What are the technicals of a market that is trying to go straight up? Here we are talking about silver, of course, a market squarely in the crosshairs as April has already seen the largest “monthly” gain in the metal since…the Hunt brothers blowout. We also have a look at the more civilized gold market and its behavior.
It’s tempting to look at the weekly chart of silver below and decide that we have entered into a parabolic market where the price ramps by an ever increasing amount every day.
But as any equity trader looking at a longer term equity index chart knows, it’s important at some point to move to a logarithmic price axis once price moves begin to be measured in multiples of the starting price. A simple switch to a logarithmic price axis as shown below still leaves us in awe of the recent price move, but it appears far more modest.
What are the technicals of straight up?
Technical analysis breaks down to some degree when you have a market like silver has been lately, in which seems to charge higher day in and day out with almost no ebb and flow that provides many of the anchor points for traditional technical analysis, like support and resistance lines, etc... Also, most “time window” types of analyses (stochastics, RSI, etc.) can break down when the move extends beyond a certain number of bars and the concept of oversold and overbought can become a bit trite when the action has taken the price several times the daily trading range above some arbitrary overbought/overold indicator that is meant to suggest an extreme.
Technical analysis breaks down to some degree when you have a market like silver has been lately, in which seems to charge higher day in and day out with almost no ebb and flow that provides many of the anchor points for traditional technical analysis, like support and resistance lines, etc... Also, most “time window” types of analyses (stochastics, RSI, etc.) can break down when the move extends beyond a certain number of bars and the concept of oversold and overbought can become a bit trite when the action has taken the price several times the daily trading range above some arbitrary overbought/overold indicator that is meant to suggest an extreme.
There are a couple of ways to approach a viciously trending market in search of support and resistance or other signs that might indicate when the trend may be playing itself out. One simple way is to look for cyclical patterns and momentum patterns from the past to see how these have played out.
As we can see from the weekly spot silver chart displayed below, within the overall tremendous bull market in silver that has seen prices advance over 1000% from 2002 levels, there have been four bull markets (the last two are really one overall move) within the overall secular bull trend that account for the entire advance in the price of the metal over the last eight years.
The seasons aren’t what they used to be
It is very interesting to note a couple of things about the patterns in this market: first, cyclically/seasonally, we immediately notice that the first three bull markets all established important new 200-day highs in the first or second week of November and last until anywhere from late March to early May – a move connected perhaps to the seasonal gold cycle and perhaps the Indian wedding season, where heavy buying traditionally starts in the late fall. Unfortunately, this time around, the critical new high that initiated the bull market was posted in early September – a timing suspiciously coinciding with the US Bernanke led Fed hinting at the coming of the QE2 money printing scheme in late August. Indeed, the precious metals markets these days seem to have little to do with the old seasonal factors and more to do with the entire theme of fiat currency credibility and whether the US Fed will succeed in destroying the US currency with the printing press.
It is very interesting to note a couple of things about the patterns in this market: first, cyclically/seasonally, we immediately notice that the first three bull markets all established important new 200-day highs in the first or second week of November and last until anywhere from late March to early May – a move connected perhaps to the seasonal gold cycle and perhaps the Indian wedding season, where heavy buying traditionally starts in the late fall. Unfortunately, this time around, the critical new high that initiated the bull market was posted in early September – a timing suspiciously coinciding with the US Bernanke led Fed hinting at the coming of the QE2 money printing scheme in late August. Indeed, the precious metals markets these days seem to have little to do with the old seasonal factors and more to do with the entire theme of fiat currency credibility and whether the US Fed will succeed in destroying the US currency with the printing press.
Technical behavior most interesting
Beyond the seasonal argument and any possible fundamental drivers out there in the ether, there is also a technical behavior that is quite specific to silver – its tendency to accelerate beyond the established trend-line at some point, a development that quickly proves destabilizing and then eventually resolves quickly into a rather climactic sell-off and long period of consolidation. The acceleration tendency was certainly there in all of the first three bull markets, as the red circles show – particularly in the early 2006 market, and in two fits and starts in the big bull run in late 2007 to early 2008.
Beyond the seasonal argument and any possible fundamental drivers out there in the ether, there is also a technical behavior that is quite specific to silver – its tendency to accelerate beyond the established trend-line at some point, a development that quickly proves destabilizing and then eventually resolves quickly into a rather climactic sell-off and long period of consolidation. The acceleration tendency was certainly there in all of the first three bull markets, as the red circles show – particularly in the early 2006 market, and in two fits and starts in the big bull run in late 2007 to early 2008.
This time around, silver has established the steepest trendline yet compared with any of the previous bull markets, and in fact, even on a logarithmic price chart, the second leg (marked number 5) has proven the steepest. This last week of action has seen the largest deviation from the trendline – a development that bears watching in coming weeks for signs of further acceleration – if the chart quickly reverts to the trendline and stays “well behaved” relative to the established trend, the trend may continue even longer, but if we get another bar or two that sees a dramatic price acceleration beyond the trend-line, this would represent a “parabolic” move and likely pre-announce the end of the rally within just a few weeks of that development.
The key thing to note about parabolic moves is that while compressed in time, the price action can become almost unimaginably volatile, so (please, this is just an example/imagined scenario) the brave soul that shorts silver two weeks from now at a price of 73 dollars an ounce might be right in August, when silver trades at 53 dollars – but that won’t help much if he got stopped out at 93 dollars in late May… The Hunt brothers spike in early 1980 saw the price of silver do a similar dance – but it was quite a jig as the price doubled in less than four weeks from 25 to 50 dollars and then traded at 20 dollars about eight weeks after the peak.
Next week critical for precious metals
Another key note to keep in mind is that May silver options expire this coming Tuesday, 26 April (and the April silver contract stops trading the following day). One has to imagine that there are some enormous winners and losers holding these contracts, those who bought and sold at strikes that were unimaginably far away a month or more ago. In the meantime, there are endless reports of tightness in the physical silver market and emotion is running high. To top things off, the London Bullion Market Association, a huge presence in the physical market, is out for Easter holiday tomorrow and Monday.
Another key note to keep in mind is that May silver options expire this coming Tuesday, 26 April (and the April silver contract stops trading the following day). One has to imagine that there are some enormous winners and losers holding these contracts, those who bought and sold at strikes that were unimaginably far away a month or more ago. In the meantime, there are endless reports of tightness in the physical silver market and emotion is running high. To top things off, the London Bullion Market Association, a huge presence in the physical market, is out for Easter holiday tomorrow and Monday.
If that is not enough, we also have the FOMC meeting late Wednesday and further UK disruptions from the royal wedding in the UK next Friday and the following Monday. We have to imagine the price next week at this time will be … anywhere but where it is now?
What about gold?
Gold has been a far more staid market than silver, a bit less prone to the blowout rallies and subsequent blowout retreats, but the metal has also seen an enormous 350% advance since early 2005.
Gold has been a far more staid market than silver, a bit less prone to the blowout rallies and subsequent blowout retreats, but the metal has also seen an enormous 350% advance since early 2005.
Chart source: Bloomberg
We have drawn a linear regression to show that gold may be getting a bit expensive locally within the overall trend as it approaches the 1 standard deviation line on the upside. This assumes we don’t kick into a high gear scenario with panic surrounding the US dollar as QE2 expires at the end of June and the market gauges whether the Fed ultimately prepares the way for QE3. The stakes for all financial markets, especially precious metals, will be very high in the coming several months, not only due to the US central bank and the dire US fiscal straits, but also as the EU grapples with a refresh of its EFSF bailout mechanism at the June EU summit and all of the implications this could have for the sovereign debt issue there.
We have drawn a linear regression to show that gold may be getting a bit expensive locally within the overall trend as it approaches the 1 standard deviation line on the upside. This assumes we don’t kick into a high gear scenario with panic surrounding the US dollar as QE2 expires at the end of June and the market gauges whether the Fed ultimately prepares the way for QE3. The stakes for all financial markets, especially precious metals, will be very high in the coming several months, not only due to the US central bank and the dire US fiscal straits, but also as the EU grapples with a refresh of its EFSF bailout mechanism at the June EU summit and all of the implications this could have for the sovereign debt issue there.
Have a wonderful weekend and a wonderful holiday if you are taking one.
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