Ripples In The Pool

June 23, 2014    When you look at various movements in Nature, it is amazing (and educational) to see how things move. Fibonacci still intrigues me to no end and the Ebb and Flow of liquids can be powerful and yet graceful  at the same time.  Its the same with the Stockmarket when certain areas surge forward. Sometimes what looks like Big Splashes can be just Ripples in the Pool , one of many repeating waves of movement.

While I had planned on writing about Gold/Silver stocks, I want to address the recent movement in the Miners , since I received a couple of private emails with people concerned that the move is only’ short covering’ and just too steep. It appears to be unsustainable and will it crash soon?  So readers wonder ‘Should I enter?’  ‘Will it pullback?’ and so on.   I’m not sure if anyone knows those answers, but  I ALWAYS look to the markets to find clues.   Lets start with SILVER/SLV.  First thing we see is…The DREADED GAPS! Wait to buy the gap fill?

Is it possible that the GAP wont fill now?  It is…

Silver had a record short position, with many calling for SILVER $13. Now that it has surged forward and the Shorts are rapidly covering, it has become overbought on certain indicators, so it must now pullback and fill those gap, right?  No. Certain indicators are very useful in a trend, but in a move out of a compressed area , like Silver is coming out of….Rules change.

Compare the above chart of SLV now with SLV in 2012 –

Notice that it too got Overbought Fast (RSI Over 70) and price had Gapped open higher. Those gaps were left unfilled for months. Price went sideways to the 10sma & then higher. 

Step back and look at Silver right now and you will see that sometimes these “Big Splashes” are just ripples in the pool. The HUGE SURGE that we just saw in Silver, Gold, and the Miners…looks like this in the big picture. This POP has room to run.

As I write, Gold & Silver are down, and when this happens lately, many say “Time to short this and play the other side”. I am staying away from trying to play both sides of this, because      1. Read my older reports, I had mentioned in MAY that I am expecting a Meaningful Low.  A real Move higher that could be hard to trade        2. They can be unpredictable with mostly surprises to the upside       3. After being compressed into the recent low and overly shorted, the reversion to the means move caused by short covering can be Fast & Sharp.

In fact, Gold was under a congestion area and may have support right here above $1300

On the subject of “Short Covering Rally s” in a Bear market.  We need to keep an open mind. I agree that I have seen many bear mkt rallys fail, and the 2012 rally is a good example of that, but I also was told in my email that “Short covering rallys like the one we see now are too steep & dont we need lows made from a ‘base’ and then slowly move upward?”  While I agree that a Base is your best low, (There are V-Bottoms too however) they also can release a move that is STEEP & never looks back.   For example, look below :  Isnt this a BASE?

If this ran straight up & out of that Base, it would leave the most people behind, and that is what markets do. In fact, many are saying they are going to buy this next pullback, because they dont chase rallys. I understand that saying well. Like I mentioned above however, sometimes indicators get overbought and there are Gaps below and so on, but the rules change.  PERSONALLY, if the Bull is about to emerge and the Bear is behind us…I would find a few good companys and at least start a small core position, because that is a base on the weekly chart. And bottoms CAN be a rip your face off steep rise that just goes up, sideways , up sideways, bye bye.

Seeing is believing, so first lets look at JO (Coffee) recently. Is the Bull emerging? So far it went up 7 weeks in a row before it rested. It went from $20 to $42  ( by the way, GDX just went from $22 to $26 ). This is a WEEKLY chart

So look at the $20 to $43 move on the JO weekly chart above, and compared to GDX $20 to $25 move on the chart above that one.  Its not so steep and unsustainable (yet).  Yes, We’ll keep an eye on it moving forward.

On a DAILY , look at the 7SMA, that was as deep as it pulled back. Everyone was waiting to buy Coffee’s rally. Most Missed it.

Imagine “SHORTING” these first GAPS at $24 & $28 as it ran to $42+?   My point? Gdx could be there now.

To address the idea that this could be  THE LOWS of the bear mkt correction and a short covering rally could actually lead to a momentum buying and the move away from a final bottom, I want to show you also some deep sell offs that had short covering rallys to start their next  Leg up, and never looked back. 

The mighty Nasdaq repeatedly formed Lows this way

Remember the 2008 Bear Mkt.  The Nasdaq went from $1200’s straight up to $1500 without breaking below the 7 SMA!  It had 1 or 2day pullbacks all the way up & that was it. Then continued up to $2000 . What if Silver or Gold does that.

NASDAQ – Look how straight up this went JAN 1991 out of the lows. It never pulled back to let anyone back on that sold that drop from July to Nov.  Later that year in Dec – Straight Up again.

On a weekly chart , it was about 14 weeks of straight up. Shorts got smoked and who could ‘Chase it’ and comfortably go long after that move? I imagine that many were waiting for the pullback that never came. A small Core position taken near lows would have been comforting later.

This is AMAZING, but look at the 5SMA! Out of the lows and hardly a down day.

SO am I saying that we are there in the Gold/Silver Markets?  NO.  What I am trying to do is just to remind readers of this. I had been watching for Meaningful lows last June 2013, Dec 2013 and May 2014…and now we see how they’ve run coming off the lows. We also reviewed here what can happen if THE LOWS are in and this short covering rally turns into a Momentum buying spree for the bigger Boys- The SMART MONEY.  The surprises are likely to the UPSIDE for the next few weeks, so shorting is dangerous or should only be done on a very short time frame.  I expect a few more weeks of potential upside ( It could stairway up, it could dip here and there,   yes – expect some down days), so pullbacks could be used to start a small core position .  That way, If this is The Lows and we break from that 1 year base , you didnt miss the move and you will have more confidence to add to positions on pullbacks.

I wanted to post many many charts of Miners stocks, but will have to do that another time. I think a CORE position is prudent for the type of move that we have seen and is still expected.  I think Shorting this move , despite overbought indicators and gaps below will prove to be too difficult and even rob one of gains they may have made “long”.

I hope this report helps you to see what I am looking for going forward. Just like movement in nature, from violent storms to liquid grace, human nature runs the stock market and the movements from Greed and Fear can be exceptional. I hope we can take advantage of them!

Thanks for reading!!

~Alex