An Interesting Week Ahead

OK. After 48 hours of MacBook freedom, The Turd has returned with a vengeance. Well, not really...but I have returned with a handful of interesting charts. Let's get straight to it.

First up, here's the bouncing POSX, which is currently the "tallest midget", again. (I'm sorry. I didn't mean to offend our diminutive readers such as Chairman Ben, SecTreas Timmuh and Robert Reich. Let's instead say that the dollar is currently the "most upright of the vertically-challenged.) As it certainly looks like a new intifada is beginning,
http://www.reuters.com/article/2011/05/15/us-palestinians-palestinians-idUSTRE74E1NT20110515
it's probably safe to assume that the index will trade higher overnight, eclipsing resistance at 76.06 and heading toward 76.75. This does not concern me in the least. however. It is what it is.

Now let's take a look at gold as it is going to be reaching a point of critical mass this week. Review, for a moment, this 8-hour chart. Note that the pennant formation will soon be closing. The question is: Which way will gold break when it closes? The no BS answer is that it could go either way. However, since the uptrend line dates all the way back to Turd's Bottom in January, there is a much higher likelihood of a break higher than a break lower. Let's put the odds of a break UP at 80% and a break down at 20%. IF the break is higher, our short term target should be about 1545.

Also, take a look at this chart that I lifted from Harvey's site. Trader Dan has been discussing this, too, and it's very important. We tend to only look at gold priced in US dollars. Look at the price in euro. As the price in euro makes new all-time highs this week, dollar-priced gold will likely rally, too.

Finally, this morning, I want to spend some significant time discussing silver and where it may head from here. First of all, for the short term, here's another look at the two-hour chart. We'll know very soon whether a bottom has formed or whether silver is headed to new lows for this correction.

Here's the thing, recent history would strongly suggest that silver will not head lower and that support around 33-34 will hold. Why do I say this? Well, I think you all know by now that much of my prognosticative ability is due to pattern recognition and, for the immediate future in silver, here is the pattern of which you need to be aware.

Keep in mind that the Comex continues to run extremely low on physical silver. Of this, there is no doubt. The latest data showed only 32MM ounces on hand. That's only enough silver to physically settle about 6000 contracts.
The last three "delivery" months for Comex silver were Dec10, Mar11 and May11. On the chart above, note the consistent pattern in the weeks leading up to "first notice day" of those contracts. (Again, first notice day is put-up-or-shut-up day. It's the day by which you must supply 100% margin in your account to signal your intention to actually take delivery on your contract.) Corrections came and lows were made in the early to middle weeks of the months preceding first notice day. Specifically, a corrective low was made on 10/22/10 before a rally toward the first notice day of the Dec10 contract, 11/29/10. Next, silver bottomed on 1/25/11 before rallying toward the first notice day of the Mar11, 2/28/11. Finally, silver rallied from 3/17/11 clear through first notice day for the May11 on 4/29/11.
This cycle has indicated to me for weeks that silver would peak sometime between 4/29 and 5/6 and then "correct" between 5/9 and 5/23. Also, if you look closely at the chart, notice that the pattern had been for silver to rally for about a week past first notice day. This is why I kept looking for one more run toward 50 and even 52 back during the first week of May. As you know, that didn't happen. Instead, the correction began in earnest on Monday, the 2nd, and has continued to this moment. Because the rally from 3/17 was steeper than the previous two (42% vs 26%), it follows that the "correction" has been more steep, too.

Now, here's where it begins to get even more interesting. To me, the "proper" percentage gain for a rally into first notice day is 26.23%. This is coincidentally(?) the exact gain made from 10/22/10 to the margin hike highs of 11/9/10 and the gain from 1/25/11 to 2/28/11. If we can now all agree that the price action of late April was a blow off top, where The Cartel stood aside and let silver roll all the way to $50, then we can assume that silver should have rallied only to about $43.25. Had it stopped there like it should have, we'd be left with a chart that looked like this:

Ultimately, this post is concerned with what we can expect for the next six weeks as we head toward first notice day for the July11 contract, so here's what I anticipate:
1) Silver continues to base this week between $33 and $35.
2) By Friday but no later than next Wednesday, silver will be chugging higher.
3) Applying a 26.23% gain to a low of $33 or $34 gives us a price target of $42-43 by 6/29/11, the first notice day of the July11 contract.

For those keeping score at home, two weeks ago I was expecting silver to only correct to about 45, not 35. I then expected a 40+% rally toward $65, not a 26% rally to $43. The severity of this correction has forced me to alter these forecasts but the pattern remains.

Therefore, I will look to be a buyer this week if/when silver retreats again to the area between 33 and 34. I will probably be buying July $40 calls. I may even sell some 43s or 45s against them to create a spread.
I'll let you know.
The main thing and the point of this exercise is to illustrate for you that the savage beating silver has taken over the past two weeks was brutal but not unexpected. Pattern and timing now strongly suggest that silver will once again swing higher very soon. Be patient but have faith. Opportunity again awaits just over the horizon.

Enjoy your Sunday and get ready for a very, very interesting week. TF