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We have had a major rethink since the
last update was posted, which was one reason why no update was posted last
weekend. This rethink has been occasioned by the rapid tilt towards deflation
of the past couple of weeks. In the last update you may recall that we assumed
that politicians and world leaders would follow the easiest route of QE which
would lead in the direction of hyperinflation, but we really should know by
now that you can't assume anything in this business. For sure, most of them
would like to follow this route, for it buys them the maximum time before
they end up at the end of a rope, but unfortunately for them they are losing
control and things are starting to fall apart at alarming rate. Details of
the latest thinking re the deflation/hyperinflation arguments are set out in
the parallel Gold Market update, to which you are referred, and it will
suffice here to give as examples of the tilt towards deflation the moves in
the US to rein in the deficits and of course the spiking bond interest rates
in Europe - if we do not see dramatic large scale intervention by the
European Central Bank (ECB) involving a massive blast of QE, Europe will be
finished shortly as a united economic entity, and after a possible temporary
party to celebrate the demise of Europe, the US Treasury market will
collapse.
On the 4-month chart for silver we can examine
recent action in detail. In the light of the latest thinking the rally from
late September following the brutal plunge is now viewed as a weak relief
rally, which failed on Thursday with a breakdown, which was anticipated on
the site with a warning being given, and for a break
lower by the broad stockmarket. Volume on this
rally was weak, and after struggling beneath heavy resistance centered on $35
and its falling 50-day moving average for more than 2 weeks, silver broke
down from the uptrend in force from late September. The MACD has dropped down
through its moving average, which is a bearish development. We cannot hope to
grasp the big picture of what is going on in silver on a 4-month chart, so
now we will look at an 18-month chart.
The 18-month chart for silver shows all of the
action from the start of the big ramp that began in August of 2010. Earlier
thinking was that as a 3-wave decline, involving 2 crashlets,
had completed by the September low, a new 5-wave major uptrend would follow,
and of course it would if politicians obliged with a globally coordinated QE
campaign, but unfortunately it doesn't look like they are going to get that
together and we are instead looking at the specter of a deflationary
implosion triggered by the collapse of Europe. This realization has prompted
a reexamination of the charts which has led to the discovery of a large
Head-and-Shoulders top in silver completing above an upsloping
neckline as shown. Other technical factors suggesting that an H&S top is
indeed completing are the volume pattern - there was no increase in volume at
all on the latest rise to mark out the Right Shoulder of the pattern and a
particularly ominous development is the strongly downtrending
MACD indicator which is showing that the major trend is swinging steadily
from up to down - and we are already firmly in down territory.
A reason for our bullishness in the recent past was
the COT charts, which showed a very low Commercial short and Large Spec
position. However, the COT has deteriorated in recent weeks with little to
show for it in the way of a rally. Currently it still looks rather bullish,
and it is difficult to reconcile this with the bearish picture we have just
described which correlates with the potential for a brutal collapse in world stockmarkets associated with deflationary forces coming
to the fore again.
Clive Maund
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