Precious Metals’ Bear in ICU (SLV,EPI)
We want to turn to a discussion of commodities today, because the action there is starting to shape up in increasingly clear fashion.
And we’ll start our investigation with a brief look at the dollar, from which so much of the commodities complex takes its cue.
The dollar, remember, puts downward pressure on commodities’ prices as it rises, and upward when it falls. That’s because the vast majority of the world’s metals, minerals and foodstuffs are traded in U.S. dollars, making them more or less expensive as the dollar fluctuates.
Have a look here –
This is the Dollar Index for the last six months, and as you can see, it has been weakening of late. In fact, at the bottom of the chart it becomes apparent that the momentum behind the dollar’s rise last fall was already weakening going into December. Both RSI and MACD indicators began diverging lower from price at that time (black lines), giving us a clear indication that the top would be soon in coming.
Since then, a clear top formed at New Year’s, and the decline thereafter has been significant.
Could it continue?
There are numerous indications that, indeed, it will.
Foremost among them is a clear head and shoulders top formation whose downside count could bring the buck as low as DXY 95.50 IF A BREAK BELOW THE PATTERN’S NECKLINE (in blue) MATERIALIZES.
At the far right of the chart you can see that Friday’s price action brought the buck to rest precisely on that line, so the next few days will be telltale.
But the outcome, in our opinion, is already known.
We may see a week or two (at most) of bouncing between the declining neckline at 99 and the rising 137 day moving average at 100, but current RSI and MACD indications (in green) are unequivocally pointing the way south.
RSI went bearish some two weeks back and MACD confirmed last Tuesday that we’re in the midst of an intermediate trend lower for the buck. There’s support at DXY 97.50 and that marker represents a first stop lower, but further losses could easily transpire once we get there. A lot will depend upon the shape of the presidency at that hour and whether his pro-growth agenda and policies are safely on their way through congress.
The takeaway from all the foregoing is that commodities should experience upward pressure as the dollar declines. And, indeed, we see exactly that happening in the precious metals.
Silver is the best example of what a falling dollar can achieve in the commodities realm, and it’s to that dirty, grey metal we turn for this week’s trade.
We’re going to look back at a single trade today, our effort from the 28th of February. The letter was called From Trump Tower to the Seeonee Jungle, and there we encouraged you to go long India and buy the EPI October 20th 22 CALL for $1.85 while selling the EPI October 20th 22 PUT for $1.20. Total debit per pair was $0.65.
We were big on the sub-continent at the time and we remain so, but we feel it’s worthwhile turning this one over and taking it to the bank all the same.
Indian equities have risen sharply as the rest of the world – including America – has stalled and, in many cases, declined. The rising trend channel (in red) shows the steepness of the climb, an ascent that may have run its course, according to the way we read the charts.
In particular, we note the pop above the trend channel that occurred some ten days ago, a development that generally augurs poorly over the short term, as stocks that experience this kind of action tend to become docile directly thereafter.
And that’s exactly what’s happening now.
One more thing: we would add that if Trump gold is losing its shine and the US equity market decides to retrench, it’s very likely India’s SENSEX will follow her lead – all the more reason to jump now while the going’s good.
Close it down and take the Mrs. to dinner.
Today the call is trading for $2.41and the PUT for $0.92. Sell the former and buy back the latter and your profit is $1.49 on $0.65 expended.
You Do the Hip Shake Thing…
Now on to our silver-lined initiative for the week.
As we mentioned above, commodities tend to move inversely to the dollar, the dollar looks to be headed lower, so silver (among others) should be trending northward.
And a look at the chart for the iShares Silver Trust (NYSE:SLV), a reliable proxy for the metal, reveals just that.
This is SLV for the last year. Most notable on the chart is silver’s pop above all its moving averages last Friday (see enlargement, in black), an occurrence that it mustered for the longevity of a Mesopotamian water beetle in late February before falling back into the soup.
But we’re there again, and with RSI now bullish and MACD just days from confirming, it appears we’re on the cusp of a silver breakout (green boxes).
Much of the move, of course, will be predicated on action in the dollar, as we mentioned above, but that seems almost a certainty.
How high could it go?
Just as the dollar revealed a head and shoulders top pattern, the precious metals are now tracing a REVERSE head and shoulders formation, with an upside count for SLV in the $20.50 to $21.00 range, IF THE NECKLINE (in blue) WERE BROKEN TO THE UPSIDE.
Such a move would also indicate that the bear market in silver is over.
But enough with the trivialities!
Our trade for the day looks forward to higher prices for the PMs and looks to capitalize in the following ingenious manner –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
By the way, SLV is now trading at $16.81.
With kind regards,
Hugh L. O’Haynew