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November 17, 2009

Ending Moves

Silver gave us our breakout, and in a big way. The path appears clear for a test of the $19.50 pivot, but headwinds appear to be growing, not the least of which is the fact that gold tagged the triangle target of $1140. In fact, the action in gold seems to rhyme quite well with its behavior during the 2007-08 run.

daily gold chart

There are distinct differences, of course. The 2007 triangle breakout carried price much further than the triangle target. The current breakout, on the other hand, is also slave to a much larger consolidation going back to the end of the 2008 parabolic run. It is this larger consolidation which will provide a foundation for our anticipated 2010 move, and like the 2007 breakout, I suspect price will handily exceed the $1350 target.

daily silver chart

So let's get back to why we could be experiencing ending moves. It has been my contention that the dollar would form a sharp countertrend rally late this year to set up our parabolic run in precious metals into next spring. We've seen a couple of false starts, but we could be on the cusp of such a bounce. The dollar usually ends declines with at least 3 days of sharp selling, and those days typically come on the heels of a head fake higher.

dollar index chart

The last two instances saw three days of selling, leading into minor-wave corrections. The next countertrend move should be of an intermediate nature, meaning a countertrend rally separating two 5-wave declines. As such, we may see more than three days of selling in the buck. If so, silver may hit that $19.50 pivot, after all.

nasdaq-100 daily chart

russell 2000 chart

dow jones transportation index

So here is the thinking. I suspect we'll see several more days of sharp moves higher in equities and precious metals, followed by hard selling. The drops will be most vicious during the first week or two, especially in the PMs. While gold and silver form consolidation patterns... perhaps triangles like the 2007-08 run... stocks will suffer severely enough that the major indexes will not set new highs during the spring bounce. Stocks will also roll over sooner than metals next year, and this action will fuel the parabolic run in metals as hot money chases the best-performing asset.

At this point, I'm not too concerned about whether we see more strength presently. My focus is on positioning for the parabolic run. Last week I hedged by writing covered calls against my GDX position. I am also lightening up on my silver trading position. If stocks do, indeed, spike for the next few days, I will use the strength to hedge further by shorting the R2K since it is relatively weak.

The trick comes in re-entering positions and getting leveraged at the right time. I will take one of two developments as my sign to do so. The first would be a tag of the 200DMA by the DX. The dollar index did not manage to get back to the 200DMA during the 2007-08 run, so I'm not counting on it here. The second development would be a breakout from a consolidation pattern by either gold or silver.

There is actually a third scenario, but it is a difficult one to execute. If, after roughly 6-8 weeks of consolidation, we see a severe panic day in silver, I intend to buy into it. Such panic days tend to immediately precede price launches in the PMs. The trouble is that it is hard to define exactly what constitutes a panic day, let alone have the nerve to buy into it. Since my confidence in a coming parabolic run is quite high, the nerves should be under control. I've successfully executed this manouver twice before in this bull market. So the remaining trick is just to recognize the day if we see it.

 

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