SUGARLAND, Texas (ResourceInvestor.com) -- It’s summer again. And I have to admit it, I don’t like summer very much. Mainly because I happen to live in a tropical wannabe area of the Texas gulf coast and in July and August it gives places like Libreville, Gabon and Borneo a run for their high heat and humidity money. Growing up here as a kid I seemed not to notice the heat as much as I do now about to enter my fifth decade of Texas climate torture. Was it always this hot? (Yes, statistics say it was).
There is another reason I don’t really care for summer all that much. That’s because the summer is usually considered the weakest part of the year for the segment of the market I am most interested in - the gold and silver markets.
Cyclic dominance
There are all kinds of cycles in the market. Some last for mere days, some last a few months, then there is the annual cycle, and of course there are longer cycles lasting years and even decades in some cases. Cycles can run parallel, they can overlap and they can even run contradictory to other cycles. People who study these cyclic events write articles about them. They build entire sciences around them and some people listen to them. Over time some repetitive cycles become self fulfilling because enough people believe them.
Whether they realize it or not, belief in a cycle affects how people trade. When enough people believe in something, believe that something is going to happen, it is only natural that the markets will reflect that belief, sometimes more, sometimes less in any given cycle, but the “pressure” of the cyclic belief is there.
The effect of a widely believed cycle by itself, versus outside forces to that cycle, is a science unto itself. The basic idea is that within a cycle there will be predictable movement, predictable change purely because of the knowledge or the “power” of the “cyclic force.” Scientists call this effect “cyclic dominance” as postulated by Dewey in 1967.
A long time ago now I wrote a paper which argued in favor of cyclic dominance at a time when the “randomists” were belching their random chaos models. Looking back at that yellowing paper today, I will admit that while passionate, it was pretty lamely written. But the premise I thought then, some 30-something years ago, has proved itself time and time again. That premise was simply, “Cycles Mean Things.” … Okay, I admit now it was maybe not the best of titles. Better would have been, “Ignore Cycles at Your Peril.”
I seem to have gone the long way around a short horse here, but in case it isn’t clear, I believe that cyclic dominance plays a part in the financial markets, and we see the effects of it all the time. This article is supposed to be about silver, but I wanted to get it started by tying in the annual trading cycle. Of the four seasons, summer is considered the weakest of the lot for the metals markets. Therefore, whatever outside forces (to the cycle itself) may be at play, the fact that a bunch of people think that the summer is weaker for the metals is enough to influence the metals to some degree. It is partly that cyclic dominance which longer term swing traders seek to exploit by taking advantage of the weaker points in the cycle to deploy capital. (Whether they realize it or not.) The theory for silver being that as the stronger fall and winter periods come, the higher expectations for the metals alone will have an opposite (more positive) influence on the markets. So the time to stock up is during the weaker summer months.
Is cyclic dominance “powerful” enough to rely on exclusively? Definitely not. However, I don’t think it hurts to consider it in concert with the other market forces at play. And that brings me to the current situation on the second most popular precious metal. Silver.
Silver technical challenge
As we are now entering the weakest part of the year for silver, things like a technical breakdown can be enhanced or even caused by the annual cyclic dominance provided the other market “stars” are so aligned to allow it. In other words, it’s somewhat easier for a technical breakdown to occur and to be sustained when we are in the weak part of the annual cycle. But just as some will try to exploit that cyclic pressure by trying to buy it, others are on the other side of that idea trying to exploit it by selling it. Add into the mix some light holiday liquidity and, …well, cycles mean things!
On Friday, July 1, silver was hammered in the same weak pre-Independence Day holiday liquidity as gold. As a goodly number of COMEX traders got an early start on their holiday, those who stayed at their posts selling in the last hour of the metal trading day managed some “fireworks” of their own. The near active September contract declined 18 US cents to close at $6.895 the ounce. The final trade on the cash market crossed the tape at $6.866. While 18-cent moves in the silver market are nothing unusual, this particular move took out a key uptrend line and linear support which has held for nearly 24 months.
Silver, 3-year, Weekly
Technically minded traders all over the globe will note that a breakdown attempt is underway … when they get back to a computer terminal that is. Of course, that’s what the Friday big sellers are counting on.
The wide triangular consolidation of silver’s early ’04 definition move to $8.50 is seeing it’s first breakdown attempt thanks to Friday’s sell-stop triggering “raid.” Yes, I am calling it a raid. Most of the selling action came in the last hour of the holiday shortened metals trading day when all of the other financial markets were closed and most in Asia were sound asleep.
The usual suspects
The Large Commercials (LC’s) have been net short silver for a long time. Years. While it is not unusual for the LC’s to be net short silver because they largely represent, or rather fade the hedges by producers and take the opposite side of the speculators, for quite some time now they have been various degrees of way net short silver. (The large commercial net positions are the ones at the bottom of this next graph).
Commitments of Traders, Silver, Current
What better time to attempt to get out of that way-net-short position noose than when people are expecting weaker markets for silver? Like right now during the annual cycle weak period. And what better time for a “raid” on sell stops than when fewer “longs” are at their computer terminals? Like just before a 3-day (read 4-day for many) holiday weekend when all the other markets are closed.
Annnnnnnnd, it just so happened that this particular light-liquidity raid opportunity happened to coincide with silver resting just above its long-term uptrend line. The opportunity had to have been irresistible for the big sellers on Friday afternoon, and it sure looks like they took it. Bam! Into the sell stops went the late-day price. The sellers got a “cheap” breakdown started.
Was that enough to send the markets into a panic on Tuesday when the COMEX is back in business?
Well, initially on Friday the shares of many of the mainly silver producers got hammered right along with the apparent breakdown in the metal. But a strange thing happened after the metals market closed and the paper market silver sellers were savoring their “cheap” technical breakdown. Most of the silver producer shares hit bottom, and then marched right back up to close to where they began the day. It was as if the market figured that this was nothing but a cheap raid by the sellers.
Here are just a couple of examples. Pay particular attention to the last half of the last day shown which was after the metals market had closed.
Coeur D’Alene, 20-day, 30-minute
Pan American, 20-day, 30-minute
The shares shrugged off the apparent technical breakdown. And just like the gold shares did, they recovered after the initial shock of the large move down in both gold and silver. This is easily viewed in the XAU index.
XAU, 20-day, 30-minute
So at least initially the US markets viewed the raid and technical breakdown with contempt. (As they should have.) It’s a good bet that global trading in silver Monday will be tentative until the “OK Corral” of the metals markets, the COMEX, reopens on Tuesday. People will be watching to see the gunplay between the big specs and the other guys in the black hats then.
In short, the shares did not answer the move in the metal. Well, on second thought, they did answer with a well-known single-fingered salute!
What to watch for. Possible Bear Trap.
Despite that initial skeptical reaction Friday by the shares, a technical breakdown attempt is underway and will be showing on the charts over the weekend. It could cause some follow-through early next week and it could also elicit a harsh counter reaction which negates this breakdown attempt in a startling and dramatic counter spike. Either way the battle is joined.
How very interesting and exciting it is for those of us who follow the market. Something is happening! If the big sellers are successful in making this breakdown stick, then the bargain hunters among us will be looking on with great anticipation. On the other hand, a possible snapback rally sets the stage for one of the most interesting occurrences in “chartdom.” The Bear Trap.
On the Dexter, or right hand, IF, repeat IF the silver market longs get back in and buy the heck out of the markets to teach the big sellers a lesson in holiday weekend trading etiquette, quickly restoring the trading to above the 2-year trend line, a failed technical breakdown or “bear trap” will have occurred. There are few technical signals more powerful to the technically minded traders than a bear trap. And again, IF that occurs quickly, within the coming week, unless the big sellers are very, very determined there won’t be much they can do to stop the rally that will surely follow a confirmed bear trap. Some of the rally even being fueled by the big sellers covering late short positions.
On the other left, or Sinister hand, If the “cheap raid” ends up paying off for the big sellers and this technical breakdown holds, it could quickly send the white metal down through a series of stale long sell stops and shake up the complacency which has crept into the silver market. Temporarily. And I believe such an event, should it occur, should be bought aggressively in the days and weeks ahead. The long-term fundamental reasons for the upward re-valuation of silver remain intact and have even been enhanced recently.
But that is a subject for another article.
A sustained breakdown if one occurs will likely test a lower support level as momentum builds. Looking at a 2-year chart, support could form for silver anywhere in a very wide range of between $5.40 and $6.50 in a frighteningly fast move. That is depending on how much momentum gets generated of course.
Silver, 2-year, weekly
Judging by the reaction of the shares to the raid on Friday, the odds for a snapback rally are good in my humble opinion. I actually expect such a rally to get underway, maybe even before the traders at the COMEX take their positions on Tuesday.
But if the big sellers can manage to win this summer shoot-out with the “longs,” the long-awaited opportunity for us bargain hunters for silver lies just ahead.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions.
