Phase change

Greetings from Memphis, friends. Might head to Tunica for some poker. Hopefully I'll have better luck than last week, when I bet that the medium term trend channels (and some very long term ones) in silver and gold would hold. They didn't, and there's been serious chart damage, no two ways about it. Now, I think ultimately that's a good thing, which I will explain below.


But first, let me say I suspect it might be naive to think we're near a bottom, as I've been hearing here and there. I mean, far be it from me to call Jim Sinclair naive (he thinks the recent technical damage is a false move that could quickly be erased with a quick recovery of the 200 day MA). But in my view, this weekly chart speaks for itself:


Also, keep in mind, even in a best case scenario, you gotta believe the 200 day and then the 144 day moving averages will be massive resistance.


With silver, all the long term charts that have been serving me so well have also, finally, failed. Going, then, to the monthly chart, please pay attention to the 2 year moving average (green).


As we approach the end of the month, a December close under $31would be ominous.


The daily chart suggests that $28.50 will continue to be support, and note the red dotted line connecting the two low points from September and last week. If we can stay above that, forming the lower half of a wedge that approaches $28.50, my intuition tells me that level may serve as a jumping board for a push back up into the mid-thirties. But again, the damage has been done and all bets are off.



I think we've reached a critical state in the metals markets, and we're on the verge of a phase change of sorts. We can perceive the steady increase in prices (especially over the past 3 years in gold, which seemed almost certainly "assisted," and thus rather predictable) as the heating of a boiler with a steam valve. Whenever the risk of overheating seemed imminent, the price would fall back to a predicable trend line (~27% growth) and start again.


However, the mania stage of a bull market is a massive explosion, impossible without a shut-off steam valve. (Note that a gold mania is a doubly exponential function, having both fear and greed as its drivers). Alternately, perhaps the heating will slowly come to a stop, and the boiler will cool down? This directional uncertainty is part of what we can expect during a phase change, and it's been missing so far, as gold has ascended steadily but surely for years now.


Obviously, I'm betting on the explosion, so an end to this controlled (perhaps literally controlled) ascent is not at all unwelcome to me. I should also add that I think technical analysis is less useful during a phase change. I mean, if everyone offers a prediction, someone will be right, but it's a lot like guessing which snowflake will trigger an avalanche. So in the next few months, I'll probably spend more time looking for interesting out-if-the-box charts (and sharing other sundry ideas) than trying to guess PM price movements, which to me now seems like merely trying to predict if and when QE3 will be announced and other similar things out of our control and sight (e.g. when will the Wynter Benton group finally bust the COMEX??).

6 comments:

Warren James said...

Time for silver to be beaten up. Just watched it get smashed down near $28.70, that is just depressing - hopefully the rout stops at above suggested $28.50 support level. While I'm fully expecting the London morning rally, this is close to shaking me out (the f'n volatility).

The last couple of discussions have been great and I think we're on the verge of uncovering really important stuff. I agree with you that the price indicators seems to be purely a game and have nothing to do with fundamentals. Price discovery is dead. Long live price discovery.

Warren James said...

... what I mean of course, is that while I realise the price is the price (i.e. sum total of all inherent market factors visible and invisible), the price action just seems distorted and surreal.

Jeanne d'Arc said...

Re gold: the 144-day moving average was particularly compelling because 144 is a Fibonacci number. Perhaps we will now move to following the next number in the Fibonacci sequence, i.e. the 233-day moving average...

Or perhaps I should just get out more...

GM Jenkins said...

the price action just seems distorted and surreal.
I wonder if some of our veteran readers could comment on that. I agree that's how it seems. Think about it: if you drop the 5 best and worst days of the past year in silver, the price would be well over $40, or +50% higher. How many other commodities, especially those in a long term uptrend, have traded like that historically, year after year?

GM Jenkins said...

Perhaps we will now move to following the next number in the Fibonacci sequence

That's pretty brilliant. The 233-day was originally support a week or two before the 144-day first was, in early 2009. Almost three years later, it is support again now (though ever so slightly breached last week). Something to keep in mind anyway ...

Swampfox said...

Hi Guys,

Here is my guess. There has been a controlled decline in the price of both metals but we are also entering into a delationary period similar to what occured in 2008. If I were the TPTB I would not print until the world was absolutely screaming for it to happen. This means that if the metals are pushed into weakness say by a series of margin hikes leading up to a massive deflationay cylcle before a period of money printing then you could make them appear very very cheap and make there future assent seem less severe. This is a big game of perception management.

Commodities will get a hell of a lot cheaper from here if I am right. Then they will become very scarce and very expensive. Once the TPTB let the printing presses rip I dount they will be able to keep a lid on things as tightly as they have. So keep your powder dry.