The Futures / Inter Market Report

Trading the World’s Markets                            

July 18, 2008

                                            
Matthew Caruso, CMT                                  
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Silver/Gold correction due – Update 1

I have an article which has been published in the July issue of Stocks & commodities magazine. It is entitled “How to hedge against a bear market”. Perhaps you may find it to be of interest.

            Gold broke out of a base three weeks ago and quickly rallied an impressive $70. The breakout was discussed here on June 27, http://tradesystemguru.com/content/view/191/58/. Unfortunately, markets do not climb forever and profits can quickly erode. This is nothing new for futures traders. Given the amount of leverage we usually work with, we don’t have the luxury of hoping for a trade to come back – we need to take profits when they are there and run when the trade goes against us. This week I will show why I believe the gold/silver market is due for a correction after its strong thrust up.

            When people think of precious metals they typically think of gold. Silver has a very strong correlation but there are definite differences between the two. I prefer to buy the stronger of the two when I anticipate a climb, and short the weaker of the two when I expect a decline. Therefore, although I have mentioned gold up to this point, I will now focus on silver because I think it is relatively weaker. The first chart I want to bring your attention to can be seen in figure 1. As you know I think time is a very important factor in determining market direction. I have outlined the 20 week cycle that is dominant in silver. It is not exact, but it is definitely an important influence. The cycle bottomed several weeks ago and there was a strong move higher. We are now approximately half way through the cycle and as each week passes the likely hood for a fall into the cycle bottom increases. Not only are we now near the “time” for a top, there are also many other factors hinting at a similar conclusion.

Figure 1 chart by Metastock

            If you take a look at figure 2 you will see that commercial traders were very quick to sell into the rally and their short position is almost similar to what they had when prices topped in March. This tells me that commercials are not anticipating a sustained rise from this level and therefore a pullback is very likely. As well, sentiment had become very bullish a week ago. Bullish sentiment is synonymous with tops – the more bullish people are, the more important the top will be.  In my view, if commercials are bearish and the majority of non-commercial investors are bullish, there is nothing left to propel prices higher and a correction is due. The time of the correction is then established with the breaks of trendlines and various other technical tools. The last bearish item to note is that gold and silver typically decline from this time of year until late August – as they did last year.

Figure 2 chart by genesisft.com

            If you take a look at figure 3 it seems that the corrections has already begun and in my view still has a lot more room to fall. The upward channel was well formed as the parallel line in figure 3 show. As well, the top in silver coincided with a 62% retracement of the correction that occurred inform March to May. A 62% retracement is typically a zone of resistance. Be attentive for entry signals.

Figure 3 chart by Metastock

Update 1 – Corn sell off

Last week I presented the likelihood for a sell off in corn this time of year – especially after a parabolic rise. Prices proceeded to collapse this week and are now testing the up trend line. Given that prices are over sold it is likely that prices will have a small rally before breaking lower.

Figure 4 chart by genesisft.com           

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