Summary: across the board warning on base industrial metals and silver with strong implications for equities.

This post was not intended but it has been written up quickly as a result of what is now becoming apparent in industrial metals such as copper and precious metals such as silver, platinum, and palladium. Before producing the evidence, let’s quickly review the vital intermarket relationships which have emerged at a pretty elementary level in the past two years:

During the equities crisis between 2008 and 2009 (earlier and later in some equity market indices), there were savage parabolic declines in copper, platinum, palladium, silver, and other base metals (gold held its ground more firmly). Thus, equity indices and the base and precious metals were positively correlated during this period, as indeed they both were with the commodity currencies and sterling and the euro.

Now let’s add to this two more recent observations:

1. Several indices, including the S&P 500, have broken their Intermediate March 09 trendlines on extremely negative volume readings (as David pointed out in his weekend posts) and on extremely odd COT report open interest and net positioning readings (as I pointed out in my post of February 1st).

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2. Copper has fallen 8.7 percent since the Midas Topfinder warning, along with declines in zinc, lead and aluminum, as I pointed out in the same Feb 1st post. Various reasons have been given for this, particularly tightening of monetary policy in China and a strengthening of the US dollar, but we’ll leave the speculation aside.

These two facts, plus the elementary intermarket observation, are pointing strongly to the resumption of the equities crisis. The current Elliott Wave International wavecount puts us at the start of wave 3 of the ongoing C wave. The evidence here is now consistent with this assumption.

These are the facts. Now lets’s look at the detail, beginning with silver and then moving to platinum and palladium (copper was updated in the previous post).

Silver

Figure 1 is the weekly chart of silver. Notice first that the secular (= 2 to 10+ years) trendline (red) was well and truly broken during the equities crisis. Since then, this trendline has acted as a wall of resistance as the market has flipped and long-term support has become resistance. The market is now at key support at 16,000 with two Midas support curves at 15,000 (= Fib 23.6%) and 14,000 (= Fib 50%). As far as Elliott Wave is concerned, the pattern is drawing out a classic ABC correction.

Figure 1

Most importantly, however, we have the indicator at the top, which is the COT Index set to a three year lookback. For those who missed the copper posts, the COT Index is normalized by running the stochastic formula through the net positions of the Commercials in the COT report. The indicator is used extensively by experts on the COT report such as Larry Williams and Stephen Briese. Because the indicator follows the Commercials, it works inversely to a normal stochastic. Thus, its present position is a sell signal, not a buy, because Commercial net positioning moves inversely to price. Only on a few occasions does this indicator reach such extreme levels, including at the 2008 top. As pointed out in the first copper report, the Commercials are divided into Commercial producer hedgers and Commercial consumer hedgers. Commercial producers always hedge by going short to protect against falling prices, whereas Commercial consumers always hedge long to protect against rising prices. Here, then, the COT Index is warning that Commercial producers are again at record normalized levels, thus warning over an over-supply in the market.

Palladium

Let’s look at palladium in Figure 2.

Figure 2, www.timingcharts.com

Straightaway we can see a very similar COT report situation to silver, with a near record level of open interest in the lower pane and extreme net positioning in the Commercials and NonCommercials (funds and large speculators). Let’s look at the data in Figure 2 in Figure 3 also.

Figure 3

The chart above contains two COT Indexes, one for the same Commercial net positioning data (top pane) and the other for total open interest (middle pane). We can see that total open interest is falling sharply, meaning that someone is leaving this market rapidly. Since it isn’t the Commercial producers, who are again hedging at record levels, it’s probably the funds and speculators.

Platinum

Here we have the same story in Figure 4.

Figure 4, www.timingcharts.com

Figure 5 (the next chart below) is much the same chart as Figure 3.

Figure 5

Here in the middle pane we see total open interest again at an extreme normalized level and in an inverse position to the Commercial net positioning in the top pane, where again Commercial producer hedgers in platinum are at extreme short levels in expectation of a severe drop in demand.

Topfinders on platinum and palladium

Figures 6 and 7 are merely the same charts of palladium and platinum respectively with the Topfinders fitted. The palladium Topfinder is 98.9% done on a cumulative volume fitting (D) of 350,000. The platinum Topfinder is 100% done on a cumulative volume fitting (D) of 700,000.

Figure 6, palladium

Figure 7, platinum

COT report observation on equities

In the post updating copper on February 1st I drew attention to the extraordinary absence of interest in the equity index futures markets (S&P 500 and Dow) by the large funds and speculators, who have had net positioning virtually at zero (with almost zero percent open interest also) throughout the uptrend since March 2009. This is in stark contrast to fund and large speculator commitments in the base and precious metals markets. In the futures markets, at least, this is where the bulk of the cash has been going, not in equity futures.

Gold

Gold held up during the previous crisis in equities even while the US dollar rallied. If we do get the scenario discussed in this post, gold looks set to do so again, with the downside target being 10,000.

AColes 2nd Feb 2010

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