Rise Of The Pigs

Scott and I were shooting the shit on gold and silver after the bell today as PMs are all the rage these days. You don’t have to be the most astute trader to realize that pretty much everyone is long the shiny stuff these days. These are the types of setups I truly live for – once everyone seems to know something I love to show up and start pissing on everyone’s parade.

And just like Scott I love the smell of bacon in the morning. However, I don’t think breakfast is ready just yet – to elucidate let’s look at some charts:
[amprotect=nonmember] Charts and commentary below for anyone donning a secret decoder ring. The rest of you guys will have to wait until tomorrow – sorry. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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This chart simply boggles the mind IMNSHO. Since October 2010 we have seen a 30% drop in the gold:silver ratio – if that is not a buying frenzy then I don’t know what is. So, it’s fair to say that the contrarian locked inside of me is waiting for a chance to slip out for some dirty deeds.

However…

The silver chart has been dominating gold and that’s where I’m getting my clues from. I agree with Scott that being short gold is probably the better choice of a victim, but I don’t think now is the time just yet.

So what we have here is a textbook divergence on the momentum side while silver is climbing higher but running out of steam. Today we saw quite a drop which shook out a few jumpy longs. But what’s more important is where prices stabilized and settled at the close – right at that former resistance line, which now seems to be serving as support.

Now I also know that a lot of PM bears have been waiting for a sign of weakness forever now and must be licking their chops right now. My intuition was that they would most likely getting positioned around the 29.5 mark (i.e. that support line) and also near the recent top.

I wasn’t too far off – case in point – the SLV February option chain – note all that activity on the put side near the money.

However, what many fledgling traders often forget (or don’t know) is that commodities and especially precious metals do not trade like equities. Well, actually traditionally they do not but most recently (due to Fed manipulations) movements in stocks seem to resemble commodities – but that’s another story. My point is that PMs have a knack for faking out contrarian traders and I don’t think this time will be an exception. So, what I think is going to happen will be a bit more whipsawing around for a few more weeks, as to give hope to the longs and shorts alike – this will really get emotions heated and you’ll see a lot of smack talk in the usual forums. Then, after the chumps have been kicked to the curb and the bus is a bit more empty I think we’re going to see a real retracement in silver, and in particular gold.

Bottom Line:

Don’t try to trade what everyone expects to happen here. Half the crowd out there expects gold and silver to run to $8,000 pretty much uninterrupted. The other half is probably betting on a slide into the abyss right here and now. If I can pull up a gold:silver ratio chart so can they. My take is a bit more indirect – I think both are wrong. Contrarians are as greedy as the pigs and I think both will be punished. A big drop will probably come when the least of them expect it – after a mutual shake out.

Cheers,

Mole