Saturday 25 January 2014
Is there a difference between fundamental analysis v technical analysis? A qualified yes. How so qualified? We do not speak for others, not even from the “technical” camp for there is a distinct difference between strict technical analysis and “reading” a chart based solely on price and volume.
We are not fundamentalists, at all, with emphasis on at all. Nor are we technicians, as most technical analysts, [TA], are. TA rely upon a few or several technical tools as a means of interpreting the markets, such as moving averages, [even used by fundamentalists, to a degree], RSI, Bollinger Bands, MACD, trend lines, overbought/oversold indicators, etc, etc.
What we use exclusively is a combination of price and volume and read within the context of the prevailing trend, for whatever time frame, monthly down to intra day. The range of a bar tells the ease, or lack of market movement. The location of the close says who won the battle between buyers and sellers. When volume is added into the mix, the market begins to take on life, of sorts, that fleshes out the actual ebb and flow of the tug-o-war between the opposing forces of supply and demand.
Fundamentals are an attempt to discover and measure the factors of supply and demand. The biggest problem with any such analysis is one of timing. There is none. The other issue is the degree of awareness of which fundamentals are the biggest drivers; some may not be known or even recognized, leaving any such analysis incomplete.
Admittedly, we know nothing about fundamentals, by choice. What we know of them is that they are fully incorporated into the charts by those who know what they know and ultimately make a decision to act upon that knowledge. That action gets translated into price and volume. It matters not if it is widely known information, insider information, market manipulation, what have you. It has to show up in executed price and be a part of total volume. Once information enters the market in price and volume, it is a “got ya” moment.
As to the more commonly recognized technical analysis, every tool is a derivative of price and volume. We simply choose to focus on the purity of the information in its original format. Derived technical tools are all attempts to impose past tense market information onto the present tense in an effort to “predict” the future tense.
It is absurd for anyone to “predict” any future market action, especially the ones that say when price is going to rally or decline, and those that show a chart depicting the future course the market will take. Please stop, or at least review your own results.
The future has not yet happened. There are aspects about the market of which we are certain: Anything can happen, at any time. Every trade potential is a unique event. Markets may appear similar, but the players in the current market are very different than the ones from a similar past situation. How price will develop into the future is unknown and cannot be known in advance.
The market is based on probabilities, outcomes that are likely to occur, and however likely they are to occur, no one can know how they will unfold. You have a history from the past two years of endless predictions on where the prices of gold and silver would be. We have not kept a scorecard on the silliness of how wrong so much respected talent, and lesser, varying degrees of not so much talent that have totally missed the mark.
Where do we stand in the overall picture? We thought gold and silver would be higher, and we have advocated the purchase of the physical metals, for reasons explained, but we have not advocated trading gold and/or silver from the long side, [save a few short-term trades that were qualified as to why]. The only reason why the futures markets were shunned from the long side was for the simple reading of the charts: the trend has been down.
The primary reason for owning the physical has been as a form of asset protection, and that has not worked well for the past few years as the value of silver and gold have been on the decline. Go beyond just the past few years, however, and the value of the PMs have done very well.
Have other asset classes performed better? Absolutely! It then becomes a matter of personal choice if one wants to own PMs, stocks, real estate, Bitcoin, even fiat currency. Some assets will always outperform other assets. Gold and silver happen to be in a class of their own, with a proven history, not always as the best protection, at times, but proven consistently, over time. They have no third-party counter-risk, and they are perhaps the most recognized and widely accepted assets around the world, bar none.
As to the current charts, we are starting to see some subtle changes in market behavior. The trend remains down, and we are not making a prediction that the trend will change next week, next month, or whenever. It does not matter. [Now we are referring to the paper futures market].
The sole purpose for trading futures is to increase one’s capital of fiat-based assets. There is always risk of loss, as many know. For us, and for those who want to grow their capital, the best time to make a market commitment is with the trend. There is no reason to be long in a declining market, and the number of profitable longs in either gold or silver has been very small over the past few years, a handful of bottom-pickers.
As an aside, re bottom-pickers, there is almost nothing worse than being right for the wrong reason. It leads to bad habits of trying to replicate the lucky event. Luck always runs out.
When the trend turns up, there will be ample opportunity to be positioned from the long side with a lower risk and a higher probability of a profitable outcome, but never guaranteed. There is no need to guess. There is no need to predict. Let the market take its course, and then follow its confirmed direction
Will you catch the bottom? No. [Care to guess how may have tried and succeeded in the past few years?] If you can consistently catch profitable trades, with the trend as it develops for at least many months and more, does that not make plain common sense?
Price is knocking on the down trend door in gold, but that does not mean it is knocking that door down. It takes time to turn a trend. We show gold testing a small 50% range. There are two higher half-way points that price has yet to approach, so despite a decent rally, last week, the trend has not turned. How gold corrects lower over the next week or two may well provide some important trend information.
Given how no one knows how the market will correct, it is best to wait and see what the market reveals, first.
The daily shows in detail why gold was expected, [not predicted], to run into resistance at the 1260 – 1270 area. Always think of support or resistance as a price area and not just an absolute number. Thursday’s wide range, high volume bar was likely a combination of short covering and maybe some new buying. What will be key to watch is how price retraces this last rally effort.
If the market intends to go higher, the next correction will have smaller ranges and lighter volume, indicating less selling pressure.
If price corrects on increased volume and wider ranges with weak closes lower, then the down trend will remain intact.
Let the market declare itself.
A Tale of Two Metals. Silver acts differently than gold. It is clear that the trend remains lower with no sign of buyers taking control. A picture of 1,000 words to which we need not add.
As an aside, how does one reconcile this chart with the fundamentals? Everyone claims the fundamentals for silver are ultra-bullish. Does the chart match?
Silver has work to do to turn the trend around. Looking at the daily chart, in some ways it would not take much effort to end the down trend.
There are no guarantees that physical silver and gold will continue to be available at current prices, maybe not even at any price until it adjusts to a higher level. That is the risk everyone who want to buy coins and bars takes, while waiting or trying to get a better price or simply trying to outguess the market.
Everyone knows the vaults for physical-by-the-tonne are like Old Mother Hubbard’s cupboards, and the premium for higher amounts of gold, to the extent any is available, continues to grow. No one knows when the available supply for physical- by-the-ounce will also tighten. Anything can happen.