Thursday, May 5, 2011

I've gone out on a limb with today's headline, predicting a quick end to the correction in bullion.  Subscribers will have learned, however, not to chisel the numbers in stone. The analytical key, as always, will lie in observing how well minor midpoint supports and 'd' targets handle the selling.

There are numerous ways to target this downtrend on the lesser charts, but 38.490 looks like the first place we should look for a tradable bounce. Any lower, though, will bring into play the two numbers flagged in today's commentary -- 37.165 and 35.390 -- as well as a Hidden Pivot hitherto unnoted at 35.415.  It is the target of the pattern shown. Bottom-fishing at any of these pivots will be relatively risky, but they will retain the ability to warn of further weakness nonetheless. _____ UPDATE (3:39 p.m. EDT): Wow. Silver has collapsed 30% with barely a blip.  A tad overdone, I'd say. The March low at 33.615 is now the key support, the correction having already exceeded 0.618 of the rally from late January's 26.45 low.  A breach of 33.615 would create a bearish impulse leg of daily-chart degree, but it would take a strong rally and then a resumption of the downtrend to create the low-risk buying opportunity we await.

The 1491.80 target shown in the chart looks like a lay-up from here.  If you shorted the top of the recovery bounce using the 1521.60 midpoint target I aired during yesterday's tutorial session and in the chat room, some profit-taking was warranted, since the pullback from the 1521.00 high came down to 1512.60. Unfortunately, 1491.80 looks like a poor place to try bottom-fishing because of its close proximity to a too-obvious structural low at 1492.00 recorded on April 26.  The Hidden Pivot is likely to be useful for analysis, however, since the extent of any bounce can tell us whether sellers may have exhausted themselves. _______ UPDATE (11:40 a.m. EDT): The futures gapped through 1491.80, turning it into resistance and further darkening the near-term outlook. We'll use a 1451.80 target now, subject to clustered action near its 1486.90 sibling midpoint.

A tortuous slog lower looks targeted on 1327.50, a Hidden Pivot support associated with the corrective pattern shown. The tedium may go unalleviated today, given that the rally from yesterday's low has exceed the c-d midpoint by six points.  You can bottom-fish the target with a three-tick stop-loss if the futures eventually get there, as I expect they will.  Bulls would be in the driver's seat again, however, on a print today at 1362.25.

Ya gotta love this stock for hanging tough yesterday when Silver futures were getting savaged. Our 300-share position from 42.01, now hedged with three June 40-May 38 puts spreads legged on for a 0.50 credit, has barely been stressed by the action thus far. That said, we don't want to get sandbagged if the stock falls a further $3 -- which it could! -- while we're busy patting ourselves on the back. I've reproduced a chart alongside that shows the corrective pattern and its 34.17 target. I'll mention as well that a rally would need to clear 38.66 today to somewhat mitigate the threat.

Although some technicians we respect think bullion’s correction will stretch into summer, we think it will be over within a week. In our experience, powerful bull markets recoup violent selloffs with rallies that are just as violent. Silver’s correction has been violent indeed, savaging quotes by 25 percent in just a few days. The catalyst for this brazen shakedown was news Sunday night of Osama bin Laden’s death.  Who needs bullion when the world is about to become an oasis of peace, right? Yeah, sure. When the revelers return to their senses the world will still be a dangerous place, the central banks will still be printing money by the trainload, and nothing will have changed to diminish the defensive appeal of precious metals. Under the circumstances, we doubt that Silver will need much base-building to launch an assault on the supposed $50 “barrier.” We view that number not as impenetrable supply, but rather, as a fat carcass waiting to be picked clean by voracious buyers.  Let J.P. Morgan and their ilk try to hold the line at $50. They’re going to be dead meat eventually, so why not now? In our years of experience on the trading floor, huge supply tends to coax forth huge demand.  As traders like to say, opportunity moves to size.  And while the bad guys may have deep pockets and the ability to create tons of “paper bullion” at will, any suspicion that they are trying to cap Silver at $50 is going transform otherwise docile, go-along buyers into aggressive opportunists.  This will prove to be equally true for Gold, we are certain.  The Chinese government, for one, has given its blessing to any citizen who wants to buy the stuff. Want to stand in their way? Precise Numbers From a technical standpoint, July