Friday, September 11, 2009

The Verdict May be In

I was confused. I can admit that. I was worried about the COT structure, and the level of equity and commodity prices. Long bonds were rallying and the dollar appeared to be stabilizing in the high 70’s on the US dollar weighted index. On the other hand, it has been a successful 18-month consolidation, with gold trading at the high end of its range. There was a picture-perfect reverse head and shoulders bottom, with its credit crisis low of 680 being the head, and its two identical shoulders registering lows of 850, gold’s approximate high in 1980. Daily trading ranges had begun to tighten, you could feel a break in some direction was imminent. Below 930, there was no support until 880, which was minimal at best, so the downside potential was significant. The deflation story had been gaining potency as credit contraction and deleveraging continue to occur. My bets were cautious as well. As I wrote, I had taken routine stabs at hedging out my physical position in the futures market. I knew it wouldn’t be long until a verdict was reached. Now, with silver’s penetration of 15.16 and gold’s penetration of 990, all downtrend lines from even the most long-term peaks have now been taken out to the upside. What does this mean?

I believe strongly that after an 18-month consolidation, a break of the narrowing technical triangle of higher lows and lower highs must be taken at face value, an extraordinarily positive achievement for the intermediate term. Gold has never recorded such an accomplishment and disappointed, except perhaps during the March, credit crisis inspired high of 1009. Some feel gold is setting the stage for a brutal head fake to the upside here. I cannot be one of them. I am choosing to follow history perhaps even more than reason. While the deflationary thesis seems credible, so does the inflation thesis, and has, as such, been the most difficult question of any for economists and market observers to truly “answer.” I will always respect the decree of the action, and gold’s recent drive through well entrenched resistance will certainly help inform my inflation/deflation thesis going forward.

Does this newfound optimism in the metals mean I am going to add to my position today or tomorrow? Not necessarily. Silver is mini-parabolic and is registering a 14-day RSI of 76, traditionally strong sell territory, and as for the COT, well, bulls will probably dread seeing next Friday’s report. While all of these factors could result in sharp drops from most likely even higher prices than Thursday’s, the drops will probably be caught. I have seen gold drives of the past like this one, where it ran and couldn’t even selloff more than 3 bucks before running again, and again. In all those instances, higher prices were in store two and three months out. Remember folks, while I’m not buying more silver before it corrects, 3 days after an 18-month consolidation is not necessarily late, as much as it might feel so to some. Taking a stab on the short side in silver makes the most sense with first resistance coming in at 16.95 and then 17.50. Those are the two prices in play, and they are conservatively higher. The objective would be a quick drop back to the 15s. Gold I will be more careful as it is not quite as parabolic as silver and upside bands of resistance harder to identify aside from its all time high of 1032 and the aforementioned credit crisis peak just short of 1010. For now, that’s all I have. Is it still possible this one giant head fake? Sure, there are ways to respect that and stay open to the overwhelming positives that this week’s action portends.

No comments:

Post a Comment