This is going to be one of those technical discussions that are tedious and long-winded (also to include at least one boring anecdote).
If desired, go to the Summary for the CliffsNotes wrap up.
For the rest, let’s get into it:
A quick look at the news and financial sites has the inflation narrative still raging.
This link to an article on ZeroHedge offers a slightly different perspective than one-way hyperinflation.
At least it says deflation is a possibility.
Back in the day, I used to read as many of these press releases as possible; combine them, put them in a spreadsheet, develop a ‘voting’ system (with variable adjusted algorithmic weighting), look at buy and sell recommendations, try to figure out if MACD, RSI and Stochastics could predict the next move … and then, I would watch Wall Street Week with Louis Rukeyser.
It’s a frustrating, unprofitable exercise that was ultimately abandoned while the search for market truth carried on; only to be found much later in 2007; that’s a story for another time.
There’s nothing wrong with Rukeyser. In fact, I did use his program (once) in what was at the time, a trade of pure intuition.
During his opening monologue (probably May 19th, 1989), Rukeyser talked about gold reaching multi-year lows.
At the time, I had been monitoring the gold miners and specifically Echo Bay Mines (ECO). Echo is now part of Kinross Gold.
The sense was ECO had slowed its decline and seemed ready to move higher. Gold also felt like it might retrace part of its decline.
The trade result is on the chart below:
The entry date for going long ECO was May 22, 1989, a Monday.
That would seem to follow if Rukeyser’s gold statements were on his (prior) Friday broadcast.
As the chart shows, gold bounced and then went slightly lower before going into a sharp (but short) rise.
The exit came on January 23rd 1990, right at the top of the brief move.
Once again, it was from intuitive feeling that gold had reached some kind of stopping point.
What solidified thinking ‘we’re at a top’, was Joe Granville coming out in his newsletter that he was going “all-in” on gold.
At the time, Granville was not making good market calls. This one seemed like a stab for attention as by now, gold was in the news.
To add to the nostalgia (looking at the confirmations), commission for going long (100 shares) was $47.60 and for getting out, $49.00
Many decades later and in retrospect, the trade worked because it was sentiment based.
After declining steadily for two years, gold sentiment was negative. At the top in January ’90, it had tuned positive.
What does all that have to do with today?
Looking at the chart of gold above, you’ll note a sharp rise in price from June of ’86 to October ’86. In effect, it’s a wide price bar.
From Wyckoff analysis, markets tend to come back to wide areas for a test. That’s exactly what we see from December ’87, onward.
Now, let’s look at the monthly close of silver (SLV):
The chart shows how each wide bar has (ultimately) been tested. Price action either rises to test or declines … but it does test.
This is how markets behave. It’s what they do.
Looking at the current situation for silver, one would think it’s time to exit (if long); anticipating a retrace or go short (not advice, not a recommendation).
There’s a wide bar from the March 2020, low to the August 2020 high, that has not been tested.
That (test) thinking is bolstered further, by the chart below:
On a monthly closing basis, SLV has pivoted (down) off the 38.2% Fibonacci retrace level when looking at the entire decline from April 2011, to march 2020.
In addition, it tagged the 23.6% level as a pivot to the upside which led into the now famous, but fading fast, ‘short-squeeze’.
It’s important to note, the short squeeze was so weak, it could not even register a new closing high on the monthly chart.
It’s not important or profitable to figure out whether it’s inflation or deflation. The important part (and the hard part) is to read the price action itself.
That price action … at least for silver, is saying we’re at a juncture (Friday’s close) where SLV’s in position to retrace and test the wide trading area created from March – August, of last year.
A retrace is possible because that’s what markets do. Our anecdote example from 1989, shows that markets do not change.
If silver, SLV opens lower on Monday, it weights the probability we’re on our way to the 17.50 – 18.00 level and/or a test the March ’20 lows.
If it opens higher, the market’s in spring position (ready to head higher) as described in this link.