 Tactical Silver
Trends 2
Adam Hamilton
Archives
January 7, 2005
The past month has not been
a happy time for silver longs, and the New Year has yet to bring
any respite. After reaching its latest interim top of $8.01 on
December 1st, the always-volatile speculative metal first plummeted
to $6.68 in a matter of days before relentlessly grinding down
to $6.41 earlier this week.
Such brutally sharp declines,
while par for the course in silver, never fail to eviscerate
leveraged longs. In the last few weeks I have received several
e-mails from leveraged speculators lamenting about the unfortunate
travails silver's plunge put them through. Silver can multiply
wealth faster than winning a lottery when it is soaring, but
when it plummets it becomes a black hole for leveraged capital,
virtually inescapable.
Silver has always been a challenging
market to trade. Compared to gold, silver is an incredibly small
market. Small markets are vastly more volatile than larger markets
and popular sentiment waves lead to greatly magnified price effects.
Small markets are also relatively thinly traded, so it doesn't
take a lot of speculators in the grand scheme of things to move
prices dramatically. The combination of small fast-moving markets
with futures leverage is a merciless double-edged sword.
But, if you are psychologically
prepared and prudently
protect your speculative capital, hyper-volatile markets
like silver are nothing to fear. In fact, the opportunities they
offer are nothing short of tremendous. If you know what to expect,
if you go into silver just knowing that it will be wickedly
volatile, then you can remain emotionally neutral and seize the
periodic dazzling opportunities that present themselves.
While silver-investor sentiment
is so rotten right now that it would make a funeral feel like
Mardi Gras by comparison, I suspect silver is presenting us with
another dazzling long opportunity today. As always though, it
takes a lot of guts and taxes one's contrarian psyche to be looking
to throw long in the midst of the bloody carnage of our fallen
fellow speculators ripped to shreds last month.
But as Baron von Rothschild
wisely said the best time to buy is when there is blood in the
streets. This week I would like to once again explore the current
bloody tactical technical scene in silver. When the recent technical
developments are combined with the amazingly dire sentiment on
the white metal, odds are we are looking at one of the greatest
buying opportunities in this bull to date.
Before we delve into the charts,
it is important to understand why speculators have to be
students of the markets. By studying silver's past behavior,
speculators can gain crucial insights into both what the metal
is capable of and when probabilities are high for a move in a
particular direction. Diligent students of the markets rarely
if ever get flustered or upset because they know what a particular
market could do before they even make a trade.
If you have been following
the price action of the silver bull in the last couple years,
the silver correction of the past month shouldn't have bothered
you one bit psychologically. As our first chart shows, there
was nothing even remotely anomalous or unusual about the negative
silver action since early December. We have seen this all before,
less than a year ago in fact, and silver is just playing off
of its usual volatile script. Nothing new under the sun, as the
legendary King Solomon wrote in Ecclesiastes!
The key to understanding the
silver action of the past month, and assessing whether or not
it poses a threat or opportunity to speculators going forward,
lies in seeing the correction within its proper technical context.
The latest silver correction's speed, magnitude, and relative
range appear all but identical to the last major silver correction
in April 2004.
Early last month, silver plummeted
17% in only 7 trading days, ripping the hearts out of leveraged
longs and leading to the horrifically ugly silver sentiment we
see dominating the market today. Now in any other major market
such a sharp and brutally fast move would seem like Armageddon.
Can you imagine the wailing and gnashing of teeth if gold fell
17% in 7 days, or even worse the S&P 500? That would be quite
the scene!
But for silver, such massive
and rapid moves are typical and speculators ought to learn
to expect them. A quarter century ago Professor Roy Jastram
wrote an outstanding book on silver called "Silver: The
Restless Metal", a perfect title. If silver has one defining
characteristic, it is its extreme volatility and restlessness.
Silver has always been a volatile and restless metal and it probably
always will be, so speculators deciding to play in the silver
arena need to steel themselves psychologically and prepare for
extreme moves.
For silver, a 17% drop in 7
trading days isn't even noteworthy! Back in April, during the
last major silver correction, silver plunged 15% in 5 days. After
enjoying a few serene days in the eye of the storm, it promptly
plummeted another 19% in only 8 more trading days. All three
of these wickedly fast corrections are marked above for easy
visual comparison. Just as the double plunge in April didn't
threaten the viability of silver's long-term bull, neither will
this December specimen.
Once we can get past the initial
shock at the 17% 7-day plunge last month and realize it is just
par for the course for this particular highly-speculative restless
metal, all the fear that grips folks who don't diligently study
the markets instantly evaporates. After all, why get worked up
over a move that is little more than garden-variety average?
This realization paves the way for other equally important technical
observations.
Bull to date, silver has now
powered higher in two major uplegs and plummeted lower in two
major corrections. But over this entire multi-year timespan,
silver has never materially violated its primary long-term linear
support. As you can see in this chart, the bull-market support
for silver is just under where silver fell to earlier this week.
So not only was silver's sharp correction typical, but its apparent
bounce point is starting exactly where it ought to be as well.
In addition to being near its
primary long-term support, silver has also converged with its
key 200-day moving average. Bull to date there are simply no
better technical times to throw long than when silver is near
or slightly below its 200dma. Bull markets, including silver's,
simply always periodically flow higher and ebb lower, diverging
and converging with their 200dmas over time. Once again this
is absolutely nothing new in silver and we all ought to expect
it.
I have written
extensively about these 200dma divergences and convergences
and their extraordinary importance for actively trading primary
trends. In silver's case, I wrote an
essay on April 30th after its brutal double-drop correction
above and correctly concluded at the time, "With extreme
volatility just par for this course, odds are that April's price
collapse was just a bull-market correction leading to a fantastic
buying opportunity to add new long positions in silver. Get deployed!"
About four months later silver
had another mini-correction in early September. Once again sentiment
grew dark and ill so I felt compelled to write. On September
10th, the day silver bottomed, my original "Tactical
Silver Trends" essay concluded, "If you join me
in believing that this young silver bull market remains in force
for fundamental reasons as global demand continues to exceed
mined supply, then there is no better time to buy than when silver
trades near its lower support zones, like today. Even after its
ugly slump this week, silver's technicals look fine and remain
quite bullish."
Thankfully these earlier prognostications
proved to be right on the money. It is just an ironclad mathematical
law of the markets that trending primary bull markets, like silver's,
are best bought for great profits when they periodically correct
and converge with their 200dmas. And as our latest charts reveal
this week, from all appearances silver looks to be staging for
another one of those incredibly compelling major buy opportunities
today.
Thus, from my perspective as
an active silver speculator and a student of the markets, nothing
atypical or concerning has transpired. Silver rallied strongly,
then it corrected sharply in line with precedent, and now it
is back down near major support just begging contrarians to buy
it before the majority of investors figure this all out. Rather
than getting upset and succumbing to the terribly negative sentiment
on the forums, the key to shrugging this correction off is understanding
it within its true technical context.
Our second chart below digs
deeper into silver's current position relative to its 200dma,
but before that there is one other crucial issue on our first
chart that needs to be addressed. At the end of its first major
upleg silver topped at $8.20 on April 6th. But at the end of
its second upleg silver topped at $8.01 on December 1st. These
descending interim tops are causing a lot of angst even
among seasoned technicians.
If silver cannot even exceed
its original interim top, does that mean its bull market is over?
I have received quite a few e-mails agonizing over this technical
development, and wondering how it ought to be interpreted. The
short answer is it is not silver's price that drives its long-term
bull, but its supply and demand fundamentals. As long as global
silver demand exceeds mined silver supply, its long-term
uptrend will continue regardless of temporary price extremes
that don't fit into nice tidy patterns. And silver demand has
exceeded mined supply for decades
now.
Technically, I believe the
anomaly was not the lower interim high of December, but the parabolic spike
of Q1 2004. If you look carefully at the chart above, silver
looked like it was topping in January 2004. It had a parabolic
ascent, broke way above old
resistance, and struggled around $6.50 for over a month,
clear topping signs. At the time I thought silver was due for
a temporary
correction, but I held onto our long positions and recommended
the same since bull market surprises are usually to the upside.
We diligently use trailing
stops to allow us to stay long for as long as possible while
still providing ample protection from a correction.
Then, suddenly in February,
silver just erupted and streaked towards the heavens. It rocketed
up in an ever-accelerating slope, a parabola, blasting from $6.50
to well over $8.00 in a little over a month. The speculative
fervor surrounding this particular spike was incredible. Such
a buying frenzy, even though small by silver's immense historical
standards, still demanded caution. When silver topped at $8.20
on April 6th analysts and investors were eagerly looking for
$10 by May. The greed was phenomenal.
Like most manias, large or
small, it is not obvious exactly why this little silver frenzy
ignited. But it had all the hallmarks of a mini-mania and called
for extreme caution. If you lop off that huge March 2004 spike
on the chart above as a speculative anomaly, you are left with
a nice tight bull-market uptrend. As a matter of fact, if silver
had fallen back from $6.50 in February as it should have without
the speculative anomaly, it would have fallen about 23% to its
200dma. This is right in line with the 17% correction we saw
in December.
And if the speculative anomaly
of March 2004 is ignored, silver's first major interim top would
have been near $6.50 in February while its second exceeded $8.00
in December. Of course this pattern, if it had happened, would
have led to wonderful warm and fuzzy feelings in silver technicians
worldwide. But when the speculative anomaly is taken too seriously,
indeed silver has carved descending tops. I am not at all worried
about this though since I suspect the speculative anomaly caused
the first top to be "too high" relative to trend, laying
the foundation for today's great technical unease.
Now the obvious corollary to
buying on 200dma convergences is selling on extreme 200dma
divergences. The farther silver stretches away from its
anchoring 200dma, the higher the probability that a correction
is imminent. Three days before the April top in our 4/04 Zeal
Intelligence newsletter I wrote to our subscribersÖ
"Stretched 42% above its
200dma bull-market support, a major correction is due
in silver. It makes no sense to buy silver stocks or physical
silver today. A typical bull-market pullback would drag the metal
back down near its 200dma, and I am sure that silver stocks would
be hit hard in a silver retreat back down under $6."
Speculation is certainly not
rocket science friends, it is just using the typical behavior
of silver, and of bull markets, to help us define high-probability-for-success
moments to trade. If you want to go long, odds are you will reap
the highest rewards by patiently waiting until silver converges
with its 200dma like today. If you want to throw short, your
odds of success increase the greater the distance that silver
diverges above its 200dma. Relative 200dma trading is
simple and effective.
Our final chart zooms in to
just the period of silver's second major upleg and correction,
since May. In addition to silver prices, it also shows Relative
Silver in red, or the silver price divided by its 200dma. This
expresses silver as a constant multiple of its 200dma over time
enabling us to easily compare relative extremes. I have explained
this Relativity theory in depth in past
essays if it is new to you.
Relative Silver (rSilver) also
shows the white metal to be a strong buy today, solidly corroborating
the conventional technical analysis above.
We have been watching an rSilver
range of interest from 0.99 to 1.25. When rSilver is near or
under 0.99 it is a high-probability-for-success moment to go
long, and when it is near or over 1.25 it is a high-probability-for-success
moment to throw short or at least go neutral. Even in just the
past 8 months or so silver has been remarkably consistent in
rallying strongly once it falls just under its key 200dma. The
sub-200dma bottoming zones are rendered above as transparent
blue ovals.
In relative terms, silver fell
to 0.937x its 200dma in May, 0.943x in June, 0.963x in September,
and now 0.958x today in January. As you can see with the red
line rendered above, silver tended to rally rather sharply once
it fell 4% to 6% under its key 200-day moving average. As long
as silver's bull market remains intact as it should be for core
fundamental supply and demand reasons, then today's 0.958 rSilver
reading ought to prove just as bullish and profitable as its
predecessors' strong buy signals.
Now on the topside rSilver's
1.198 apex in early December near its second major interim top
didn't even approach the massive 1.448 that silver witnessed
in early April at its first major interim top. I realize this
also bothers some folks, but once again I suspect the reason
is the speculative anomaly of March 2004. Without that strange
surge in speculative fervor at what probably would have been
an interim top, April's extreme rSilver reading wouldn't have
been anywhere near as high.
And major topping levels are
nowhere near as inherently predictable as major bottoming levels
anyway. While 200dma convergences are very obvious, like today's,
200dma divergences at the end of uplegs can run all over the
map in extent. As such, it is best to buy low near major 200dma
convergences and just run trailing
stops so you don't have to worry about selling. The stops
will enable you to ride bullish uplegs as long as possible but
still sell you out sans emotional angst when the inevitable subsequent
corrections finally arrive.
The bottom line is silver looks
fantastic today technically. While its sharp December correction
nuked sentiment and slaughtered some leveraged longs, the restless
white metal really didn't do anything out of the ordinary technically.
Silver is behaving just as it ought to and there is nothing to
fear.
As usual, we are starting to
scale in our own trades for this next expected major silver upleg,
the third of this bull market to date. In the shiny new January
issue of our acclaimed Zeal
Intelligence newsletter just published, I discussed and recommended
two new silver-stock trades. Both companies have excellent prospects
in the next silver upleg, and one in particular is a small junior
with staggering 10x+ gains potential if this silver bull continues
to march higher in the years ahead.
Both of these stocks are being
mercilessly hammered now, blood is flowing in the streets, so
you might not have another equally stellar opportunity to consider
adding them to your portfolio. Please
subscribe today before silver rallies and this amazing long
opportunity evaporates. I am also planning on layering in more
silver-stock positions in the months ahead as silver confirms
this third-major-upleg thesis.
Brand new e-mail PDF-edition
subscribers will receive a complimentary copy of this just-published
January newsletter. In addition, in our exclusive subscriber-only
charts section of our website we have a huge rSilver chart similar
to the one above that we update at least weekly for our subscribers.
You can watch this silver bull unfold as a fellow student of
the markets and keep considering silver's moves within their
proper technical context in order to remain emotionally neutral.
As Rothschild famously said,
the best time to buy is when blood is flowing in the streets.
If you listen to the eviscerated leveraged silver longs and the
dreadfully negative Internet forums, you would think there is
more blood in the silver markets right now than in the Revelation
account of Armageddon.
While December's correction
was sharp and harsh, it was merely garden-variety typical for
silver. If silver remains in a long-term bull market for fundamental
supply-and-demand reasons, then there is no better time to throw
long than when it falls to or under its 200dma, like today. Carpe
diem silver speculators!
January 7, 2005
Adam Hamilton, CPA
email:
zelotes@zealllc.com
Archives
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