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Aaron Basile
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Contrarian Investor, Commodities Speculator, Technical Trader.
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Aaron Basile
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  • Friday’s Yields Demolished – Perfect Example Of Why News Is Secondary

    In yet another example of why the news cannot be trusted, US bonds yields were crushed on Friday even though the headline news that has been at the front of everyone’s minds is the possible default on US debt obligations. So in the face of a possible default yields on the 10 year were down 5% on Friday as equities were also down substantially on the opening bell before recovering throughout the session. The market is so used to bonds being fundamentally linked to monetary pressure that traders may have forgotten that there are several other factors that drive bond prices. Ultimately, the US has the ability to pay off its debt by raising the debt ceiling, but the reason why it wouldn’t be paid (hypothetically) would be to lack of agreement in Congress and the White House. Therefore, it’s not the bond that is insolvent per se, it’s the ineptitude of the clowns in Washington to simply raise the debt ceiling and then debate the budget afterward.

    That all being said, one could have come to the conclusion that bonds would rally by observing the bullish consolidation pattern on the chart of TLT.

    TLT made a 9 month high Friday and was able to pierce resistance at $98. There is still strong resistance at $98 as it came off of the highs after breaking through them earlier in the session and it is possible that bonds may have put in a short term top since some of the fear should subside after the debt ceiling is agreed upon.

    Also, a downgrade is looking more and more likely. Moody’s is either making themselves look more foolish than they already are by constantly attempting to grab attention, or they are actually serious about a downgrade and will do so next week. Moody’s, like S&P have missed many obvious ratings in the past (take MBS for example) and it seems foolish for anyone to care what credit ratings they decide to give out. Additionally, a downgrade of US debt without labeling many others across the globe as junk is hypocritical and adds to the ridiculousness of their image. In any case, I would advise staying out of bonds until the outlook becomes clearer but if I had to choose, I’d have to favor the downside in the near term.

    The S&P was down about 20 points by 10 am Friday after the news that Boehner’s bill failed in the House overnight but the market rebounded after Harry Reid announced that his own debt agreement bill would be pushed through the Senate. Not coincidentally, the market initially fell into the 200 MA which also coincides with the trendline going back to March 2009. A confirmed break of this trendline will signal a fundamental change in the market. I do expect this to eventually play out but with yesterday’s price activity, it was obvious that it was not set to happen then and there.

    Remember the fundamentals of the chart, any time you gap down into or trade straight into a key level without first consolidating, there is usually a 90% chance of that level holding and it usually results in a bounce. For this reason, I have not sold any of my long positions and you can see the market is already sharply off of the lows and managed to only lose .65% with the close on Friday.

    To further support my theory, the weekly chart of the SPX shows an inside bar bull flag off of the sharp move up from the Independence Day rally. The pattern is valid as long as it stays above 1258 on a closing basis though I personally won’t hold long positions if the market moves much lower.

    I think the more likely scenario is the market sees some upside next week though it may be a bit of a stretch to think that it will break resistance at 1345 which has been an amazing resistance level so far.

    Once again, if the powers that be really believed that there would be a default, gold and silver would have been up 5% yesterday and I believe that gold, like treasury yields, confirm the likelihood of a rally in the equity markets next week. Gold should have traded much higher yesterday if there was a legitimate default risk and like I mentioned earlier, situations like this are why the news is secondary to the chart. I have been talking about this for a few weeks but gold is still very extended which should tell us that any bad news is already baked into the chart – and that is why gold did not explode on Friday.

    So, to follow up with Thursday’s analysis on silver and due to requests, gold is still extended and Friday’s close of $1628 was less than impressive considering the noise that was going around regarding the debt ceiling. Gold is up 10% in the last four weeks which is the most it has been up in the shortest amount of time since the bottom in October 2008. I have talked about this many times before, but to summarize once again, gold typically makes two peaks during the bullish moves in its cycles. This here is the making of the second peak and it is no coincidence that it is happening as the debt ceiling is being debated. Any debt ceiling resolution should be negative for the precious metals and should be a catalyst for a correction in both gold and silver.

    The bottom line is until I see bottoming patterns that coincide with cycle lows in gold and silver, I won’t spend any investment capital on them and they will remain nothing more than trading vehicles until that time.

    Jul 30 3:18 PM | Link | Comment!
  • Is Silver Headed Lower Once More As Part Of A Massive Five Wave Cycle?

    Silver, like gold has been in a bull market since the earlier part of the 2000′s decade and aas everyone knows it has recently peaked just below $50 before a large correction brought it all the way down to $33. Silver has since recovered and is hovering near $40 on the back of the political posturing over the debt ceiling. Silver and gold serve as safe havens versus currency debasement and the risk of a default that could send the OTC derivatives market into another Lehman-type phase should the debt ceiling not be raised. Most believe that the debt ceiling will be raised – let’s face it, the politicians like Obama, Reid, and Boehner will not only not be automatically counted out for re-election, but they would go down as the stooges who couldn’t come up with a simply compromise that had catastrophic repercussions on the global economy. I think that whatever happens, they will manage to get the debt ceiling hiked and that will cause precious metals prices to come down off of the recent highs.

    I have recently talked about gold and the three year trend that it is extended from and how it is even now following its own typical cycles going back to 2008 and I have used that as an example as to how a correction in gold would coincide with a debt ceiling agreement. However, it also appears that silver may have even larger cycles that could coincide with the debt ceiling and an agreement could serve as the catalyst for another large move down in silver. From a purely technical standpoint, this is very possible.

    Those of you who have been following my recent work may recognize this chart. I have stated that I think that silver ultimately gets back to this trendline on another move down. However, it is not clear if this trendline will be the low, or just a major support level on a large move down that may occur due to an event (however big it might have to be) that sends silver crashing to new 18 month lows. It sounds crazy, and I hate to sound like the bear, but let’s just look at the charts.

    Going back to 2004, silver has gone through four waves that have extremely similar qualities. From late 2003 to April of 2004, silver had a run from $5 to $8, which is a 38% leg up. Immediately after peaking, it collapsed to $5.50, a 32% loss. Throughout the next 2 years, it consolidated in a tight trading range and did not make a new high. Then in the summer of 2005 it began another move up, this time it was from about $7 to a high of $15 (over 100%) in the spring of 2006. Towards the end of spring it collapsed to $9.50 – a 37% loss. For the next year it consolidated in a tight trading range before bottoming out in the summer of 2007 around $11.75.

    From there it rocketed all the way up to $21 in early 2008 for a roughly 90% gain. Once again, immediately following the peak, it fell from $21 to $16 within a few short weeks for a 25% loss. Silver then consolidated for a few months then peaked again just shy of $20 which was only 5% off of the high. Following that last peak came the financial crisis, where silver lost nearly 60% as it dropped all the way to $9.00 once again.

    After bottoming out at $9, it recovered under the QE program and traded higher for the next year or so before consolidating within a tight trading range beginning in late 2009 and ending in summer of 2010. After Jackson Hole, silver shot from $17 to $30, then after a brief pullback, it made a high of $49.50, or a 290% gain from August 2010. This is where it becomes interesting. As we know, silver fell from the highs of nearly $50 all the way to $33/oz for a 32% collapse in less than two weeks. What amazes me is how unbelievably similar the chart looks now as the move up, consolidation, and collapse from 2007 to late 2008. Silver has recently consolidated after the initial blowoff top this past spring, and has made another move higher to about $40 on the back of the debt ceiling argument. It is still 20% off of the highs but the pattern is almost a mirror image of the on made in 2008. If silver is part of a massive five wave cycle, then there is a possibility that silver falls back to levels not seen since 2009-2010. Determining the price target is difficult but there is support at $30, $26, $21, $17, and $15.

    Once again, it does sound crazy, but based on the chart patterns, such a move is on the table. However, if silver were to collapse to $17 and then recover once more – perhaps to $25-$30, the next move could be “the big one” as many in the precious metals community have been talking about. Then again, maybe silver doesn’t collapse to $17 and instead only falls to $25 and then recovers to $33 before making another 200-300% leg up which could even take it to over $100/oz.

    In any case, its food for thought. However, there is more to this theory than just spot silver’s movements. A huge credit goes to Seeking Alpha and Financial Sense Contributor David Urban for finding the first two charts that I am about to show, the rest I found after researching this further.

    This chart is of Silver Wheaton (NYSE:SLW) which is commonly known as a benchmark silver stock and it is clearly showing a head and shoulder reversal on the weekly chart.

    Silver Standard (NASDAQ:SSRI), another benchmark silver producer is showing the exact same pattern. Again, credit to David Urban for these two charts, the rest below are ones I found after seeing SLW and SSRI.

    Coeur d’Alene (NYSE:CDE) also a top silver mining stock, SHS top is clear as day.

    First Majestic (NYSE:AG) is showing a sloppy, but valid SHS reversal. The pattern is valid because the high of the head is higher than the high of the right shoulder and the neckline is ascending instead of descending, which would void the pattern. This pattern is sloppy, but the patterns in the other miners confirm AG’s chart.

    Great Panther Silver (NYSEMKT:GPL) also has a sloppier pattern but again, it is confirmed by the other head and shoulders reversals shown above.

    Head and shoulders on Alexco (NYSEMKT:AXU) as well which is another up and coming silver producer.

    Global X Silver Miners (NYSEARCA:SIL) another perfect pattern.

    Endeavour Silver (NYSE:EXK) is a near mid tier producer and again has a slightly ascending, but valid pattern.

    This topping pattern is not limited to one class of silver assets, there are juniors, seniors, mid-tiers and ETF’s that are showing the head and shoulders top. This coincides with the analysis I have on silver’s long term cycles and these charts could be potentially be leading indicators for the next leg in the silver bull market.

    Does this all play out? Maybe, or maybe not. Like I have said before, the best patterns are failed patterns, and the fundamentals for silver are most certainly favoring the bullish side, but I feel that the size of these moves should not go undocumented since they coincide with current events and with the movements in spot silver over the last 7 years. At the very least, I think we can all agree that they are definitely incredible patterns and are worthy of recognition.

    Jul 28 2:06 PM | Link | Comment!
  • Financials Rally Off Of Lows As Market Pauses

    The banks had a big up day today thanks to the hangover from the news that The President may have found a debt deal that he believes is reputable. The S&P finished slightly negative but was lead by financials as they stand to benefit the most from a debt ceiling hike due to the fact that they are directly exposed to the derivates that would collapse because of it. Utilities were also higher but commodities and energy stocks lagged as many have been overbought, namely gold. Gold stands to lose the most from the debt deal because its main attraction at this current time is sovereign credit risk, which will subside, if only temporarily when Congress comes to an agreement.

    Gold broke through yesterday’s low but had an impressive rally in the afternoon to close just slightly negative. The Fibonacci fan resistance at $156.50 (which translates to Friday’s high for spot gold) on the GLD has worked so far though I personally won’t take this for a short since it will most likely take 1-2 months for gold to bottom. I think the low for gold will be around $1475-$1495 depending on how fast it falls but once again, I won’t take the short because of the time factor. The debt ceiling hike should serve as a catalyst for a correction that takes us back to the 2008 trendline on the weekly chart.

    Silver traded similar to gold and once again made a lower low but still managed to tough out a rally in the afternoon session. The rally took silver right into $39.50 which is the level that it failed to confirm above yesterday. Expect this to be short term resistance if there is continued pressure on the sector. There is also additional resistance at $41.

    To quickly recap for those who haven’t seen this yet, the trendline on the chart above is where I believe silver is headed. This could play out over the next 2-3 months or perhaps even longer though I believe that it will happen sooner rather than later. In short, if silver trades into this trendline without consolidating, it will be a strong buy. Unrelated to the long term trends but also worth mentioning is that if silver closes negative for the week, it would also fail confirmation above the 20 MA.

    The SPX had a pause day after yesterday’s big rally through the moving averages. The trading range today was only 7 points which may mean that the market is waiting for more news to find its direction though I have to favor the upside if volume remains suppressed and no significant news breaks. Again, the debt deal is key. I think that the agreement will be largely priced in, but I am expecting a large rally after the announcement that may last 2-3 days.

    This, plus the technicals on the chart is why I am positioned long the market. I entered TNA at $82.16 and I am currently about $1 in the money. Short term resistance for the SPX is at $1333 while additional levels are at $1345 and $1359. I am generally expecting the market to reach $1345 within the next week or so and it is possible that it makes it back to $1359 shortly thereafter.

    Financials had a strong day as the XLF rallied for a 1.14% gain. I was a day early in calling the bottom but the sector has since recovered and most bank stocks are sharply higher. Goldman Sachs (NYSE:GS) was up 3.32% today and is now 5.5% off of yesterday’s low. JP Morgan (NYSE:JPM) is 6% off of Monday’s low and Bank of America is 4.5% off of the lows. Resistance for XLF should be between $15.11 and $15.14 and I will most likely unload my FAS long into that level.

    I am still holding the Aug 11 $38 Citigroup (NYSE:C) call which is now up 27% from my entry of $1.16. I am looking for confirmation above $39 to exit so that the call will go another dollar in the money. I believe that this will happen over the next week so and once again, Citi, like the other banks, will surge if there is any positive news regarding the debt ceiling.

    Jul 20 8:18 PM | Link | Comment!
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