Sunday metals pre-game, 4/7/2013

Hello, friends --

Last week's action reminded me of late December 2011, when out of nowhere, following what should've been bullish news, the metals tanked. I called bullsh#t on that then, and I've done the same here, holding on to my position. Sometimes you gotta listen to the charts, but sometimes you just gotta protect your hand. Can gold really decisively break through it's 13 year (conservative) 99% trend channel after the Cyprus fiasco and the Bank of Japan's latest attempt at re-enacting Weimar?  

Go ahead, whoever the hell is pushing these markets around -- show me your cards. 

Whatever is going on, I suspect the Exchange Stabilization Fund (ESF) is involved. But what do I know? I like Warren's comment in a previous post:

[Re: common complaints about manipulation:] The observed effects don't tally with what is often presented ... the ones who really wield the power in the system do so from such a social distance that the little guys will never be able to comprehend what goes on  ... I am increasingly of the opinion that the nonsense will continue to expand, simply because humanity has opened the Pandora's box of complexity. Anyone attempting to describe such complex mechanics in his own perception (and within his own set of influences) will invariably produce stuff that we read on the silver blogs - sort of a 'Plato's cave' effect.

To perhaps help us to understand better the inner workings of the system through the prism of modern politics and foreign policy, it is now time for STFU to engage the services of someone at the center of such goings on. Or, at the very least, to recruit someone to regale us with tales of dodgy derring-do in the less travelled parts of the globe, and recount his experiences with the powerful, the great, and the not-so-good. To this end, I have recruited to the site His Excellency, Ambassador GM [Grey Mouse] Lemur, an old friend who has made it his business to be at the center of world events - to influence them for better or worse - and who has kindly undertaken to be STFU's Permanent Representative to the United Nations. Which, for a small(ish) blog like ours is quite a step forward, I think you will agree.

HE Amb. Grey Mouse Lemur will report back from the tropics, the deserts, and the snow-laden wastelands of frozen tundras in due course. Stay tuned.

Back to the metals ...

Despite the fireworks of last week, the "three line break" charts we've been looking at (see here for background) tell us that nothing all that significant has happened just yet. Note that on the weekly gold chart below, gold didn't even make a new red bar, as it finished the week higher than a weekly close back in February.  

And look at how remarkably "clean" the chart patterns have been -- you typically don't see that kind of textbook regularity. In this chart, corrections (red) all extend at least 3 bars, and therefore all have required a "three line break" to reverse. But, when the upside reversals do come, they have always had legs. It is thus encouraging that the last two red bars have been very small, meaning a three line break reversal from here will be easier. All that's needed is a ~$1615 weekly close.

Similar regularity on the silver weekly three line break chart. Here, too, all that's needed is a ~$28.75 close for a three line break.

And as far as the monthly charts are concerned, I've just re-posted the ones from my older post linked above (Feb 22), because they haven't changed. April would have to finish below ~$1450 (gold) and below ~$27.50 (silver) before any major reversal can be said to have happened. 

I don't think we're going to see that happen, so I remain cautiously bullish.

Finally, let me update my new indicator ideas (based on principal components) from two weeks ago.(See here and here for background.)

Starting with the volatility based "holy grail" indicator, as predicted, the second indicator (red) has indeed followed the first one (blue) down into negative territory. Note that this happened on Friday, which you can see on the second magnified chart below. When the red indicator follows the blue indicator into the red, it has always meant a big rally in the past (and in fact has reflected bottoms with precision).

My other second principal component indicator turned up (bearish).

I (carelessly) jumped the gun in my post when I wrote: "If gold drops precipitously from here without a strong move up first, that would be unprecedented."  Looking at the indicator, it's clear that it actually had to fall a little bit more before a reversal would have been unprecedented, and instead we got a false change of direction, similar to what has happened twice since November. In fact, the action is very reminiscent of the previous correction last summer (see red circles). Let's see how this all plays out. Next 2 weeks will be exciting.