Tucker Report

It’s been a while since my last update. The last two updates were on the silver bubble as it was reaching a very overbought condition. At the time it seemed like the bubble would burst at any moment, but as is usually the case in an extremely overcrowded bullish market, the bubble burst very dramatically and quickly. My last couple of posts gave some clues but technical analysis will often either give false or late signals when this type of market finally falls apart, as was the case this time. One can usually find momentum divergences, and there were many during this run-up, but it is usually not a good idea to act on these when a market goes into its parabolic blow-off. I find the adaptive CCI (in the middle sub-graph) to be helpful in determining if a market is trending too strongly to fight a trend. In this case by time this indicator fell under the 100 reference line to indicate the market was no longer trending (the upper cyan dashed line) the market had already collapsed. Taking a shot at the downside in a parabolic uptrend is very risky and usually success is either a matter of luck or of deep pockets combined with perseverance. Most traders give up after a succession of losses just at the time when the trade would have worked out.

One technique to attempt to profit from these types of markets is to use options and do a put back spread. The above chart shows a trade that would profit if the market dropped dramatically, and would still profit slightly if the market continued to advance. The only area of loss would occur if the market stopped moving and just went sideways over a few days or weeks. But often when a market has an exponential blow-off the market will either continue the parabolic advance or will stage a dramatic reversal to the downside. Of course the market can do whatever it wants and it is possible to have a parabolic up-move followed by a flat trend, which would produce a losing trade with a back spread, but it seems more likely that the market will move one way or the other. The back spread in the above example is simply a short put option slightly above the money, and going long twice as many puts a few strike below the money. Of course this trade could be done with a bias toward the other direction by reversing the spread and doing calls instead of puts.

This is a specific type of trade to do during a specific type of market action. Just to be clear, I’m not in any way suggesting this type of trade after a bubble bursts or during more normal or range bound markets. It is only a tool to keep in mind when a market has a speculative bubble such as was the case in silver recently, or another type of unusual movement. This information is for educational purposes only and no trade recommendation is implied or should be inferred.

Now that the uptrend in silver has been broken it would be normal to expect rallies up to resistance. But where is resistance? It is difficult to find logical reference points when the previous uptrend was of a parabolic nature. I will be watching the moving average (darker blue line in SLV chart above) for a clue. There is no magic in the formula for this moving average, but it does attempt to adapt to the current cycle of the market and offers a good reference point when there are few other clues.

The silver market continues its impressive bull move. There are few technical signs suggesting that this will end, although from a sentiment perspective this trade is extremely crowded on the bull side. There are times when I’m fully in agreement with the story behind a market trend, but there are times within that trend when a market can overshoot and become vulnerable to a severe shakeout. My gut tells me that silver is at or near that point. Most signs point to continuation. Volume seems supportive of the trend. Buying seems to emerge at every little intra-day dip. The adaptive CCI in the chart above is staying above the bullish reference line, suggesting the strong trend is still intact. It seems like grasping at straws to find anything to suggest that this trend will ever end, or even slow down. It seems from past experience that when everything looks this bullish that something happens to send a market unexpectedly the other direction.

One thing I noticed is the symmetry of the two impulse moves defined by the two red lines over the price bars in the above chart of the silver ETF. These lines have been drawn both as regression lines and are of the same length. The little pullback in between these lines is subtle, but I think it is enough to suggest that these two impulse up-moves should be counted separately. If so, the current impulse may be at or approaching an end, not necessarily the end of the bull market, just the end of the current impulse. Before reading too much into this, I’d caution that these symmetrical impulse moves do seem to jump out of the charts when they succeed, but the failure rate is high, and all patterns seem to disappear from notice when they fail. It is easy to become fooled by randomness. But these symmetrical impulses, like other chart patterns do get my attention and often they do become a piece of the puzzle in reading market clues.

The above chart looks at a similar situation from a longer term perspective. This is the weekly chart also with two longer-term impulse uptrends described by the red regression lines. In this case there is a larger pullback that occured for most of the month of January. This time the first impulse to the left is of a longer duration than has occured so far on the current impulse to the right, suggesting this impulse has more to run if symmetrical impulses are in the works. On the other hand, the angle is quite steep, which could suggest this impulse could become unsustainable. There’s always an “on the other hand” when analysing charts. Again, the adaptive CCI is strongly bullish, as it would be with this strong of a move, and may not give much of a warning of a turnaround .

Another thing I always look when trying to figure out the precious metals market is divergence between the metal and the companies that mine it. The above chart shows Silver Wheaton in the lower part of the graph, which is a popular silver miner. You can see how this mining stock has failed to participate in the current uptrend in the underlying metal. Pan American Silver has even shown more weakness, and was down 93 cents today with silver being up by as much. Of course, many company specific issues can cause these divergences, but this seems to be occuring in many of the silver miners. However, (on the other hand) these divergences seem to be less reliable than in years past, probably largely due to the effect of the ETF market.

As I’ve said many times on this blog, it is dangerous to try to pick tops and bottoms. It is much safer to trade pullbacks once a trend is established, and clearly the trend is up in the precious metals. But it is also dangerous to overstay a position in an extremely crowded market. I’ve know many people who have been burned by the silver market over the years in previous bull runs. Almost as many as those burned during the great bubble dot com bust of a little over a decade ago. At least the precious metals market is based on something other than hot air, as was the case with most of the dot com stocks. This is most likely a very long term bull market, that will persists as long as politicians do what they do best. Maybe it will end when we get change that we can really believe in. But don’t hold your breath.

As a result of an irresponsible monetary policy with out of control spending and deficits, there are many asset bubbles being formed, and the silver market seems to be the latest such bubble grabbing headlines. Bernanke has a fear of deflation, which is understandable, but his method of creating “a little inflation” as a cure is sure to have disastrous consequences down the road. And kicking the can down the road is a problem in this country when politicians and monetary policy makers have to think more about re-election or reappointment, than in correcting the problem. Fixing the problem would be painful and insure losses in an election. But destroying the currency and trying to force inflation to defeat deflation will only postpone the inevitable.

The chart above is the weekly silver ETF. After an extended period of consolidation this market broke out to the upside, and has more than doubled in a few months. And that launch was a couple of months prior to the announcement of QE2 (not the boat). You can see how the adaptive CCI (middle sub-graph) quickly went above the bullish plus 100 line and has stayed there. Also, there was an oversold inverse head-and-shoulders in the double stochastic indicator in the lowest sub-graph at the start of the big move. There was one consolidation, forming a bull flag at about the mid-point of this trend. Now the stochastic is in over-bought territory and turning down a bit, along with a still bullish and trending CCI. The daily chart (not shown) shows a very similar interaction with these indicators, however the daily bar show an outside reversal day to the downside, which has a bearish implication if one believes in these patterns. Like all patterns they work about the same as a flip of the coin, but they are interesting to watch as they do sometimes precede spectacular reversals.

So what does all this mean, if anything. For me, as much as I think this market is long overdue for a correction, I don’t want to try to pick a top and go short, at least not yet. I prefer to let someone else pick the top, and to wait for the trend to turn down and then sell the rallies back up to the moving averages. Of course the downside of this thinking is that sometimes the market just collapses and good entry points just don’t materialize. If one were to look at the great silver bull market of the late ’70s to early 1980, one would see a run from $5 an ounce all the way past $50, at least in the futures market, and then a straight drop all the way back down. Of course this was a different time. The market was being cornered, and then regulators changed the rules at the peak, with the peak only lasting a short time, and then limit moves for many days to the downside. Now we don’t have anyone cornering the market, but we do have a fed chief who is engineering inflation and destroying the currency, and money is pouring into just about everything solid, well, maybe with the exception of real estate. But what about supply and demand? Is there a silver shortage as there seems to be in some commodities? There may be a shortage due to the demand to have physical silver back each share of the ETF. But keep in mind that this shortage can quickly turn into a surplus if holders of the ETF reverse their trade. So things are different this time. But they are also the same.

As bullish as I am on the long term fundamentals of both gold and silver, I try to keep an eye on how crowded the trade is, and know from lots of painful experience how quickly greed can turn into fear. I don’t know, and nobody else knows, if this market is putting in a top. This market was under $10 near the end of 2008 and went past $40 last Friday. That was enough for me to take half my silver eagles to the coin shop Friday after the close to lock in some profits. There were many people there buying. I asked the coin shop guy if there were more people buying or more selling, and how high they think silver will go. He said everyone was buying and that silver should go past $50 by next week. After hearing that I felt like getting the rest of the silver out and selling it.

I hear many justifications for higher prices, and of course the destruction of our currency is a legitimate and sensible reason for a continued bull market, but markets can and do become overheated and test prices beyond what the fundamentals can support. The idea of buying high and selling higher works for a while, but buying low when nobody want it, and then selling when they are all waiting in line to buy seems like a more sustainable strategy. And one more point: I’ve been hearing on the radio nearly double the number of ads for silver than for gold. One common justification I hear is that gold historically sells for 16 times that of silver, therefore silver has to climb to way over $100 an ouce just to get back to that ratio. That is utter nonsense. Each market trades on its own fundamentals. Inter-market relationships, even in so-called highly correlated markets, tend to fall apart as differences in supply and demand shift and change in each market. And of course that 16 times ratio theory doesn’t take into account what would happen if gold fell rather than silver climb to achieve that ratio.

And one final point is that the fed has nowhere to go regarding any further lowering of interest rates, and it’s unlikely there will be more QEs. If there is not to be a QE3 and QE4 and QE5, and if the inevitable interest rate uptick happens, especially if unemployment is still high, these asset bubbles could all pop very quickly and be followed by deflation. Uncle Ben surely understands this, but what can be done to prevent it? I sure don’t have the answers. But I do know it’s easier to get out of bubbles as they are inflating rather than waiting until they pop.

Well, another long pause between posts. There are times when market fundamentals and news will drive markets with technical indicators offering little help in trying to figure out which way the market will move next. The above chart is of the IWM, the ETF version of the Russell 2000. It has been a momentum leader for much of the upmove over the last couple of years. You can see how erratic the candles have been lately. The trend can still be considered to be up, at least according to the moving averages used here, but it has been a wild ride. This market started to break prior to the January 28th decline inspired by the events in Egypt. But then the momentum players and other bulls took the sell-off as a chance to get on board the bandwagon, and this index pushed up to test the 2007 high. Since the Libya situation began, with a more durable oil price implication than that of Egypt, this index has been flipping back and forth with violent swings. Of course the other indexes have been doing about the same thing, but this index, with its higher volatility, shows this more clearly. The indicator in the lower sub-graph is simply a detrended price line with a 10 period Bollinger band. This indicator helps to show cycle direction and sometimes identifies waning momentum, aka divergence.

There are many indicators that work very well at certain times in certain market conditions. But there are no indicators that work well all the time. And at a time like this when news is driving the markets, it is best to not rely too heavily on technical analysis to guide trading decisions. The current market is especially difficult. The fundamentals are not supportive, in my opinion, of the kind of bull market we’ve seen over the last couple of years. But the reality is that the market has gone up a great deal and part of trading is to not fight a trend however illogical it may seem. It seems the buying is partly inspired by near zero interest rates resulting in a situation where there are few alternatives to earn a return, most likely with much of the money feeding the trend that would normally be going into safer investments. Then there are the momentum traders who en masse can keep a trend going just for the sake of the trend. Both these conditions almost always end poorly. Now add an increase in oil prices to an already high unemployment rates and mix that in with an administration that is becoming more inept by the day, and that all makes me wonder why anyone would pile onto this bull bandwagon. Yet people are. On almost every dip in the market the buyers come rushing back in. Lately all it seems to take is a few pennies dip in the price of oil to encourage the buyers. When you watch the market tick by tick all day you can sense the urgency of the buying. In markets of the past the buying would seem labored like an uphill climb, and then the sell offs would be characterized by a sense of urgency. This market seems to be just the opposite. It’s eerie. Is this an aberration or something to get used to? I don’t know. Many analysts think it is an artificial condition engineered by the fed, and I’d have to agree. Be careful of the downside. It could emerge in a more serious way. One of these days a down candle might not attract buyers.

The above chart shows one of the big momentum stocks of this bull market. In 2008 (off the scale of this chart) the stock was trading under 20, and on Valentine’s Day of this year the stock almost hit 250. So it’s over a ten bagger. Today the stock just filled that big gap up from January 27th. The trend appears to be reversing, even on a big up day in the overall market. For a long time one could just buy all the pullbacks to the moving average lines and many would have worked out profitably. You can see the last couple of days the stock moved up to the declining moving average lines and has since fallen back. I’m only showing this stock as this pattern seems to be showing up in many of the favorites of the momentum crowd. And many of these stocks were very crowded with bulls. And of course when that’s the situation, something’s gotta give.

I just read the heading on this post and realized that I wasn’t being politically correct.  I’m really sorry I used the word “killed.” I hope that doesn’t encourage anyone out there to go get a gun and start shooting people. I’d hate to feel responsible for anyone innocently reading this blog and then suddenly becoming inspired to go out and get a gun and start shooting  just because I so carelessly chose a bad word. I’ll really try harder to do the right thing.

It’s really hard to believe that CNN had to apologize for a guest using the word “cross-hairs.” Didn’t they have a show called “Crossfire?” I wonder how many shootings were caused by people becoming violent when they saw the listing for that show in their TV Guide? Don’t both parties use the term “battleground states?” And John Boehner won’t refer to the health care bill as “job killing” and changed it to something a bit tamer. I think the latest version is “job crushing,” but maybe that’s even too harsh. Maybe not. I didn’t see him cry when he said it. The politically correct thought police really must think we’re a bunch of morons. Because one crazy person decided to go on a shooting rampage we now have to change our language, just like millions of us now have to take off our shoes at airports because of one crazy passenger. I suppose Microsoft will have to take out the bullet points feature from their Word software. Some mild secretary might become crazed and violent when she’s typing a letter and asked to put in bullet points.

Back to the markets. The above chart of F5 Networks is not a stock I trade, but thought it was interesting to show how quickly a bubble can pop. This stock was around $18 a couple of years ago, and recently went as high as $145. When a story is well known and all investors pile on an overcrowded bandwagon, the rush for the exit can become a stampede. Certainly a lot of money can be made riding the trend. It is difficult to know when the trend starts to accelerate only for the sake of itself, rather than future prospects based on fundamentals. There are many stocks that seem to be in this situation. It’s amazing to watch talking heads on the financial news shows that suggest these bubbles still have a long way to go, and try to justify their valuations, even calling them fairly priced as their price charts have gone parabolic. When the stock inevitably breaks down the talking heads, along with chat rooms, bulletin boards, and other market commentators suddenly stop talking about yesterday’s stock and are off chasing the next bubble. I’ve felt gold and silver have been in that bubble territory for some time, and there are finally signs that the trend, at least this phase of it, is tiring. I do feel the fundamentals in gold are sound and that the long term bull market is still intact. It just needs to shake off the momentum traders and build a new base for the next leg of bull market.

But how to determine when to get off the bandwagon prior to the bubble bursting is the difficult question with no clear answer. I think technical analysis can be a great help. In the case of the above chart there is clearly an over-bought condition from the double stochastic indicator in the sub-graph. It turned down from over-bought territory prior to the big gap down. However, looking back at the chart over the past couple of years would reveal similar over-bought reading, even with divergences, that did not call a top, with the indicator turning back up and the market going ever higher. But when a market or stock accelerates in a parabolic fashion it is best to not get greedy and to let someone else get the last bit of the move. The above chart even had a double top that would suggest that the parabolic move might be ending. Another thing to gauge is sentiment, which of course is quite subjective. When sentiment is all of one opinion, the opposite opinion is probably the side to start thinking about, especially if the trend is just feeding on itself.

I read an interesting article in the Wall Street Journal last week. I know it is now this week. I’m a little behind in my reading. Anyway, the article talks about how the U.S. is losing ground on economic freedom. You coulda fooled me. According to this article the U.S. is now ranked number 9, right behind Denmark, if you can believe that. I’m surprised it is not ranked lower. With the desires of many on the progressive left who view France as the model we should follow it would seem we would be much lower on the list. France actually came in at number 64. I suppose if the Hollywood left had their way, with their love of Castro and Chavez, we would be much nearer the bottom. In fact Venezuela came in at number 175, with Cuba a close second at number 177. Only Zimbabwe and North Korea were below that, at number 178 and 179 respectively. I wonder if Michael Moore and Sean Penn would give up their millions, their careers, and all their possessions if the U.S. would adopt the kind of government they seem to want for the rest of us. It’s a dumb question. The answer is obvious.