The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, May 5th, 2014.
Tuned in aficionados of such mental exercises would chime in with the Golden Ratio being the most important number in the world when it comes to explaining movements in financial markets, and they would be correct. Fibonacci based retracements and resonance / ratio based projections have a tendency to mark turning points of varying degrees more often than not, extending into Elliott Wave Theory, W.D. Gann's work, etc. And as you know, our own work is based in this approach a well in recognizing this tendency.
This being the case, it should also be recognized an important element of using such knowledge / technique successfully is perspective, or creativity if you will, which some would refer to as 'art' when it comes to being 'good', and 'successful', at the practice of technical analysis, and more specifically the application of Fibonacci elements into the formula. Here, the big job is not doing the math, which is straightforward. The big job is finding the appropriate / salient subject matter to apply the art / technique that will render the desired information, whether it be a price or time target.
Further to this, but something that does not happen very often, we are able to identify an important number (target) in a market of particular importance, which if you have been following my work recently, you would know to be the S&P 50(SPX) / iShares Silver Trust (SLV) Ratio, where we identified the number 106 (to 107) as an extremely important target. Truth be told the actual target should have been stated as 107, because if the factor exceeds this threshold a new signal will be thrown off, suggestive far higher trajectories lie ahead. (i.e. after a correction.)
Why the SPX / SLV Ratio? As mentioned previously, silver is the bureaucracy's whipping boy because it's a small and localized market that can be more easily controlled than gold (or oil), the suppression of which is used to help control (suppress) all other commodities to varying degrees, with none more than gold considering its importance. (i.e. it's the most widely traded commodity in the world due to its monetary importance.) What's more, the bureaucracy's price managers don't stop there, as discussed ad nauseam throughout the years, the boys and girls in New York have the computers set to exploit sentiment extremes / patterns in the various markets, which includes inter-market relationships. We commented on how this works with the relationship between silver and stocks (specifically tech stocks) in our last correspondence, as follows:
"Expect continued strength in tech stocks into options expiry in two weeks as a result. Strength is tech stocks, where hardware manufacturers use silver in the production process, will give the bureaucracy's price mangers the go ahead to let the algos loose on the bird brains that play in precious metals derivatives (instead of buying bullion or the shares - generating genuine demand), still close to the lows generally - especially SLV. (i.e. where a mania amongst precious metals investors clearly exists, which is what keeps ratios low as the bird brains that play the derivatives keep backing up the truck every time the commodity price drops a buck.) This is how they could take silver down, in an algo driven inter-market trade."
And sure enough, going into the jobs report on Friday, as is customarily the case (for no good reason other than it enriches the oligarchs and their ilk), attempts were made to boost stocks at silver's expense, however with values on the SPX / SLV Ratio in proximity to a Fibonacci resonance resistance clustering, seen directly below, Da Boyz were unable to mount formidable moves. In fact, if we see any follow-through on the potential reversals witnessed Friday on Monday morning, we might have the long awaited signal, a possible top of the 5-year advanced in stocks off 2009 lows, along with a bottom in precious metals. It's possible -- I say this with a great deal of reservation. (See Figure 1)
Figure 1
Because at important turning points, where markets have been stretched to their limits, the rivets come popping out at the most surprising times. And while I cannot give you all the reasons why, suffice it to say that the numerical message(s) being triggered in the various markets we follow right now appear to be of a profound nature, exemplified in the longer dated SPX / SLV Ratio plot above. Here, we can see that when measured off the 2011 lows, which marked an important top in precious metals, we have a Fibonacci resonance measure that extends to new all time highs if the present range is exceeded on a lasting basis, meaning stocks are going much higher, and silver would collapse. So you see, right now, as far as mankind's collective economy is concerned, the 107 level on the SPX / SLV Ratio is the most important number in the world. (See Figure 2)
Figure 2
Is this possible? Is it possible that the rigged US markets could render such an outcome? Anything is possible, however unlikely from a fundamental perspective. But is it probable? Obviously, the answer to this question is no. But what then, is powerful enough to break the control the bureaucracy's price managers seem to have on the markets? Is it we have just reached that tipping point, where people are so afraid of runaway fascism that the locals begin to act on their fears? Or is it periphery players, tired of being screwed of a 'fair price' for the wears? (i.e. think Russia, emerging markets, oil, commodities.) Or, is it a combination these factors and everything in between coming together to create sufficient force to overcome financial repression currently being imposed on us by the oligarchs and their dogs?
Only the shadow knows for sure obviously, but this is the beauty of technical analysis, because if applied well, it can answer such sweeping questions. So, the question then arises, 'what message(s) are we presently getting from the two charts above; is this 'turn time', or do present trends persist after a correction lower?' You will undoubtedly remember last week I thought it was the latter, where after a correction in stocks the SPX goes higher, and silver lower. (i.e. until the SPX / SLV Ratio hit 107, setting up a move to 115.) After looking at the charts over the weekend however, with particular attention to the fact significant negative divergences exist in all important indicators in Figure 2, we are not so sure anymore. 115 sure looks a long ways off now all things considered. Heck, even 106ish looks challenged. (See Figure 3)
Figure 3
In looking at the silver plot above, we can see that both open interest and volumes spiked on the volatility last week, which considering the trend has been down, should be the mark of a bottom. If this is true, then the $20 mark should be bettered at some point this week, followed by $21 and $22. (See Figure 4 below) You may remember from my article entitled Silver Linings Playbook a while back though, that it's resistance at $23 that needs to be breached in order to send out a strong Fibonacci resonance related message that something is up, which would be borne out with a move to $33 in relatively short order. The likelihood of such a move based on the way gamblers are betting is not good right now, as you may know from our sentiment studies, however at turning points of such degree, anything can happen as a result of more earthly factors. (i.e. think physical market conditions.) (See Figure 4)
Figure 4
And again, sure enough, stock market futures and precious metals are following through this morning, down and up respectively, suggestive the turns discussed above could take hold. At the same time however, it could be argued that this will not persist considering these moves are likely based on developments in the Ukraine over the weekend, with tomorrow being the big test in this regard. Because the bureaucracy's price managers, led by the New York Fed's prop desk, has signaled Tuesday's are bully days, where traders, hedge funds, mutual funds, etc. are expected to come in and buy stocks / sell precious metals because it's a national conspiracy (especially for east coast money types, politicians, bureaucrats, etc.). (i.e. to defraud the world.) Of course the Russian's, BRIC countries, emerging markets, and anybody else getting screwed by these people are not backing down anymore, as evidenced by Russia's actions over the weekend, so it will be interesting to see how this all plays out - no?
If I had to guess, the first opportunity they have, US price managers will give it to commodity suppliers and prop stocks veraciously, especially the way gamblers in the options market are reacting to these developments (they are generally buying puts on stocks and calls on precious metals), by unleashing the algos on the problem as options expiry approaches in two weeks. So, new highs for stocks are possible, however new lows for precious metals may not be in spite of all this, making a vexing of the 106 vicinity on the SPX / SLV Ratio both possible; and, potentially more permanent in terms of a top than previously thought. Post options expiry in two weeks however, the bureaucracy's price managers may be increasingly challenged in this regard however in not have the support of hair-brained speculators who might be desensitized by then if stocks remain firm, setting the stage for a larger decline.
Market moves spurred by political events and not 'fundamentals' are always retraced in the full measure of time, however this time around, lower stocks and higher commodity prices are in fact consistent with real world fundamentals, meaning expect a different outcome at some point. So, the prescription here is don't play with options, because you will likely get screwed again (Albert Einstein - repeating a negative behavior makes you an idiot); but, position for trend changes. For precious metals, this does not mean buying a bunch of aggressive stocks however, because too many speculators are still doing this, which will likely not be good when the rest of the aggressive gamblers out there decide to purge their margin debt. Buying real gold and silver bullion is likely a good idea however, especially with rising paper world confiscation related risks (think bail ins, wealth taxes, institutional holidays, etc.).
Good investing all.
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