The Dow Report: A Long-Term Look at the CRB and Silver
By Tim W Wood CPA, January 7, 2005
Every market is comprised of cycles of various durations. Each of these cycles is constantly ebbing and flowing with one another much like the currents, the tide, the waves and ripples in the ocean. Sometimes these different cycles are moving together and sometimes they move in opposition. In cycles analysis the trend is defined as the direction of the next larger cycle. If the tide is going out, it does not matter that the smaller degree movements are moving in opposition to the tide. The trend is set by the tide. The same is true for the markets. What we try to do is identify changes in the direction of the tide. This is not a science, but we can use the behavior of previous cycles to develop expectations for the future. These expectations are developed based on the quantitative data of previous cycles that can then be applied to the present in an effort to make educated assessments about the present.
Today, I want to start with a look at the long-term cycle in the CRB known as the 3-year cycle. The direction of this cycle is like the tide. When it is coming in, commodity prices rise as the general direction is up in spite of the shorter-term cyclical movements, which could be moving down. When the tide turns and the 3-year cycle tops, the general direction is then down and prices will move lower from that point until low tide is reached. No amount of reasoning under the sun will change this naturally occurring phenomenon as the cycle will have its way. The only question might be just how high or how low the tide may be.
Below is a monthly chart of the CRB. You can see that I have marked each one of the 3-year cycle lows. Like any other cycle, this cycle can contract or expand, but it has historically averaged 38.4 months in duration from low to low. This cycle is now in its 39th month. Without boring you with the details, I will tell you that all of the preliminary evidence strongly suggests that this cycle has topped. If so, the tide is beginning to go out and it will then pull commodity prices down with it. The confirmation of this tidal shift will come in the first quarter of 2005. If the CRB doesn't better its recent high of 291.50 AND if it moves below last month's low of 274.25 during the first quarter of 2005, we will have cyclical confirmation of this tidal change.
It is currently my belief that we will see this confirmation. Additionally, evidence suggests that the break seen last year in grains and lumber were the beginning of this tidal shift. This weakness has since moved into the oil markets and the metals complex.
Now I want to look at the impact that the 3-year cycle in the CRB has on the silver market. Below is a monthly chart of silver. I have marked cycles of two different durations on this chart. The first one I want to look at is the 3-year cycle. I have marked the corresponding 3-year cycle lows in the CRB on the silver chart. There is no denying that the 3-year cycle in the CRB has a definite impact on silver prices. As you can see from this historical data, this impact is simply a matter of record and not opinion-based.
Now the danger to silver, as I see it, is that current evidence is suggesting a 3-year cycle top in the CRB. If the historical relationship between this cycle in the CRB and silver as shown here for the last 30 years hold true, then silver is at risk of being pulled down by the downward forces that are about to be exerted on the CRB. The only question is, how much will this force pull the silver market down?
Let's get away from the CRB now and take a closer look at silver itself. In doing so, I want to shift our focus to the shorter-term annual cycle in silver. This cycle averages just less than one year and for this reason we call it an annual or seasonal cycle. I have marked this cycle's low with an "s" on the monthly chart above.
I mentioned above that I use quantitative data gathered from the behavior of previous cycles to develop expectations for future cycles. When looking at the data surrounding the seasonal cycle in silver, history shows that 76.19% of all seasonal cycles that have failed to move above the previous seasonal cycle high have moved below the previous seasonal cycle low. An obvious example of this can be seen with the 1980 seasonal cycle top. In this case the seasonal cycle bottomed in May 1980 and began moving up toward the all time highs again. But, this cycle topped before these levels could be bettered. The result was a decline that carried silver well below the May 1980 low. When a cycle fails to move above a previous cycle high, I refer to this behavior as a cyclical failure. Other examples of these cyclical failures at the seasonal cycle tops occurred in 1981, 1983 1984, 1985, 1987, 1988, 1989, 1994, 1996, 1997, 1999 and 2000. Each of these cyclical failures lead to declines that moved below the previous seasonal cycle lows. In some cases these declines were modest and in some they were not, but again, on average, 76.19% of these failures have lead to declines below the previous seasonal cycle low.
May 2004 marked the most recent seasonal cycle low at 5.49. As you can see on the monthly chart above, the seasonal advance out of that low has failed to exceed its previous seasonal cycle high. Therefore, we now have a cyclical failure and the historical quantifications are telling us that silver has a 76.19% chance of a move below the May 2004 low at 5.49. It would take a move above the April 2004 high at 8.50, with the current seasonal cycle advance, to invalidate this setup. However, I do not see this happening as current evidence is suggesting that the current seasonal cycle has topped.
Next, I want to look at one of the longer-term dominant cycles in silver. This cycle averages some 5-years in duration. You can see that I have marked these lows on the chart below. Silver is now in its 4th year for the current 5-year cycle. The next low point for this cycle is ideally due in 2006.
So, we know that the cycle is getting long, but what can help us to identify this cycle's top? For this answer we can turn back to the seasonal cycle. Notice that each of the 5-year cycle tops have occurred with a failed seasonal cycle. I have marked each of the proceeding failed seasonal cycle lows with an "s" and the failed tops with a downward sloping trend line. Again, we currently have a failed seasonal cycle in the making. Since this cyclical failure has occurred at all previous 5-year cycle tops, the current failure is highly suggestive that the April high at 8.50 marked the top for the current 5-year cycle.
When we combine the fact that the 3-year cycle in the CRB has likely topped with its usual influence on the silver market along with the seasonal and 5-year cycle quantifications, it does appear that silver is now at high risk for a significant top. This does not necessarily mean that silver will collapse. That is not what I'm saying. What I'm saying is that according to my work, evidence is mounting in support of a top for the 5-year cycle and lower prices now appear to be in the cards rather than higher prices. How far down it goes is another story.
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Tim W. Wood
© 2005 Tim Wood