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Silver has surely had a wacky two weeks. In fact, if
you count the rally from the December 2012 lows, it has had a wacky 2 months.
In this post I attempt to provide you with some key areas to watch for
heading into this all important week for the metals. Remember, the FOMC meets
Tuesday. We will see what they have to say. Anything they say regarding
potential easing will move the metals, up or down depending on their tone.
I’m personally still leaning to the latter.
The Line in the sand for silver appears to be the
200 day moving average indicated by the red line moving across the chart.
We’ve had 3 stabs at it that all failed until it shot over it last week
only to be flatly rejected.
Interestingly the action in silver has formed a
potential bearish head and shoulders pattern and again, we are close in the
right shoulder to hitting that 200 day moving average that stands at $34.90
SPOT. Elliot Wave analysis showed a stopping point for the silver rally off
the sell-off lows between $34.00 and $34.50 and it reached that potential stopping range last Friday before
reversing and really failing to advance higher.
This is critical week. The FOMC meets Thursday and
any word or hint about QE3 will send the dollar down and the metals up.
However, I am of the view that the US dollar has started a rally that should
take it to 84 on the dollar index which spells bad news for precious metals.
I think that volume
always precedes price which is why we need to still respect
the high down-volume day highlighted on the chart. In my current opinion, the
200 moving day average is going to be the battle ground but, as early as
Tuesday we could get a major move down in silver if the FOMC says that they
will not be printing money.
Remember the clues are all around us if you look for
them. On February 23 I advised you that Federal Reserve Dallas FED president Fisher said
in plain English that any thoughts about QE3 were “wishful thinking”
and a “Wall Street
Fantasy”. Bernanke pretty much confirmed those words on
the day silver and gold took major hits made no comments about QE3. It is
unlikely he will mention it this Tuesday either given the improving state of
the US economy. Remember, this is an election year… whether we believe
the data coming out of the US is real, Obama needs to head into the election
showing that inflation is in check. Don’t expect any QE3 announcement
in an election year.
The only positions I have on are 300 free contracts
of the March $31.00 SLV puts. You will recall we opened those on the rally
following the crash day and they doubled in 1 trading day. We used the 100%
gain to take our capital off the table and are now riding free options.
I do think that silver breaks lower this week. The contra trend rally has in my view ended and we should see silver
break to the downside again this week… that is, unless the 200 day is
breached with conviction and if spot can get past $37.58 taking the H&S
out of play. The neck line is $32.50 and if it is breached, we will see sub
$30.00 silver in no time at all.
If we take a look at the 2 year chart in silver you can see that silver still remains
in a downtrend.
 
It has tried to break above the top line of he down
sloping channel but has failed to do so, making lower highs and lower lows in
the process.
Until the 200 day MA is taken out with conviction,
we may see the bearish head and shoulder pattern that is taking shape,
identified on the chart 1. I placed question marks in the first chart because
the shoulder, while clear, is still taking shape. You can chose to place your
positions now speculating that the pattern will formulate or you can wait for
a clear breach of the neckline only making a move on confirmation of the
break.
There you have it. Two scenarios are still in play
and I do believe they hinge on what the FOMC says this Tuesday. The
pattern sure looks like it has formed itself with that meeting in mind
because by Tuesday we should see a break down or a bullish break above the
200 day MA. The gaps put in place have now been filled so we need not worry
about those. In particular, I am talking about the Monday gap that opened
silver below the 200 day MA and did not get filled intraday.
As for the U.S. dollar, I see a potential “bullish”
inverse head and shoulder shaping up that could indicate a move up in the
dollar is shaping up. We will need confirmation. However the RSI is turning
up and the MACD still shows upside momentum.
Forget what people are telling you about the smashes
and the perceived manipulation. Play the actual news (not the spin on it) an use the charts as a tool (guidance). Nothing is ever certain,
that goes for technical or fundamental analysis but with a look at everything,
including the real news, not the interpretation of it, you
can try to stay on the right side of the markets more often than not.
Keep your eyes and ears open for hints about what
central banks say regarding the potential for more easing but bear in mind as
well that this IS an election year and the government must confirm that the
economy is improving in order to keep Obama’s second term in clear
site. A strong dollar, low inflation and the portrayal that things are
getting better is what the administration needs. For the time being, those
signals alone may keep silver in a tight range (as all other commodities).
Regardless of your views on fiat currency, remember,
in a world of “horrible” fiat options, the U.S. dollar still
remains the best of the bad lot. Until a significant break above the
down-sloping channel for silver, it may be difficult to make a strong
conviction buy on the metal. Do not for one moment ignore
the relevence of the major sell volume that
occurred when Bernanke last spoke. The rally off that crash has been less
than inspiring so this week will give us clearer direction on which way
silver in particular is going to move. Watch the aforementioned indicators
for additional insight.
This information is not intended to be a recommendation
to buy or sell and is for information purposes only.
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