(By Michael Harris) If there is a pick-up in economic activity and indications about a possible uptick in rates, precious metals will fall. If there is further decline and talk about QE3, precious metals will rally. Technical analysis can only identify price levels with some significance to the market price action at this stage, mainly of very short-term nature. Anyone thinking that technical analysis can provide longer-term forecasts in any market whose course depends on future economic activity and policy is in the best case misinformed.
The future course of precious metals has not been decided yet because it depends on future economic activity and on what action the FED will take in response. If the FED decides in the future that "Operation Twist" is not enough and there must be QE3, then precious metals will rally. If instead there is a pickup in economic activity and unemployment falls – something that I doubt will happen – then precious metals will fall because of the possibility of an uptick in rates. This is simple in principle but maybe too hard to understand for those that are stuck with chart patterns on weekly or multi-year charts thinking that these can provide clues about the future direction of the markets. Classical chart patterns are in the best case random formations.
It may be seen from the SLV daily chart above that since the middle of last month prices moved on a short-term uptrend and the line TL played the role of support. This line was violated yesterday and this indicates a high probability for a move towards long-term support near the lows of January 2011 and May 2012 at $26.
As expected, both the RSI(14) and the MEI(14) indicate a stalled market with a tendency to go lower. But as I said, the future course of this market will depend on decisions not taken yet. Thinking that technical analysis and especially chart patterns formed over the course of months or even years can provide any indication about the future course of this or any other market is no different than believing in a fortune teller. Sometimes the calls are correct and sometimes they are bad. Of course, the fortune teller hopes to be able to make more on the good calls than lost on the bad calls and thus end up with a net profit. However, this will happen only at the limit of large numbers when no transaction costs are involved and this is what fortune tellers and chart analysts with no mathematical background do not understand. In the short to medium term, some analysts will get a streak of losers and some will get a streak of winners. The losers will point to the winners to prove that their fortune telling is not worthless. In the longer-term, most will be losers because of transaction costs and slippage but very few will get very lucky and for some reason miss a few large losers and retain only the winners. Then, everyone will point to them as a proof that charting can be profitable, possibly because they will write a book of how they made millions with chart patterns not realizing that these were the losses of the other chartists that were not as lucky as them.
Fundamentals is what determines the future course of markets and technical analysis can be used for determining price levels or action where very short-term events may (re) occur or price levels that anticipate major changes in trend but without specifically identifying the direction with sufficiently high probability to justify the risk of directional bets.
Disclosure: no relevant positions.