Saturday, June 18, 2011

BUY ZSL $18.30 -- Update Gold, Miners, Silver and SP-500

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I took an initial position Friday afternoon in Proshares Ultrashort Silver ETF (ZSL) at $18.30.  This 60 minute chart shows that my timing was well intentioned but honestly, it did not work out quite as I hoped. As you can see I was looking for an upside break of the True Strength Index (TSI) indicator. But after my purchase the indicator bounced downwards and took out the lower trend line, leaving price to close for the day at $17.95. A little more patience and confirmation of both a favorable trend line break and ZERO crossover would have served me well.
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Click on any chart to ENLARGE
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My outlook on gold, miners and silver continues to be bearish. This point of view is strongly influenced by my observation of past price performance. The ebb and flow of sentiment seem to yield similar price movement and I will show you how this analysis seems appropriate.

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Let's begin with this daily chart of the World Gold Index (XGLD). I notated the previous intermediate cycle tops and bottoms of the past 2 years, then studied how price has behaved during the period separating the top and the corresponding intermediate cycle bottom.
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My observation is that there is a surprisingly repetitive pattern, as follows:
1. price tops then falls
2. a new up trend line is established, which fails
3. a second new up trend is attempted beneath the previous trend line (which forms a bear flag).
4. this bear flag fails and price moves down to make a final low
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I would also like to point out that each of these recent intermediate corrections bottomed when gold reached its 150 dma (green moving average line in the chart).
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My thought is that we are soon going to conclude the bear flag phase and then gold will head lower until it makes a final intermediate cycle low.
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This is a daily chart of the Amex Gold Bugs Index (HUI--X). The same repetitive pattern of price behavior seems to apply at the same intermediate cycle tops and bottoms.
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The twist this time, however, is that it appears the miners have already completed the entire corrective process. However, I know that in past intermediate cycle corrections the miners always bottom within a few days of gold.....and if gold has not bottomed, the miners have not either. My hunch is that miners will rally soon with the stock market, then put in a lower low.
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The next chart up is a daily of the World Silver Index (XSLV). This analysis is more of the same song, second or third verse. I expect silver to let go of the bear flag and continue falling.
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My other concern about silver is the pennant/wedge pattern that has developed.  In a matter of just 4 trading days, silver plummeted from near $50 to $32.  Longs who blinked missed their chance to get out.  They are trapped and should price begin to slip, I imagine they will be extremely motivated to sell.
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And finally, let's look at the Standard & Poors 500 (SP-500) first with a weekly chart then conclude with the daily chart.
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As I believe we are now heading into the next major down leg of the secular bear market, a peek at the previous down leg may be instructive.
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I think a decent case can be argued that a head and shoulders pattern existed at the top of the previous cyclical bear leg in latter 2007. What followed in early 2008, as we all know, was nothing short of brutal.
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Perhaps coincidental, but I can envision another head and shoulders pattern setting up at the present time. Price is likely to rebound soon but I seriously doubt it can be sustained - particulary with the conclusion of QE2.
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This daily chart hypothesizes that a rally of about 2 weeks may occur next.  For what it's worth, that would place the left and right shoulders exactly 9 weeks apart from the head.  Don't you love that symmetry?
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My TSI Trading record has been updated to reflect my purchase of ZSL.


21 comments:

  1. Thanks for your analysis. Great as always!

    You should put up a donation button, im sure some of your readers would like to show you their appreciation from your time.

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  2. Great analysis, very well thought.
    Im investing 30% of my portfolio with you.

    Again, thank you. I hope we have profitable venture with ZSL.

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  3. John - Good analysis. Let me offer some thoughts that could change the result. Yes QE2 is ending. But isn't interesting the general market started losing steam well in advance of the scheduled end date. This suggests that if the Fed doesn't move soon on some form of QE3 the wheels come off the cart. They know it. Now perhaps the inflation push back will force them to delay QE3 until it is politically acceptable, like general panic fear. In that case the meltdown you see will materialize. But will gold get crushed? Checkout the ratio of gold divided by the SP500 on stockcharts.com
    That suggests gold should hold up relatively well.

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  4. Gilbert - I hope so too!

    Rick - My hunch is that your and my thoughts are in relative agreement.

    I do think, however, that the bigger picture is a gigantic bear market fall in the stock market.

    QE1 pushed the markets up and they stayed up for all of one month after that program ended. QE2 pushed the markets up and they stayed up until *one month before* that program ended (as you pointed out). QE3 is going to push the markets up but by the time that program is *half way* ended, the markets will begin to collapse.

    We have not payed off the debt of credit card (QE1) one. Nor the debt of credit card (QE2) two. And I imagine there is going to be a currency crisis or something that means the debt of credit card (QE3) three is widely known/viewed as junk.

    Gold, in doing my humble research earlier today, did surprise me in one way. Daily gold price at the bottom of recent previous intermediate cycle corrections has been supported by the 150 dma. In a couple of weeks that will come in at around $1450 or so. So, I think the chances are excellent that gold's correction is going to be comparitively mild. Down $85 from where we are now is not that big of a deal.

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  5. Technical analysis of leveraged commodity etf's is not accurate because they are controlled by the underlying asset therefore the chart of ZSL doesnt matter you have to look at silver (which you did) but more heavily. Also silver has major support around 34 personally i dont think that it will drop below that

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  6. Anon - to say that technical analysis of leveraged commodity etf's is not accurate is a provocative statemnt.

    Accurate in terms of the tick chart? Surely you don't think it is an inaccurate representation of the weekly chart, do you?

    I think your idea is interesting. Would you be willing to narrow down the time parameters of your statement so that I can benefit from it? Thanks.

    The 2006 silver parabolic peaked at $15, crashed down to $12, then charged back up the hill for 15 days and reached $15 again. This time it crashed back down to just above $12, made a bear flag for 6-7 days, then utterly collapsed to $9, ASAP.

    The 2008 silver parabolic peaked at peaked at $21,dropped hard to $17 and went sideways for quite literally 4 months ($16-$18 mostly). Then it rolled over and reached $10 in about 8 weeks.

    Maybe we get the 2008 version now in 2011. Beats me.

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  7. You're going to be crushed as silver will take out $40 within weeks.

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  8. Well Jake, we are pleased to know you have a crystal ball that sees the future. Myself included. Best wishes!

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  9. I have a position in ZSL. In analyzing it now, I see the possibility that too many people think silver is headed lower. The current triangle that ZSL is in seems to be just dribbling out toward the apex which many times means it is not breaking out in either direction with any conviction. Both the OBV and A/D are weak and Slow STO seems to be offering a slight divergence. I'm thinking that if it fails to make a higher low and/or a higher high, I'm out-a-there.
    Loren

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  10. Hi John,
    Is there any stop with ZSL in your portfolio?

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  11. Loren - you make some excellent points. Thanks for sharing them.

    Gilbert - I don't use stops. But I guess I may be inclined to sell if the TSI (7,4) trendline on the 2 hour chart is broken to the downside. This would also put price below the 50 ma on the 2 hr which has acted as support/resistance for the last couple of weeks.

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  12. John, I'm still itching to buy XG,how does it look to you? Its probably waiting for me to buy before heading south :-)

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  13. Anon - XG. Well, what I see is this. Price now $11.35. The (7,4) 4 hr TSI gave a buy signal with a trend line break and ZERO crossover near the close last Thursday.

    The previous TSI peak on the daily was TSI (7,4) 0.15, price high $11.71.

    I'll keep my fingers crossed for you!
    Current TSI (7,4) 0.10, price high $11.43.

    Translation: if you buy now at $11.35 with TSI 0.10, and price rises to $11.71 but TSI does not surpass 0.15, that will create a negative divergence suggesting the price will likely fall tomorrow.

    It looks like a tough call to me, but aren't they all? If the dollar would continue to weaken that would help you tremendously. At the present time it is fighting to stay at an area of support. If it falls through sometime today I would think that a safer entry for you.

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  14. Any thoughts about ZSL the way is behaving today ?

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  15. hi John ,
    I lost a lot money for AGQ month ago, and just bought zsl week ago with hope to cover some lost . Looking at the rising of price in silver right now makes me scare. Do you still see silver head down ? Thanks very much and i really am appreciate all your works .
    Tracy

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  16. Tracy, looks you and i are in the same boat, i also lost in AGQ and trying to cover losses.

    The only thing i could say is we are in good hands with John y really trust him.

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  17. ZSL is probably more influenced by the direction of the dollar than anything else (besides, obviously, the spot silver price).

    On daily SLV, $35.45 is the 100 dma and so far it has acted as resistance to the price crawling beneath. Something around SLV $37+ is the price trendline that has separated the previous uptrend attempt from the current bear flag rally.

    As far as I am concerned, as long as SLV price remains beneath those two metrics I am just going to twiddle my thumbs and wait to see what happens.

    Tracy, it is no fun to be scared. I understand that. The best thing to consider is selling whatever amount you need to feel more comfortable.

    The other thing I would say is that the previous silver parabolic deflations had very similar characteristics to what we are seeing now.

    If you are scared now, imagine how those traders felt during the bear flags of the previous examples. No doubt they were a bit unnerved, as well.

    But how did it turn out? The answer to that question is what keeps me in the trade, for now.

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  18. Gilbert - I appreciate your confidence in my judgement. But let me be the first to say that my judgement is flawed just like anyone else's. I try to play with the odds in my favor, but I can get fooled by a curve ball or change up with the best of them.

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  19. silver has a nice up-trendline beginning back in aug sept 2010 on the daily charts. I think that trend line is going to hold and UP we go. FMOC this wednesday will make it or break it. Sorry to disappoint you John. But, being the nimble trader you are, you won't get hurt.
    M-

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  20. Monty said:

    "FMOC this wednesday will make it or break it."

    There is no doubt about it. "To QE3 . . . or not to QE3 . . . that . . . is the question."

    One way or the other, the market is going to move . . . ready set . . . ??????

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