It's Clear - Just Upside Down

By: Erik Swarts | Wed, May 9, 2012
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For the better part of the past year, I have maintained a bearish perspective towards what was once one of the more favorable corners of the market - the precious metals sector; more specifically - silver. This was largely due to a confluence of conditions, namely;

  1. The extreme outperformance of silver versus gold through the first half of 2011,
  2. Major pivots in both the U.S. Dollar and the Euro, and
  3. The underperformance of China's equity markets

And while I am still skeptical of silver and gold's prospects as well as our own equity markets over the longer term, their immediate prospects look quiet compelling - should the price and momentum patterns unfurl as I believe they may.

Essentially, many of the key asset proxies that comprise the risk on/off formula - gold, silver, the silver:gold ratio, the Australian Dollar and the Shanghai Stock Exchange, all present distinctly inverted head and shoulders patterns, as well as secondary momentum signatures, that indicate to me - a violent reversal is approaching in the coming sessions.

Leading the way, the Shanghai Stock Exchange has already completed the right shoulder of its inverted head and shoulders pattern. Not surprisingly, the silver:gold ratio has trended very closely over the past several years with China's appetite for risk. I believe the silver:gold ratio, after completing its contractual agreement with structure - will continue to follow the SSEC, which should put a tailwind behind both the equity and precious metals markets going forward.

Shanghai SSEC SLV:GLD

SLV:GLD Ratio

SLV Daily

GLD Daily

Teh Aussie (FXA) Chart

All of the assets mentioned above have momentum profiles very similar to the inverted head and shoulders chart of the SPX from last year. I believe we will see a similar reflex trajectory develop as we spring out of the bear trap that is the right shoulder of the respective patterns. Shanghai has already made the turn, the remaining assets should follow in the coming days.

2011 SPX (hourly)

Considering where the equity markets and these bellwether assets are currently situated - it may be the first year in three where "Sell in May" is no longer the perennial market maxim.

As always - stay frosty.


 

Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

Copyright © 2011-2014 Erik Swarts

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