Eidetic Research on Silver April 20 2011

Here is the latest technical analysis on silver with the assistance of Eidetic Research, our institutional-level technician. The lack of posts on Silveraxis during the past few months have been in large part due to being busy at Metal Augmentor (new website design to launch soon) and partly out of deference for giving the silver move some space to play out. We are now coming back because this rally stage of the market may be in the very latter stages. More stuff will be posted soon.

We’ve had some recent discussions with our market technician partner at Eidetic Research in order to help us gauge the current situation in precious metals and other markets with an emphasis on silver given its notable recent behavior. While our own outlook will always remain our own, we are heavily influenced by Eidetic’s technical and market observations. The reason is simple: the analysis is more useful, apt and accurate than any other technical work out there. With the above understanding out of the way, we’ll paraphrase and embellish Eidetic’s views below. Our own supplemental and dissenting thoughts will be presented in separate market updates to follow.

According to Eidetic Research, there is not a huge amount of insight that can be gleaned from near-term gold or silver at the present time that the charts don’t already make rather obvious. Tellingly, a $41 area swing target for silver didn’t contribute much to the recent price action as the moon metal powered through the low 40’s range and is now within striking distance of the January 1980 all-time spot market high of $50-something. Last Monday’s top reversal from around $41.70 could have threatened the trend but a lack of follow through and then an upside reversal into Thursday with a new bull market high on Friday revealed just how strong this market is currently. Unsurprisingly, the price action to end last week has translated into aggressive buying of silver into early this week.

Importantly, the recent exuberant performance by silver has not undermined the market. Indeed, there are presently no specific nearby price levels below which silver would need to drop for there to be lasting technical damage. Overall, silver appears to be in an accelerated third wave of an even larger wave three — what Elliott wave theorists call a “third of a third” (i.e., Wave 3 within larger Wave III of the sequence that began in 2001).

Silver should continue to outperform gold until it no longer does — in other words, there is no nearby ratio of gold to silver that has technical significance. That said, there could always be a bounce in the ratio if silver hits a meaningful downdraft in the short term. Even with the technically overextended conditions, however, silver is telling us in the macro scheme of things that eventually it will narrow its ratio to gold to the 15-17 area (around where the 1980 top was made).

On its own merits, gold still looks good as well. The gold market has put behind it a huge amount of resistance in the 1420-1440 area during the range-bound price action from last November to March and this fact should support further gains. Turning short-term neutral to negative might be warranted if spot Comex gold were to close below 1410, thus returning prices to the November to March range.

A couple of thoughts by Eidetic Research on other markets: the Japanese yen blow-off the night of March 17 to 129.57 on Globex — about 77 in the cash JPYUSD — appears to have been a “major, major” turn. How major? Possibly reversing the multi-decade yen/dollar trend that has been ongoing since a 1950 cash high at 620 yen to the dollar! U.S. Treasury bonds still deserve a bearish outlook even though that view now has a lot of company. That market has an outside chance for one last neck snapping runup to the 126 area basis spot month Chicago T-Bond futures, but longer term, bonds likely have a date with destiny down in the 85 area — the level where they traded in 1987!

Now for something a bit more specific on silver that could potentially have immediate implications even if it tells more about the past than the future. The following chart represents a method to target price levels that Eidetic has used in the past to generate very long-term, high-probability market objectives. For example see the recent work on commodities and other markets

We’ll let Eidetic explain the above chart in words dating from 2007 (the above chart has since been updated but it was unnecessary to update most of the explanation):

The majority of technical analysts will agree that uptrends consist of 3 well defined advances.  In major bull moves we have observed that those advances are often comparatively related.  Our experience is that the size of the initial advance sets the standard for the subsequent 2 advances.  We have found that typically, when the initial advance is considered as a baseline of 1 then the second advance will reach to a level approximate to 1 and the final advance will reach a level that approximates 2.

In the above silver chart, we have drawn a major uptrend line (A) below the lows of  1971 and 1993.  Subsequent intermediate term lows in 1997 and 2001 were in the general area of that trend line, thus validating it.  We subsequently paralleled a line (B) from the 1974 high to define a long-term channel.  Notice how many intermediate term price highs and lows, both backward and forward in time,  occur in proximity to that mid-channel  line.  We infer that line as corroborating the channel.

As the ongoing uptrend from the 2001 low matured, it underwent an acceleration phase as prices cleared the top of the A-B channel.  Typically an upside channel exit accompanied by increased momentum will carry to a distance equal to the vertical height of the channel.  In this case, that potential was achieved when prices traded at $15.11 in May 2006.  Our interpretation is that $15.11 marked the top of the first advance in what is a long term uptrend series.  Therefore, in our view, the distance from line A to line C determines the baseline of the series (A –> C = 1).  Observe the classic pullback to line B following the 2006 high as well as the failure of price weakness to carry back within the A – B channel.

That was written in 2007. Eidetic Research then went on to say that the next expectation for upside potential in the silver market was in the area of Line D,  which is drawn parallel to the underlying A and C lines and at a distance from C equal to the height of the A-C channel.  (C –> D = 1).  That would put upside potential for the subsequent advancing phase in the $26 area with some consolidation around the halfway distance from line C to line D, which is around $21. This in fact appears to have been very close to target as well. Indeed, the last update on silver from Eidetic Research was made in early September 2010 as silver was staging for a move past this very level.

Eidetic Research finishes by pointing out that ultimately the third advancing stage of the current cycle should reach the area of line E, presently just under $45, which is drawn parallel to line D and at a distance equal to the height of the A – D channel (D –> E = 2).  Notice how, if line E is extended backward in time it crosses near the top of the 1980 blow off phase ($50.36 on this chart which features the inactive January 1980 COMEX futures versus the actual high of $41.50 basis the active front month March 1980 silver futures).

So what does this all mean? For one, that silver has achieved this week a very significant, long-term price objective even without having taken out its all-time-record-high nominal price. Silver could hesitate here or perhaps even pull back in deference to the technical pattern although it could just as well power through on its way to a level that defies all attempts at prognostication. There is certainly nothing at this point to suggest that silver in the longer term will find it hard to achieve further gains.

Tom Szabo

Silveraxis.com

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