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For months now, we have been tracking the Silver/Gold ratio’s (SGR) bottom, upturn and rally. As originally planned, that would come with a party. Hit it boys >>>

That was especially so with the Canadian index full of speculative resources stocks (TSX-V) outperforming its daddy, the TSX. Flipping the SGR over to its mirror opposite, the Gold/Silver ratio and combining it with the US dollar, an upturn by these two could signify the coming of [more imagery] >>>

That would be a period when the Gold/Silver ratio and US dollar rise together, impairing many markets, especially commodity, resource and after such an astounding rally, the precious metals as well. So let’s take a checkup on all of these items.

First, USD (daily chart). It pulled back from its ill-fated break above resistance at 99 and is now testing the 50 day average. I drew the little broken uptrend channel in there so that we can all but ignore it. Others probably will not ignore it, and that’s another reason I drew it in. Channel breaks are among the more useless things in TA. More important are higher/lower highs/lows (USD is at a higher low to the last short-term low) and support/resistance.

However, if USD can hold the SMA 50 and/or support at 97.50 to 97.70 it would be a candidate to rally. With its poor fundamentals, the only rationale for a rally is as we’ve noted repeatedly in the past, a liquidity problem with risk capital seeking “safety”.

In that regard, USD’s companion would be gold relative to silver. As you can see, the GSR is bouncing sharply but locked in a daily chart downtrend. Here let’s recall what we’ve been noting all along during the party: The major trend in the Silver/Gold ratio is still down, hence the GSR’s major trend is still up. But don’t tell that to the most frenzied silver bugs.

TSX-V/TSX is getting clubbed hard today. It looks impulsive, like an opening salvo against the speculative resources trades. Could recover promptly if USD fails and the GSR fails. But I am not prepared to bet on it after such a great “party”.

Bottom Line

Personally, my plan was always to use mental stops, rather than actual ones on these volatile items (precious metals stock and broader “resources” stocks). Today I exercised some of those stops, taking profits on non-core items and also being aware that I need tax losses in the taxable account. So, taking a couple of those too.

Could this be an alarming shakeout, with a recovery coming next week? Sure, the 2001-2008 bull market was filled with events like this. But this rally has gone almost exactly to our plans (and much further), based on the duo of the Silver/Gold ratio and the TSX-V/TSX ratio. All good things get interrupted, if not come to a major end. Bigger picture wise, I vote “interrupted” if the correction continues.

We’ll have more on Sunday in NFTRH 885. But for now, I want to highlight USD and the two ratios above along with their parameters to keep the party going or see it fail. If it keeps going, I’ll play the bull game again. If it fails, even temporarily, we’ll plot buying opportunities, which are kind of the point of this whole market game.

[edit] Any selling I’ve done in gold stocks is of non-core and is in consideration of my puts on GDX. Ideally, I’d like the puts’ potential to be in effective balance with gold stock holdings.