The Greatest Trick The Devil Ever Played

There’s no central theme to this weekend’s update – consider it one of my ‘Mole goes eclectic’ posts. I’d like to kick things off with some musings on gold and silver. Despite a rather painful correction it continues to be on everyone’s mind. And thanks to a continued and systematic currency race to the bottom across the board precious metals are guaranteed to remain on the forefront of anyone aware of being subjected to the hidden tax on the ignorant, a.k.a. inflation. They say the greatest trick the devil ever pulled was to convince the world he didn’t exist.

Well, I think the devil (or Kaiser Söze) may a piker compared with the likes of Bernanke and Greenspan who both convinced the world that rampant inflation via quantitative easing would be something to be desired or at minimum of long term benefit. Of course to us traders all of this may be academic but if gold and silver are considered the last vestige of safety from inflation then we should expect it to remain a crowded trade – on both the up or downside. As speculators we concern ourselves with how to take advantage of crowd behavior and with that in mind let’s look at some pertinent charts:

When it comes to charting gold I usually refer to silver as it provides us with a lot more context, in particular in recent years. You may recall this chart from a little over a year ago when I made a point about silver having gone exponential. The ensuing shake out was just a matter of time and not surprisingly it’s been a sea of tears ever since.

Of course this was not the first time silver went exponential – as a matter of fact it has happened several times since the mid-nineties. And each time it was followed by a rather thorough correction. The point I’m trying to make now is that each and every of these corrections led us below the 61.8% fib line – sometimes a lot lower. Now I concede that there are dozens of ways to slap some retracement fibs on this chart but either way it should be clear that the current correction has thus far been rather mild when compared with previous ones.

Now the problem I usually have with charting gold should be pretty obvious – since the Greenspan put around the turn of the century it’s been running the most memorable short squeeze of a generation. And that’s not really helpful as there’s not much to hang our hat on. However, when considering silver’s rather distinct retracements it made sense to put the two into context. Although it’s not the most obvious chart you’ll find it does seem to suggest that there is a cycle to things, even with gold. In other words – if you want to know where gold is heading long term then look at silver.

Now here’s the same view but with silver against the silver:gold ratio. And it is here that things are coming a lot more into focus, wouldn’t you say? We we have a pretty well defined long term channel which may aid us in timing long term buying and selling opportunities of the shiny stuff. Currently this chart continues to leave some room for a continuation of this correction. If the ratio manages to drop toward 0.0160 then it may be time to start accumulating some physical but until that happens I remain pretty long term neutral (which means I only play the short term via my charts).

With that in mind let’s look at the P&F charts on both gold and silver – after all they treated us very well last year:
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And it’s not looking exactly bullish here – descending triple bottom breakdown on the 4th and a continued bearish PO of 1560. Of course we could drop quite a bit lower here – this is just a guide.

The LT panel suggests that 1638 needs to hold – a drop below that mark and we breach a medium term support line.

Silver – pretty much the same story – also triggered a descending triple bottom breakdown. And the price objective would get us back to a long term support cluster near 26.5.

I told you guys it’ll be an eclectic post and here’s one I definitely wanted to throw in the mix. In recent days the Dollar has managed to push higher, even breaching its 100-day SMA and thus signaling a long. However it now is facing considerable medium and long term resistance  and I can’t help but question its ability to overcome the 25-week SMA, a weekly NLBL and the 100-month SMA. It’s exactly where it failed the last time and until we see a breach we have ourselves a medium term short setup here. Believe me – I would love to see this one snap higher and being short here is a great way to hedge against continued inflation.

SPX – double top breakout on the first trading day of the year. Our new bullish target now is 1600. You may recall that we also reversed bearish PO as we pushed above 1445.

Here’s one I haven’t been showing for a while but once again it’s time for an update. My CPCE Deluxe chart is once again approaching its reversal line. In the past few years a touch of that diagonal was preceding a meaningful correction. We are not there just yet but I wanted to put it out there ahead of time.

Let’s finish up with an exotic one. I looked at the BDI today and noticed that it was once again scraping the bottom of the barrel. Now that’s however not the focus of this chart – it’s another observation which is that apparently there is usually a seasonal drop on February. Now whether or not this affects the tape is another question – apparently it does not as I don’t see a firm correlation. So why share it with you guys?

Well, because if we make another low in February you’ll probably once again hear about the BDI and the corroding state of Western economies from all the usual suspects (sticking with the initial theme). And parallels will be drawn suggesting that a major market correction will have to be just around the corner. But from what I can gather the market seems to care as much about the BDI as it does about J.Lo’s impressive backside. Apparently quite on the contrary – it now feeds off the fact that QE initiatives in one form or the other will be here to stay through 2013 and probably well beyond.

Cheers,