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February 4, 2010

Violations

Okay, let's cover the bad news first. During this intermediate decline, the market has thrown us curves, drawn us gold bugs into trades too early, and then dispensed more than a moderate amount of pain. However, until today none of our big picture expectations had been violated. With today's monster decline in silver, though, we are facing quite an unusual situation for a parabolic run. Silver has not seen a single-day decline of this magnitude at any point during its previous three parabolic phases. Even if today's bloodletting proves to be a panic ending move, we must recognize that these types of panics typically end the sell-off following a parabolic move rather than ending the mid-point consolidation of a parabolic move.

Furthermore, previous parabolic runs in both gold and silver have rarely seen two consecutive losing weeks, and by "rarely," I mean it has only occurred once before for each metal, and in those cases, just barely. Weekly losing streaks of four or more are typical of the sell-off following a parabolic run.

On the other hand, the sell-offs following a parabolic run tend to be much more violent than what we are witnessing now. The post-parabolic collapse usually escorts gold down between 15-20% over the first 4-7 weeks of the decline. We now are 9 weeks off the top and still a healthy 4% drop from being down 15%. So what gives? Where are we? My supposition at this juncture is that too many traders caught wind of the 2-year gold/silver cycle and were positioning for the next big run into spring. The atypical behavior in the current action was necessary to shake off the multitudes. If true, it also means the big run, when it arrives, will be of much greater magnitude because all those that got shook will find themselves chasing it on the back end, fueling a tremendous blow-off phase.

More on the negative front... both gold a silver lost significant pivots:

gold chart

silver chart

If one is nervous about the prospect of recovery here, dumping your positions and waiting for a close back above those pivots would not be unreasonable. After all, price will have to soar back through those levels in order for our projections to come to fruition. You forgo the gains between the current price and the next close above the pivots, of course. For what it's worth, the Docfolio will be riding it out.

Now for the good news. There are important aspects of our expectations that are still on course, and if they stay on course, should soon produce desired reversals.

us dollar index chart

s&p 500 daily chart

Putting these puzzle pieces together, there would seem to be a pretty good chance of a blow-off move on the heels of tomorrow morning's jobs report. If we see the DX pop a percent, the SPX flirt with its downside projection, and precious tank then recover, I would be bold enough to call a bottom. If, however, we see no explosive bounce by the middle of next week and our lines in the sand are violated, we will be at the point at which we must consider a paradigm adjustment for our intermediate-term outlook.

 

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