06 June 2010

Silver Charts and a Look at the SP 500 Long Term Cash Chart

Several readers have asked for thoughts on the silver charts.

Silver normally functions as both a monetary and an industrial metal. This provides it with a higher beta (risk variation both on the upside and downside) than gold, and a stronger correlation to the SP 500.

So if one is looking at silver, one first has to ask, what do we think the SP 500 will do next, and then, what will gold do next?

SP 500 Long Term Cash Chart

The SP 500 is at a point where it will either find a footing and break back high according to its longer term bull trend, undoubtedly with serious assistance from the monetary authorities and their banking cohorts, or it will break down further and activate a more serious decline and a H&S topping pattern.

My bias now is for further weakness to the downside, possibly even a false breakdown, and then we will look for the turnaround to gain traction IF volumes remain light and there is no panic selling.

If there is a further decline, let's see if it can hold the 1000 area where there is a long term bottom of the bull trend channel.

Silver Daily Chart

In the short term silver appears to have further downside. How much is a very open question.

If and only if the SP 500 falls out of bed and there is a general liquidation of assets, silver may trigger a short term H&S top and fall down to the target area in green. There it is likely to be a singularly attractive trading buy, but we would have to look at the overall market landscape and the Fed's monetary actions.

Silver Weekly Chart

The weekly chart appears much stronger than the daily chart, suggesting that if there is a breakdown it might be short term, and look much worse on the daily chart, an intra-week spike down on the longer term chart. Again it is hard to say because the SP 500 is such an important variable in this.

I doubt very much that silver and the SP 500 will diverge. Gold however is more likely to diverge from stocks if it comes to that.

I have some confidence in Ben's and Timmy's willingness to sacrifice the dollar and the bond for stocks in the short term, and the US bond appears to be topping. The dollar DX index is looking toppy, but as I have repeatedly said this index is badly out of date, being so heavily weighted to the euro and the yen.

The way I will play this is in the obvious paired trades with little leverage and a short term bias until the situation clarifies. There is a distinct possibility that stocks, gold and silver all go up from here. These market are being driven by artificial liquidity, largely based on thin volumes, carry trades, and technical gambits by the big hedge funds and trading desks.

When you are playing in a rigged casino, don't be all that surprised if your 'systems' and indicators do not produce the usual, or even normalized, results in the short term. The intelligent individual response is to stick with the primary trends, based on fundamentals and the longer term charts, and tighten your leverage and lengthen your investment timeframes.

Or even better, stay out of trading altogether. It is a con game these days, especially in the English speaking countries.

Here is a news piece from the City that is worth reading: Why Rothschilds Is Piling Into Gold

This tracks closely with some information I had from some big private money people in the States, particularly in the old money northeast US.