Sunday, September 28, 2008

That Was Crazy! -- A Reader Requests Assessment of Recent Silver Collapse

among other things J.S. in New England writes:

A week or so ago you invited your readers to offer suggestions for what they would like the blog to cover. I'm still wondering about that huge gold and silver drop a few weeks ago--especially silver's. Wondering if this is a case where FA trumped TA--basically the unwinding of the short dollar/long commodity trade and, I suppose, desperate cash grab on the part of the Financial BigFoot class meant TA analytical and predictive tooks had to be thrown out the window?

many, many thanks for your kind note. it's nice to Know that not all my readers are web-bots.

as I mentioned in my email response to you, Trend & Value does not accept the dichotomy between 'fundamental' and 'technical' analysis. (in theory, though as you'll see, it's hard to exorcise the demon.)

Price as the Countenance of the Market

what is called 'technical analysis' most closely resembles another widely derided 'science': Physiognomy.

(and while we're dabbling in analogies, I suppose 'fundamental analysis' more resembles the 'science' of Psychology.)

a prominent theorist in the field of physiognomy once said, "Physiognomics provides a great tactical advantage in achieving objectives. The body never lies." (quote from this wikipedia article)

now how often have we heard similar assertions from market 'technicians'!! "Technical Analysis provides great tactical advantage in achieving objectives. The chart never lies." sounds familiar, doesn't it?

well now, the success of technical analysis (actually I usually prefer the term 'price analysis', I've yet to figure out where the term 'technical' figures in to all this) is completely contingent on an understanding of the social/economic/historical realities hiding behind the data, although the recognition of these realities can (must?) be in turn informed by the analysis of price action.

I find it necessary at this point to quote a longish passage from Professor Ortega's work, Man and People:

[T]he body of the other, at rest or in motion, is an unstinting semaphore that is constantly sending us the most various signals or indications or suggestions as to what is going on in the within that is the other man. This within, this inwardness or intimacy, is never present, but is compresent, like the side of the apple that we do not see. And here we have an application of the concept "com-presence," without which, as I said, we could not explain how the world and everything in it exists for us. Certainly, in this case the function of com-presence is more amazing. For in the case of the apple the part of it that is hidden at any moment has been present to me at other times; but the inwardness that the other man is has never made itself, nor can ever make itself, present to me. And yet, I find it there--whenever I find a human body.

The phsyiognomy of that body, its mimicry and its pantomine, its gestures and words, do not make patent but manifest that there is out there an inwardness like my own. The body is a superlatively fertile "expressive field" or "field of expressiveness."

future break-throughs in the field of financial markets analysis will come from a theoretical application of this Presence/Compresence dynamic that Ortega was so fond of. this new science will go by the name The Phenomenology of Finance. someday I'll publish a book by that title. but for now my all too fuzzy thoughts on the subject will occasionally be offered to the readers of this modest weblog.

now to address your question of What the Hell Happened to Silver?

for nearly a year, Silver was laden with a heavy commercial short position. a clean-out was certain to occur at some point. then the stars aligned in mid-July, the expected corrective trend developed, yet at every stop along the way the short position wasn't closed out. why? I'm not really sure, but the obvious, if unhelpful, answer is Because They Could.

since 1970 I count 13 times where Silver has either at least doubled in price or its price has been at least cut in half. so the unexpected should be expected. not that I had anticipated the extent of this last haircut, but don't think it was a failure of Technical Analysis, but more a failure of Technical Analysts. for example, the total extent of this correction was almost precisely .618 of the gains from the lows of the early 90s to the high of March of this year.

plus one of the most basic charting techniques--the trendline--could have whispered to a technician 'ten dollars, ten dollars.'

furthermore, one of my favorite price patterns should have hinted at the potential extent of the collapse. for lack of a better term I call it the Reversal Arch.

speaking only for myself, it seems that it wasn't my 'technical' toolbox that lead me astray. rather it was my 'fundamental' prejudices. 'Silver can't go all the way to 10.50. that's way too cheap. Silver under 11? That's Crazy!'

Saturday Night Live - Brian Fellows Safari Planet