On The Lookout, Part II

439
Wed, Jun 27, 2012 - 10:31am

When you eat, breathe and sleep your work, sometimes inspiration strikes you at the most odd of hours. Last night, I'm tossing and turning, trying to relax when the following pattern came to mind.

First, let's review a few things to insure that we are all on the same page. In Comex silver futures, there are five "delivery" months. These are the contracts that are the most actively traded because they are the contracts with the most volume and open interest (liquidity). These five contracts are considered "delivery" contracts because they are the ones through which holders most often take actual physical delivery of metal. Yes, the other months do see some delivery action but it is the months of March, May, July, September and December where the bulk of the physical settlement takes place.

If one desires to take delivery through The Comex, one must first buy a futures contract. Let's say you wanted your 5000 ounces of silver in March so you purchase a March12 contract. When you buy the contract, you only have to put up part of the money, this is your initial margin requirement. However, once the contract expires, The Comex will ask you to put up all of the money needed to purchase the silver. The date where "100% margin" is required is known as First Notice Day. It's a sort of put-up-or-shut-up type of thing. By late February, trading in the March contract will have ceased so The Comex wants you out of the contract. Only those with intent to take delivery are allowed to continue to hold it and all of them must have 100% of the cost of delivery in their respective brokerage accounts by First Notice Day.

It is on First Notice Day that we get some idea of how many contracts are standing for delivery. Recently, this number has been coming in anywhere between 2,000 and 4,000 contracts, or roughly 10,000,000 to 20,000,000 ounces of silver. OK, are you with me so far??

Here's the rather alarming trend that hit me late last night:

For the December11 contract, first notice day was November 30, 2011. Closing price that day of the March12 contract was 32.87. BY 12/29/11, the MARCH12 TRADED AS LOW AS 26.50. DOWN 19.38%.

For the March12 contract, first notice day was February 29, 2012. Closing price that day of the May12 contract was 34.70. (It was even higher at 37.26 on 2/28.) BY 3/22/12, THE MAY12 TRADED AS LOW AS 31.18. DOWN 16.32%.

For the May12 contract, first notice day was April 30, 2012. Closing price that day of the July12 contract was 31.01. BY 5/16/12, THE JULY12 TRADED AS LOW AS 26.73. DOWN 13.8%.

Graphically, it looks like this:

Uh-oh. Maybe now would be an excellent time to go back and read this post from last Saturday:

https://www.tfmetalsreport.com/blog/3940/lookout

As you know, yesterday was option expiration and the final trading day for the July12 contract. The action now shifts to the September12 contract. First Notice Day for the July12 contract is this Friday, the 29th. If things get a little dicey next week and into mid-July, don't say you weren't warned. That said, I firmly believe everything I put into the Saturday post referenced above. IF a washout through $26 materializes, please do not panic. Recognize it for what it is: The Closing Acts of The Silver Cartel. Once they are net flat or even net long, things are going to get very exciting around here.

Be patient. Think clearly. Be rational. Prepare accordingly.

TF

p.s. My intention is to update TurdTalksMetals with a new podcast, every day by 4:00 EDT. Today, there will likely be a bit of a delay, however. Thanks for your patience and thanks to all who are supporting the new venture.

About the Author

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turd [at] tfmetalsreport [dot] com ()

  439 Comments

Urban Roman
Jun 27, 2012 - 11:06am

Just in time

... for a couple good articles on ZH:

https://www.zerohedge.com/news/europes-monetary-twilight-zone-neutron-bo...

https://www.zerohedge.com/news/nirp-your-pocket-or-gold-just-happy-see-n...

Does your stack shrink by 2% every year?

Of course the governments of the world will try to tax PMs ... good luck with that, governments.

proton777
Jun 27, 2012 - 11:07am
rl999
Jun 27, 2012 - 11:09am

so metals will be discounted..

Now comes the great debate...where do I set my buy alert?

I magnified TF's chart to 400%, and it seems that each decline was roughly 4$...Maybe this is what those fiends at JPM have been waiting for - they have been working on a longer timeline than us - we kept asking why they haven't blitzed through 26$ to get to all those juicy stops below...because they have been building up for the big attack...now AG is right above support, and a 4$ drop would take it to those evil 18-22$ predictions.

Three times is a pattern to me. Anyone else think so?

¤
Jun 27, 2012 - 11:12am

Explanation

Thanks for the explanation and your thoughts on what our seeing. It's funny how things are on the periphery of your mind and they just snap into place at the oddest times.

Pretty interesting stuff and a classic TF post. Unique and insightful and maybe a little sleep deprived Lack of sleep and eccentric/different thoughts allow for out of the box thinking more so then not.

I'll be buying silver if or when it drops again if I have the powder to do so. I have no clue, but I don't see sub-$25 silver happening and if it does it will be fairly brief. That would be my guess.

I'm rubbing my hands together at the prospect of it though and I think we'll see a huge smash down just before 'lift-off" and $25-ish silver will be a memory after that. I hope.

Everyone have a great day!

Paladex rl999
Jun 27, 2012 - 11:12am

Be careful!

Be careful, folks ... As soon as a pattern becomes obvious, TPTB tend to switch and do the exact OPPOSITE, in order to fleece people trying to ride their coattails. Remember Happy Tuesdays that suddenly became UNhappy Tuesdays?

rl999
Jun 27, 2012 - 11:19am

averages

some simple math from TF's chart above

the average monthly decline in $ = 4.72

the average monthly decline in % = 16.5

those numbers would put us at 22$, tho I have to think that if the price declined that far on it's own the prospect of additional harvesting would be high.

People argue that support would be considerable..Wouldn't it be to the benefit of the BoS to allow this drastic downward spike, and then use it as a springboard to start their own rally? Don't they look for the best value for their money as well?

The Doc
Jun 27, 2012 - 11:20am

good catch TF, will be interesting to see

if the pattern continues.

-Doc

Dagney Taggart rl999
Jun 27, 2012 - 11:20am

@rl

Maybe I'm wrong, but as we approach 0, $4 drops become less likely so there is a caveat to your thesis. A $4 drop at this point is a lot bigger deal than at AG 40.

robov
Jun 27, 2012 - 11:23am

Both Gold & Silver Charts

show long term descending triangle formations off of records highs for gold and previous high levels for silver. If one is going to look at the pattern from a technical basis where we have triple and quadruple bottoms and lower highs off those bottoms the chart really does scream out to a collapse of those bottom levels and more and are predicting or suggesting that we could see lower levels. It would make sense to me that there would be a number of benefits to this for the EE. As Turd states it allows them to extract themselves from their net short positions, prior to going net long and makes BS Bernanke happy to have gold sub $1500 or even $1400 and silver in the low 20's or even high teens prior to announcing some for of QE. As hard as it is to accept it is looking more and more likely. I for one have only recently started stacking silver on the dips so would relish an opportunity to back up the truck and buy in the teens or low 20's. Problem is the premiums for physical would likely be ridiculous.

Descending Triangle is a decline to a new low on news followed by a kick back rally to an intermediate resistance level, a second decline to test the recent low followed by a second rally toward but not through intermediate resistance and finally a decline to fresh new lows on strong volume.

The technical target for a descending triangle is derived by measuring the vertical height of the triangle and applying this length to the new breakout level.

The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattern. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution.

For the descending triangle, the horizontal line represents demand that prevents the security from declining past a certain level. It is as if a large buy order has been placed at this level and it is taking a number of weeks or months to execute, thus preventing the price from declining further. Even though the price does not decline past this level, the reaction highs continue to decline. It is these lower highs that indicate increased selling pressure and give the descending triangle its bearish bias.

John Galt
Jun 27, 2012 - 11:29am

Cartel Fishing?

I'll be the first to admit that I'm not a big follower of charts, mostly because I do zero trading in the paper game.

However, it is interesting to watch them - being as ignorant of them as I am.

A little while ago both gold and silver spiked higher, only to get immediately dialed back again. The movement reminds me of fishing, and jigging the hook....trying to get a fish to bite on your bait so you can reel him in.

Perhaps this is a new cartel hobby, to dial the prices up and down...in effect, painting the tape on the charts, to try lure in unsuspecting suckers for a bite of the action.

Perhaps that sounds a little too conspiratorial, but clearly there are people who are going to make a great deal of money in this kind of whipsaw action - when they know in advance what directions the moves will be and place their bets accordingly.

(Oops, pardon me...that too sounded conspiratorial. Tsk, Tsk John Galt ...these are free and fairly traded markets, didn't you know?)

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