatrick had this to say regarding gold: “We would also like to see gold break out against its downtrend line and the 55 week moving average.  The 55 week moving average on gold is currently at $1,672 (see chart below), and if you look at the downward move that took us to the lows of $1,526, that actually began from around $1,672.

A weekly close above $1,672, if we could get it, would signal to us that we have broken out of the triangle and would open up for a retest again on what we believe is the bigger level at $1,791 on gold.”

Fitzpatrick also warned about the VIX and stock market: “If you look at this overlay, which is the VIX against the S&P, what you’ll see is we have a very well defined trendline of support that the VIX has retraced to on six occasions, starting with October of 2007 when the S&P hit its all-time high.  On all five prior occasions you have subsequently seen a multi-month down-move in terms of the S&P (see chart below).

The shallowest of the declines was actually the last one we saw this year, but most of the moves have been well in excess of 20%.  We once again hit the trendline this month, down below 14%, and we’ve come off quite strongly.  We are now in the high 17% area, forming what looks like a very bullish hammer formation on the monthly chart.

So the suggestion here from the VIX chart is that we are right on the threshold yet again of another significant, double-digit down-move in the S&P over the course of the coming months.”

Fitzpatrick also added:  “We believe the Shanghai or Chinese stock market is now breaking through the last vestiges of support (see chart below).  If we do push decisively through this area, around 2,050 on the composite, we think there is a real danger that it could open up the way to take us all the way back to the lows that were posted in 2008, around 1,665, or an additional plunge of roughly 19% on the Shanghai Index.

If we get a close through this support, then the bias would be for an acceleration to the downside.”

At the end of the day, we already know that the European economy is struggling, and even Germany’s economic data beginning to shake a little bit.  The US is also struggling and consumer confidence numbers have already deteriorated. 

So the message across the board seems to be that of weakness, and we see this with the poor performance of what we would call economic commodities such as copper, and the likes of iron ore shipments collapsing.  Across markets and indicators, we definitely see warning signs that suggest the growth dynamic right across the spectrum seems to be one that is beginning to struggle again.”

From Tom Fitzpatrick’s latest report:

The Shanghai composite has now moved decisively below the 76.4% retracement of the 2008-2009 bounce at 2,093 and is testing downward sloping trend line support at 2,051.  These developments are increasing our bias that we can see this index all the way back to the 2008 low at 1,665. (19% below present levels)

As the financial crisis hit in 2008-2009 China was in good shape given its growth and export dynamics leading to large surpluses.  In addition its Equity and property markets had performed well.  While the Shanghai composite fell sharply in 2007-2008, it bounced over 100% into August 2009.  However since then it has struggled and is now over 40% below that peak and about 66% below the 2007 peak.

Inflation (CPI) has been dropping sharply (Albeit Food and energy price concerns are growing).  PPI is actually back in negative territory (Minus 2.9% YoY)

Housing/property markets are struggling and economic growth projections while still elevated have been revised down.

Despite all this we constantly hear commentary that China is “going to save us all” with renewed stimulus. (Like Japan did after its bubbles burst???)

The backbone of Chinese growth has been its export market and the developed World has been the primary demand engine for this.  It is increasingly obvious that the developed World is not getting back on the “normal growth path” people expected.  Europe is in or heading towards recession in most instances and US growth is sluggish at best.

Because of its starting point China has been able to “buy time” awaiting the developed World recovery on the back of various monetary/fiscal stimulus programs.

Is it time to entertain the idea that China is “running out of time”.  The months ahead will likely tell but the charts above are giving us rising cause for concern.  If correct that would likely make China more reluctant to allow its currency to strengthen and provide a potential feedback loop of weaker regional currencies.

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The interviews with Art Cashin (UBS $612 billion), Agnico CEO Sean Boyd, John Hathaway and Eric Sprott are available now.  Also, be sure to listen to last week’s line-up of other KWN interviews which included Jean-Marie Eveillard, John Mauldin, Gerald Celente and Ben Davies by CLICKING HERE.

Eric King

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