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Sunday, June 12, 2011

SOME THINGS NEVER CHANGE



I came across this chart comparing the last Silver crash to the current market condition, and I thought this was worth discussing. To give credit this is from the McClellan group and it was in a daily letter through Porter Stansberry's advisory service. I have mentioned I subscribed to this to get a regular dose of the doomsday stuff. I always like to hear extremes in both directions on things just to weigh what merit if any they might have. I am not a know it all, so I always want to consider that there might be something I have either missed or misconstrued in my analysis. At the same time you have to have conviction in what you are doing, so I look for the basic thesis of other opinions and evaluate them that way. I do think some of the things these guys are saying have merit, not so sure about some of the other things. They do have a couple of very good writers on their staff, Jeff Clark in particular. He is someone who knows how to trade, he is not just some dumb ass analyst like so many newsletter writers are.

One of the things that is always a characteristic of a bubble that bursts, is those who believe in the bubble not accepting what is happening. If we look back at the Tech bubble of 2000 and the housing bubble, they both exhibit the same thing. The proponents argue when things begin to unravel that it is a buying opportunity, and it is "different" this time. There was a chat portion below this chart in this article and every single comment was critical of the analysis and insulted the author. His basic thesis was that he was not saying absolutely that we would retrace this far, but just that the pattern was very similar and that he liked to use past patterns as predictive of future price direction. This is a very good way to trade and is for the most part how I approach things with a few differences. A bunch of unknown scrubs who likely never made a dime trading just killed him in the commentary. This is typical of when a bubble pops. The folks who have bought the bill of goods don't realize what is happening, and they just give away their hard earned shillings to those who do, and go back to work at Walmart broke again. Please be careful when you read these arguments written by people who don't actually trade about why something should go to a certain price, especially when the arguments are based on something that has no historical precedent. The end of the world scenarios could very well result in metals absolutely tanking just as easily as them soaring. Study history, you will see there is not a consistent relationship.

I really don't have any idea whether or not this pattern will repeat in the fashion shown. What I do believe though is that when we see the type of stratospheric move we saw in this market prior to it topping, we are likely seeing a high made that could last many years. My trading frames are shorter than this type of analysis, but I have studied blow offs for many years, and this certainly had the mark of one and I said so while it was happening. Overall, I think we saw the highest Silver price that will be seen in my lifetime, when that high was made.  That is just an opinion based on observing what Larry Williams calls the Fallen Angel pattern that is in place there. That pattern is characterized by a large spike up then back down. These markets tend to move sideways to down for years after these types of patterns, and that is why he calls them fallen angels. This is a textbook example of that pattern. As always do your own analysis, consider mine, and disregard it or accept it that is up to you. There was a sell signal on Friday in this market that I passed on because one of my filters I use did not confirm the trade, so I am flat in the Silver market right now.

Here is a market that is setup very well for a sell on the weekly chart, Natural Gas.





This is a market that has virtually everything we could ask for. We have very bullish sentiment, huge commercial selling, high valuation, high open interest, and a seasonal bias, all of which are bearish. It is hard to ask for a setup better than this one. Now, a setup is not a trade. I think people get confused watching the Larry TV videos or reading what I say about setups. A setup is just simply a fundamental condition that should lead to a move in a certain direction. That is much different than a trade entry setup, which is a shorter term pattern that is the basis for entering a trade. Natural Gas had an insane 1 minute bar the other day which makes the daily chart bars a mess. This market along with Cocoa are the two that seem to be the most prone to these electronic death spike bars, so you have to be aware of that when trading them. About every few months a bar with thousands of dollars per contract in the range will show up that lasts a minute or so. These bars can clean everyone out. Cocoa is worse, but that one in Nat Gas the other day was a beauty. I do think the way the chart looks that in a couple of days it is possible a sell could setup on the daily chart, so I am watching this one closely.

The Bernanke's are still in the same position they were the other day, just a bit more oversold now. Certainly if you are short it is time to have a tight stop. We may continue to roll over, but statistically there is a better than 80% probability that we bounce at least to a reading the in the 2 day RSI of over 70 on a closing basis. As a result, if I were short which I am not, I would be out at the first sign of trouble ( rally ). My stop would definitely be at Friday's high. It does appear the Bernanke 2000 has become the weakest index, and that is the broadest one. That tells us we have broad market problems here not just a few heavily weighted large caps that are dragging things down.

Talk about a Fallen Angel, how about Weiner? The obvious joke that I cannot believe some comedian has not run with yet is that NY has now taken Missouri's place as the "show me" state.

Good trading to everyone this week

1 comment:

John M said...

Gut says silver falls faster and therefore harder than the 1980 situation. Currency fluctuations back then were pretty small compared to today. The dollar rally is going to goose the selloff.

Maybe.