We started this series “shallow and wide” on the subject of what's really determining the silver price…
What are the factors, the most influential factors right now? Last week we covered high-frequency trading and algorithm trading in association with the future's market. This week we're going to kind of go on a second factor, which is silver prices and technical analysis.
Once again, we started this whole discussion about talking on just surface level the major influences on price. We started with electronic price discovery versus the sort of fundamental reality underneath, underlying it. We went through 6 factors. We listed the futures market and HFT. And today the focus will be technical analysis.
We'll talk about in subsequent episodes the standard of care mechanism that manage money traders use. We'll also go through data analysis, options expiration, the FOMC, and actually a whole host of others.
Last week, we focused on high-frequency trading and algorithm trading.
This presentation comes on the heels of lots of volatility…. Upside for a change, but nevertheless very artificially induced.
The purpose: I want you to be able to wake up in the morning, see the price down 3%, and instead of immediately going out and trying to find a bunch of false or offered correlations as to what's going on.. Correlations that that are often totally disconnected…
I want you to stay connected and look at what the primary pricing mechanism, the most important factors that influence price.
As a recap, I don't think that speed, electronics, or computers are necessarily a bad thing, but when you combine self-regulation with a for-profit exchange like the CME, that's a recipe for disaster, and that's actually where we are. Algos aren’t necessarily a bad thing either. High frequency traders (HFT’s) have evolved from a special privelege. This special class of algorithm trader are represented by the commercial traders on the Comex. The Comex is owned by the for-profit Chicago Mercantile Exchange or the CME.
HFT’s have access to exclusive information and the ability to move or put the price wherever they want. They use key technical indicators as their target. And the daily moving average price is a primary one in the silver futures market.
We will touch on the other technical indicators, but the key one is the moving average. I think that's probably a pretty good segue into diving into really the core today I want to talk about.
Silver price and technical analysis….
Again, I think the main one is the moving average, but what is technical analysis? Technical analysis is really a method. It's a method of forecasting that's based primarily on price and volume. It's been around for nearly 200 years. I know that's not forever, but it's been around for a long time. There have evolved from it, models and our trading rules and our charts and patterns. These charts and patterns have existed the longest, because they were around before we had computers that could crunch numbers and create all these statistical data sets.
We have indicators now that are really just mathematical transformations of where price and volume are. There are techniques that have evolved from technical analysis. Many of you know or have heard these before: Candlestick charting. There's the Elliot Wave theory, there's the Dow theory. These are techniques.
Many traders use some combination of all of these. Some of the patterns that I'm sure you've heard of are head & shoulders, double top/bottom reversals. There are support and resistance channels and flags and pennants. These things that you can kind of read when you look at a price chart over a period of time, you can see these patterns evolving, like patterns in tealeaves.
Some of the indicators, these mathematical indicators are up and down volume, the RSI which is the relative strength indicator, the moving average convergence and divergence, the MACD or the moving average, which I think is the daily moving average, I believe is the most important one. Of those moving averages, you have the 10, 20, 50, 100. There are others, but the 50 and the 200, really the 20, 50, and the 200 are the key ones. The 200 is the one we are flirting with right now.
This is where kind of we've been over the last week, we've seen kind of a nice little rise in the price.
We moved through the 50-day moving average very quickly up to the 200-day moving average. I think Monday we crossed over and then went below. Tuesday we went through it. Yesterday we stayed above it. Now today we're way down below it. We're not down to the 50-day moving average which is technically a positive sign, or may be a positive sign. What we'll actually find out ...
What's interesting is that because Tuesday was a cut off day for a data report that we talk about a lot. We go over our weekly review in our membership program every week, we analyze this data, so every Friday a report comes out from the CFTC. It's the commitment of traders report. That report shows the interaction of the 2 major entities that formulate the silver price on the futures market, the Comex, the most important exchange for discovering silver prices currently in the world.
There are other exchanges that are evolving, that are coming on-line. The Comex is still the largest by volume by far. These 2 entities, these main entities, the commercial traders, the big banks, the investment banks, the JP Morgans versus the managed money traders or the hedge funds or these funds that are basically managing money on behalf of others, other people's money.
The interaction is based upon these technical indicators. In that report, we'll be able to see the change in their trading structure, the relative positions of those traders. What we'll probably see based on today's price action is that on Tuesday's cut off when the report comes out on Friday, it's a little confusing, we'll see what happened was that most likely the managed money traders had covered a lot of short positions that they had accumulated in that rally, so that position will be less. That category usually represents the fuel that burns when we move up through these moving averages.
On the other side, you'll see the net short position of the commercial traders will have increased. You and I probably noticed that even during these rallies we saw ... I think Friday was the biggest up day we had seen in a year. Even though we were up and it was significant, we were up at 5%, we still tapered off. That's an indication that that rally was capped, and we'll see evidence of that in the commitment of traders report.
What that all means is that we're still locked in this cycle, this pattern where these big traders, they're commercial traders who use high-frequency trading in order to keep the price contained, to keep a veil over the fundamental supply and demand reality.
In that video, you can go back to the You Tube channel to find it, we talked about the major factors that I think will lead to a convergence where what we're seeing on the surface in terms of price, these factors will converge and the true fundamentalist supply and demand factors will kind of manifest.
We're seeing a lot of those signs right now. We can talk about them but, again, just to recap, we've been talking about technical analysis as it pertains to the silver market and futures market in particular, the moving average, the relative strength indicator, and the MACD are probably the most important technical indicators.
I would say moving average is number 1, and we're kind of flirting around with a 200-day moving average today. You saw when you woke up this morning, most of you saw the price was down a solid 2-1/2, 3%. Really out of nowhere. There's no economic justification.
What's absurd about all of this is that if you back up and you look at this whole phenomenon, this religion of technical analysis, which these traders really adhere to, it's based upon a fundamental, this principle that price reflects all of the relevant information. That's it. That belief right there is what all of this analysis hinges on, is this belief that the price is already done, already factored in, all of the relevant information.
Of course, it hasn't even been factored in even close to the relative information. That's a dangerous thing. I remember, and I'm sure you remember as well, when I was a kid, I watched professional wrestling with my friends. I was convinced, only because they were so convinced ... I had this funny feeling that it couldn't be real, although it seemed like it was pretty athletic and impressive what these guys were doing, but my friends, they really believed it, and they would fight about it and argue about it. It turns out many years later, it's all just ... It's not real at all.
Technical analysis is dangerous. That was entertainment. This is dangerous, because we've gone so far disconnected that, as Russell was saying before in the chats, he feels his internal alarm bells ringing, because when we do correct finally, most people are going to be in for a significant wake-up call. That's the core of what I wanted to present today. I know that was kind of fast. I do have a couple of charts to show you. I'd like to answer questions or take your questions and comments.
How absurd this idea of the principle of technical analysis that price is actually taken into consideration all of these factors. Look at this, inflation and student loans and food stamps. I know you've seen this before, but debt levels, overall money printing, health insurance costs. Look at labor force participation. The workers share of the economy which is related. Median family income also related to that. Even home ownership.
Again, that's another reason why I think we're in for a shock, most people are.
To what extent do the manipulators use technical analysis?
The way that they use it ... They use it to make money. The commercial traders, I think, they're in this for a lot of reasons we can go into. Who's controlling them? Who controls the fed? But on the surface, they're using it to profit.
Today, for example, maybe over the last couple of days, they allowed these managed money traders to maybe come back in before they would fleece them by putting the price back underneath the 200-day moving average, so it looked like everything was going to keep going up because, technically speaking, we just crossed over a huge ... We stayed above the 200-day moving average.
The manipulators, again, they use it because they could put the price where they want it, and they know the trade structure. They know how these managed money funds trade. In fact, they broker their trades. They're the dealers for these guys. They're just gaming them. They're playing them. They're playing it for a profit. That's what they get on a surface. No one's watching, so they can do it all day long. They're still involved, unfortunately.
Steve believes that the manipulators don't care about technical analysis, and that manipulation's done for political reasons. I agree and I disagree. I think that they use technical analysis to game it, to make money. It justifies their existence if they're making a profit. JP Morgan has a perfect trading record. But you're right in that there are political reasons, I believe, that are connected to this. The purpose of this, the reason why I want to bring it out is because it allows regular people like you and I ... instead of going out there when the price is moving and trying again to find some crazy correlation, or being sucked into the commentary that usually follows like ... I haven't seen any of the stories yet, but you'll see them come up. Someone will say, "Oh, yeah, the silver price is down because we have deflation. China is not producing. Greece is going to turn over again," and all these really sort of loosely-connected reasons, when the trade ... You can see the trading actually happen in the data.
I think that's why it's important to kind of keep people sane. Some peace of mind. Even for long-term investors, because there's really no way to turn all of this off. The information is out there. It's so easy. You can turn on your computer and it's right there, whether it's the price or a commentary about the price. I feel like many people become disillusioned on this journey and forget about really ... Again, it's a veil. This all puts a veil over really the underlying fundamental supply and demand reality. .
I'll add here that there is a legal precedent for intervention in these markets, at least in gold, for example.
If you follow any of GATA’s (gata.org) work, you can go through their essays. There has been a legal precedent for intervention in the gold market for years, primarily through the exchange stabilization fund (ESF), which was created at the end of World War II.
I haven't seen a legal precedent for involvement in the silver market, but we've gotten to the point where the regulators are completely captured. The fox really does guard the hen house in these markets. There's not going to be any regulatory intervention.
If you take the combined budgets of the CFTC, the department of justice, the SCC, the GAO, all of them combined don't even come close to the money power behind even one investment bank, like the JP Morgan for example. Any kind of lawsuit or suit will just go on forever.
Chris asked the question about signs of shortage.
That's one of the factors that I think will eventually break the back of paper trading. I haven't heard anything brand new this week. More of the same. There's certainly controversy. I've heard some people say they can find silver, or there's a slight delay - but only for certain products like the American Silver Eagle. Premiums, I've seen people report from 20 to 50% premiums on Eagles, but ‘normal’ premiums for rounds or junk, small bars, for example.
There's definitely something going on. The US Mint continues to report significant demand. We've seen it out of Perth also. On the surface, the fact that this demand exists, is incredible given the overall sentiment.
Even if you move beyond sort of hearsay from the retail demand side, but if you look at like US Mint Reports or what's coming out of Perth, the fact that we are so down in the dumps in terms of sentiment overall ...
Nobody sees this market, and yet demand has been so strong. That goes against human nature. Either Ted's right that there's major intervention by someone who knows better, or we're small but collectively there are enough of us that see this as an opportunity.
I don't know if I believe that. I think that even people that understand the opportunity still can't get over what they see in this price, this illusory price that's created by these points that I've been bringing up.
We certainly haven't seen or heard any more evidence of that particular retail shortage developing into a wholesale shortage, although if you look at what Ted Butler brings up every week, (to which no one makes much comment about,) is the very visible and frantic “into and out from” silver COMEX warehouse inventory.
No other commodity is exhibiting this kind of massive turnover. That's huge, but only time will tell if that develops into a wholesale shortage.
If you know the story and you see lower prices, then many people look at it as a buying opportunity. Especially for a long-term investor.
As I reflect on who we're talking to or who you guys are and as time goes on, I’ve witnessed an interesting phenomenon. You've seen this go on and on. We've seen swings from single digits to 20 back to 8, up to 50, back down to where we are now.
If you're brand new and you have an open mind and you can see the fundamentals clearly enough or objectively enough, then many see manipulation as a gift, an opportunity not to be taken for granted.
However, I don't think that's fair for most of us who have been here for a long time, many people who want to retire, who have been waiting for this. It seems like the writing has been on the walls for years.
Maybe that's the definition of long-term investment, but many people see this as, “Wow, here's another opportunity to buy low”. I think when we moved to the 200-day moving average, and given what we know is likely about the positioning that transpired as we got there, it would been prudent, if you were thinking of buying, to wait until we get pushed back down, which is the normal pattern that's developed.
While you can't predict, or I think forecast accurately, you can come up with a spectrum of probability, and that's something we are developing that as we discuss these issues.
Again, the purpose of this was to kind of create some sanity by understanding what the major price influences are. This is a series that we've been doing. We began by introducing the key factors, and then we've been doing in these episodes, these shorter episodes, a subsequent deep dive into each one of the categories.
If you have any questions, feel free always to email me. You can find me, again, if you don't know me, Silver-Coin-Investor.com.