Sunday pre-game 2/26/12


I've heard it said that technical analysis isn't rocket science. I tend to agree. I liken it more to particle physics or quantum chemistry.
As we know from the ninth and tenth laws of thermodynamics, the entropy of the universe is always increasing. George W. Bush eloquently captured a corollary of this concept in 2001 when he said "God has planted in every heart the desire to live in freedom." In fact, Bush was just a few equations short of independently discovering the Uncertainty Principle, which Werner Heisenberg came up with while studying Doji candlestick patterns of Volkswagen stock during the Weimar hyperinflation. Hesienberg's conclusion (my rough translation is from the original German) was: "Just as particles act to maximize their positional ambiguity at all times, so do prices on charts."



Once silver broke the top long-term blue trend line on Thursday, it ambiguously moved right below it on Friday, matching its high from last October, and thereby maximizing its freedom of interpretation to sustain hope in both bulls and bears. (Incidentally, this is why crossing points of two or three trend lines seem to exert such strong pull on prices; the maximal number of interpretations is kept in play for the longest time possible. It's physics...).

I'm going to make the bullish case here. First, we're still smack in the middle of the steep green 2012 channel on the above chart, so $34.50 should be a fairly robust first line of support this week. Now, as I mentioned a few weeks ago in explaining my bullishness, I think the lower blue trend lines (the dark blue line which completes the downwards channel, and the light blue line which completes the falling wedge) are no longer realistically in play; I don't think silver can be pushed below $25 in the case of the wedge, and below $19 for the channel. Given that these formations are now obsolete, in a sense, the silver chart has "given away" its hand. I suppose the red horizontal line at $26.50 is not yet out of the question (especially with JPM shorting like there's literally no tomorrow).
So lets look for more evidence to make our case. On the linear chart of closing prices, we see that the red line extending from the lows preceding silver's August 2010 explosion and connecting the December 2011 lowpoint creates a massive wedge and approaches $28.75, well above $26 and the other bearish lines on the previous chart. Moreover, in weeks past, I have drawn other horizontal levels of strong support that will each be difficult to break. So, in short, while of course nothing can be ruled out in markets (especially corrupt markets), I think the top blue trend line is due to be broken reasonably soon.
That said, I doubt it will happen this week. On the weekly chart, note that silver finally crossed the 34-week MA for the first time since September and stalled at the 55-week -- in similar weekly action to the last time the two MAs had completely crossed (see red boxes and arrows). So, though this week may show a lot of volatility, my guess for the weekly close is between $34.60 and $35.60, which will be the area between the 34-week and 55-week moving averages, in a pattern similar to 2009. Note that the grey zone on this chart also shows a stable floor at $30.
Here's an old long-term daily chart (now colorized) that I stopped posting last November, when it looked like the long-term green trend channel had been decisively broken. Au contraire. Silver has valiantly made its way back in there, such that $34.60 should be initial support with $32.80-$33 (in the green zone) even stronger this week.
Finally, the weekly "10-year yields measured in silver" chart argues against any major waterfall sell-off. It shows a lot of room for upside in silver (i.e. downside for the ratio, which bounced off the top of the purple channel again last week before falling almost 8%, still hovering near the top).
Gold just finished a really important week. Whereas the week before, we had ended right on the lower black trend line, so that a further decline would've been quite bearish (short term, anyway), three weeks of consolidation proved enough, and this week gold shot up a good $60. How much gold goes up or down in the next two weeks doesn't really matter so much as that its weekly finishes remain in the black trend channel (>$1755 this week). Of course, ceteris paribus, the greater distance gold creates from the black line, the more bullish the chart looks, and a visit to the center becomes more and more imminent (while the late 2011 tanking will look more and more anomalous, like the big correction proved to be in late 2008). The backdrop is of course the G20 meeting where our noble leaders will continue trying to hold the corrupt banking system together with duct-tape and string. Does anyone really think they don't care about the price of gold?
Finally the HUI looks poised to attack the top white line. In fact, it's behaving exactly as I predicted three weeks ago, which drove me to take profits Thursday, since whenever a plan seems to be working too well, I know it will invariably crash and burn (it's physics).

3 comments:

Duff said...

Excellent work, GM! Thanks for the work, and thanks for discussing the oft overlooked corollary between quantum physics and chart trends. Nice humor, but as Fat Tony once said when watching the brutal violence in an Itchy and Scratchy episode, "It's funny, because it's true."

Dr Durden said...

I'm getting confirmation on the upper TL break now on the daily. Waiting for a backtest hold to the support level around $34.50 on the weekly. Me, you and everyone's sister has been watching this for months, so it's up momentum could be huge.

GM Jenkins said...

Thanks Duff, and good early morning call Dr. D.

Note that silver looks like it will close today *right* at the trend line connecting peaks since April (see second chart above). Note also RSI is at 80. So, there should be a pause now, but will it be a correction thru time (trading flat as it has the last month), which would be very bullish going forward, or a price correction? I didn't take profits today which I am slightly regretting.