Clinging to 36

The flatline dance around $36 continues for silver. We wrote about this last night and ,mentioned it again this morning. Whether or not this is due to whimsical dealings of internet folklore or the very real machinations of The Cartel, no one can be certain. What we do know, however, is that there is an uneasy equilibrium around this number 36. There is no conviction either long or short.

You can see that I’ve lengthened the pennant from last evening but that the action still fits well within it. This simply won’t go on indefinitely so it looks like were certain to get some type of breakout before this time tomorrow. I’d still say that the odds of a break UP versus a break down are about 70:30.

In gold, the picture seems more clear.

There appears to be solid support between 1422-24 and that area now has the primary. short-term trendline passing through it, too. I sold my remaining April 1400 calls when things rolled over this morning. I will, however, look to buy back some 1420s or 1430s if we trade down toward the 1424 level again.

Lastly, the Brent/WTI spread is blowing out again today. We discussed this a few weeks ago when WTI was at $84 yet Brent was well over $100. Historically, this spread is about $4-5, not $20, so you knew something was going to happen. It did and crude shot up to $105, closing the gap back to almost $8. With today’s action, the gap is now back to $12.
What is happening is that traders are selling WTI contracts and using the proceeds to buy Brent. Brent is “North Sea” crude. Think of it as European crude where Europe could be supply-squeezed due to ME events. WTI is “American” crude and here, for now at least, we have excess supply. So this spread gets put on and it works…to a point. A few weeks ago, that point was reached when we got almost 5X the historical “gap” in price. The rubber band could only be stretched so far before it snapped back into resting position. Last week, the gap stood at 2X. With today’s action, we are back to a 3X normal position. You could call it 3 standard deviations if you’d like.
Anyway, I tell you all this because I think the moment is coming where the rubber band will snap again. Let’s say by Friday, Brent is $120 yet WTI is still $104. At that point, I’d be looking to buy some WTI calls again. Two things can happen:
1) The gap closes by those long Brent selling their positions and using the proceeds to buy back their WTI.
2) The gap closes as people rush into WTI like we saw on 2/22-2/24 when WTI went from $89 to $103.
Could they both go down? Yes. However, it is much more likely that WTI will go up the next time the gap closes.
Does that all make sense? I hope so. It would be much easier to explain this in person than through typing. I hope you are able to get the point. If I need to further explain/expand, I’ll be happy to.
In the end, I sold my remaining April $105 calls a couple of hours ago but its a very strong possibility that I will be buying them back soon.

More later this evening. TF

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