That Magic Number
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, June 2, 2014.
Well, we're there - we touched that magic number - 107 - last week. In reading my last post on this subject you would know that 107 is very important Fibonacci resonance based resistance on the S&P 500 (SPX) / iShares Silver Trust (SLV) Ratio, where a two-day close above 107 would signal a move to somewhere between 115 and 145, and a de facto crash in silver. And you know what, although I thought this was unlikely last time this prospect was examined, I must confess, now a breach of this resistance appears possible. Read on to find out why.
Why would that be? Answer: In a nutshell, it's because of the mania in paranoia and risk avoidance amongst broad market players that continues to add to hedging strategies against equity portfolios that keeps the perpetual short squeeze alive and well, and the bureaucracy's price managers (a broad swath of hedge funds fall into this category either trading 'official capital' directly, or their own capital in sympathy) license to unleash the computers on silver (precious metals). We know this from the short selling / put buying activity discussed in our last meeting, again, which is the result of the present mania in fear. Of course this fear is not just about stocks going down, it's also the fear of missing out on further upside in stocks, where market participants (think crazed and speculating hedge fund managers chasing performance so they don't get fired) don't actually sell stock when they think a correction is possible, they hedge exposures, which fuels the lunacy. (i.e. short squeeze.)
So, it will be interesting to see what happens to short ratios and open interest put / call ratios moving forward now that we have reached that magic number. Naturally, a correction should be expected since the SPX / SLV Ratio has now reached the mark, not to mention the fact a large ascending triangle (wedge) has formed off larger degree waves 3 and 4 denoted in Figure 1 (see below); however, as long as speculators / hedgers keep shorting the broads anything is possible until these positions are burned off, which would mean further squeezing higher. And in checking the key open interest put call ratios we follow, it should be noted noticeable increases have occurred since last week in SPY, DIA, IYT, and drum roll - QQQ. There is just no helping these people, many likely playing the leveraged ETF's and options due to unbridled greed; a phenomenon top-level industry insiders are becoming increasingly concerned about. (i.e. if everybody goes broke speculating in the market, they will have no suckers left.)
Short interest is out now too, with updated charts attached here. Given this data is two-weeks old it's obviously difficult to draw hard conclusions based solely on these readings, with the performance of the markets last week, one could easily conclude that the overall sentiment profile is likely still supportive of further extremes. Therein, overall short interest profiles in the key markers we follow have not changed in material fashion since the last reporting, leaving room for further gains in stocks, and losses in precious metals. One thing is for sure, there is no squeezing potential in precious metals (this changed right after this report), right from key ETF's to the shares themselves despite the beatings these things have endured these past years; so again, I come back to the conclusion that it will take some sort of outside shock, perhaps a supply shock, to change things for precious metals moving forward. Or perhaps just the stock market topping out at some point in coming months will be enough (which looks probable if history is a good guide). Who knows right? But one thing is for sure, if no shorts show up to support precious metals prices after a surge, sustainability becomes the question.
Of course you can't blame speculators for betting the way they do, because the news just keeps getting worse, so they short stocks (buy more puts), and but what they think are precious metals (but really only paper). Heck, even the so-called pros are doing this now as well, which is the next set of newcomers being squeezed out of stocks. GDP comes in down 1% in the first quarter last week, a figure that would have sent elevated stocks reeling in previous times, and the cash SPX was up right into the close on Friday, taking the SPX / SLV Ratio to important Fibonacci resonance related resistance at 107 on the last day of the month. (i.e. think window dressing.) What's more, such an announcement, along with what this likely means for the future, would have also sent precious metals soaring as well, but this conflicts with the establishment's official story line at the moment - so it was ignored. (i.e. which is easy when stocks are getting squeezed higher.) (See Figure 1)
Nope - they just won't hear of it. The consensus view is the economy is going to grow at 3% this year, and that is that. Oh and don't forget about Europe, which has very capable bureaucrats managing the situation over there too. Because the ECB is going to loosen things up this week, which means the US is relatively strong, which in turn means the dollar($) should be stronger, which in turn means precious metals should be sold. That's the official script. That's the Kabuki theatre. That's all that matters don't you know? That's why the SPX / SLV Ratio can blow through 107 once paper silver longs begin puking up their positions, which still looks likely for small speculators in Chicago silver. That's why it can go to 115 now, minimum. RSI broke out on the charts last week, so after a correction (that may never arrive if enough speculators bet on it), it should be off to the races again. (See Figure 2)
But the economy is not going to grow at 3% in the second quarter. In fact, according to John Williams at shadowstats.com, GDP growth has been negative since 2005, and it will be negative again this year too, possibly accelerating its decline in the second half. This is why the penitent are looking for a cycle low for gold in July, as it will become evident to growing numbers mainstream estimates for growth this year are complete rubbish, and an re-acceleration of currency debasement (QE, etc.) will be necessary to support the economy. With the SPX / CBOE Volatility Index (VIX) Ratio closing the month with the sine target fan, as per our comments on this subject last week, what you should expect now is a blow-off into July in both this ratio, and the SPX / SLV Ratio, setting the stage for reversals into the second half, again, largely because even the severely debased will be forced to change their views on growth soon rather than later. (See Figure 3)
For silver, as you can see above, now that its broken below structural support at $19 (it might need to test what is now resistance at $19 thoroughly [meaning higher] before moving lower) this means it appears long-term support at $17 (to set the larger degree B wave) is now in our sights, as a function of the inter-market relationships discussed above. And there are more technical relationships that support such thinking, however for our purposes, keeping it simple is desirable given all the confusion these days, leaving us in the penitent camp, waiting for better opportunities in late June or July. I really don't know what else to recommend, because both stocks and precious metals can be expected to blow-off in opposite directions until then, where we know from our sentiment related work that such moves are in fact quite possible.
It's a blow-off in the most profound collective mania in human history folks; so again, being patient is the only prescription. Because as you can see in Figure 3 above, using the white metal as proxy for the precious metals sector, if $17 does not hold for silver, it could fall to the 78.6% retracement at $13.80, erasing all gains over the past ten years, before a trend reversal could be expected.
And this could all occur over the next 5 to 6 weeks - believe it or not - but perhaps longer now that we have all this speculator front running of anticipated seasonal strength in precious metals next month.
Remember, a two-day close above 107 in the SPX / SLV Ratio would signal the blow-off is on; and conversely, a two-day close below the large round number at 100 would mean the party is over for stock market bulls.
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