Silver prices and technical analysis
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.