A Melman Minute
| By | Leonard Melman |
|---|
If there was ever a morning where trading in many directions provided excellent examples of the term "whipsaw market", today's the day. Both of our primary precious metals were impacted by the election which dealt with the question of whether the Swiss Franc should be backed, at least partially, by physical gold.
Obviously, had the measure passed, it was assumed that the Swiss government would be required to enter the international gold markets and begin to accumulate additional stocks of the yellow metals, perhaps driving the price higher. In the opposite direction, if the measure failed, not only would these purchases not take place, but a negative vote could be interpreted as a repudiation of the concept of gold-backed currencies, given that the Swiss people in the past had demonstrated a historic affinity towards gold.
Well, the measure not only failed, but by virtually any political measurement, it was trounced, losing by a count of 78% to 22% - a truly huge margin.
What followed were genuine displays of market fireworks, as illustrated by the following short-term charts.
As may be noted, immediately upon release of the election results on Sunday, gold plunged by about $40 from the low $1,180s to the low $1,140s. However, after stabilizing near $1,150, gold suddenly turned around and shot higher and by the time of this writing near 7:00 AM, gold was approaching the $1,200 mark - a short-term rally of almost $50.
Trading in silver was even more spectacular than gold on a percentage basis as the initial decline dropped the price from near $16.00 to about $14.20 - a drop of about eleven percent in just a few hours before turning directions in a stunning rally which carried it to $16.40, a rally of FOURTEEN percent bottom to top!
It will be most interesting to watch trading in the coming hours to see where the precious metals stabilize.
In any case, there is one lesson which might be considered seriously and that is that it can be very dangerous indeed to chase rallies or sell-offs based on a single news event.
………..
Despite some short-term gyrations, it now appears we are witnessing simultaneous drops in a variety of items such as gold, silver, copper, Crude Oil, heating oil, gasoline and many others. In fact, it would appear that the major trends for several commodities denominated in US Dollars are pointing to the downside, to put things mildly.
The chart of one of these commodities - as noted Friday - has just provided us with an unusually clear technical signal which I interpret as being an indication of lower future prices and it happens that the commodity in question - COPPER - is regarded as one of the most important commodity items of all, given its enormous number of applications within our modern industrial world. In fact, copper is so important to the functioning of our consumer and industrial establishments that it has been widely regarded as `Dr. Copper" for many years.
After observing trading charts for going on forty years, it is my personal observation that few trading patterns have the predictive value of 'right angle triangles' which come in the form of bullish upslanting triangles where the underlying trend is toward strength and downslanting where the underlying trend has been toward weakness.
It is also my personal opinion that the longer it takes for a pattern to form, the potentially greater the move which will ensue upon a valid trading signal.
Please note the 25-year chart of copper which shows a clear example of a downslanting right angle triangle formation with a series of declining tops beginning in mid-2011 and a horizontal bottom generally along the $3.00 line.
Late last week, the pattern broke to the downside with a decline that rapidly moved into the $2.80 range - the lowest price for copper in several years.
Our main interpretation of this weakness and the threat of future declines is that they could represent declining demand for copper, declining industrial activity, and therefore, diminishing inflationary influences into the future which would be negative for our world of precious metals mining.
Lest anyone think that there is no predictive power in definitive chart patterns, please note the 25-year chart for silver and it is easy to observe that over roughly the same period of time, silver formed two downslanting right angle triangle patterns. The first developed from early 2011 through mid-2012 with horizontal support near $26. When copper dropped through that support, it plunged by $8 - or almost thirty percent - within a few weeks.
Silver then formed another, tighter downslanting right angle triangle with a new base just above $18.00 and when the price of silver plunged below the bottom of that chart pattern, it dropped quickly to near $15.00 - a drop of almost twenty percent in just a few weeks.
I have often written that charting may be regarded as inexact from a scientific point of view, but I also believe there are a sufficient number of examples of trading patterns being fulfilled to at least cause us to sit up and take notice when an example of this nature takes place in as important a commodity as copper.
……..
NOTE: There may be another major crisis in the development stage, the rapid decline in the comparative value of Russia's home currency, the Ruble. I plan to discuss that item in Wednesday's Melman Minute.
EARLY MONDAY DATA as of 7:45 AM PDT
Dow Industrials, 17,770, - 59
TSX Index, 14,620, - 124
Gold, $1,196, + 20
Silver, $16.30, + $0.74
Base metals, (average), + 0.6%
Mining share indexes (avg.), + 3.0%
US Dollar Index, 87.96, - 45 basis points
TYX Index (30-year bond rates), 2.906 - 04 basis points
Crude Oil, $67.51, + $1.36