 Tactical Silver
Trends 3
Adam Hamilton
Archives
March 4, 2005
Silver's performance was excellent
in February, up more than 9%. Since its latest major interim
low on January 4th, it has rallied a very impressive 17%. To
put this into perspective, it is interesting to realize that
the market-darling NASDAQ actually fell by 4% over the
same period of time. Silver is really starting to shine again.
As an active silver investor
and speculator, I am certainly grateful for silver's recent performance.
As a lifelong student of the markets however, I am even more
pleased with silver's latest behavior from an academic perspective.
Silver's extraordinary volatility has reinforced priceless speculation
lessons that seldom play out over such a short timeline.
One of the greatest obstacles
to learning the art of speculation is time. The longer the time
between a technical signal and a market response, the more difficult
it is to perceive the efficacy of the signal. If I touch a hot
stove and get burned instantly, I learn pretty darned quick not
to do it again. But if I touch a hot stove and my flesh doesn't
start sizzling until six months later, my mind won't properly
link the effect with the original cause.
In silver's case, in just two
short months we have gone from a major technical buy signal to
substantial gains. Eight weeks ago when silver languished at
$6.41 I wrote,
"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!"
Thankfully the tactical silver
trends have already proved this earlier technical signal correct.
Silver has indeed thrived since it fell below its 200-day moving
average to bounce off of its major bull-market support line.
The metal is now carving a typical technical fingerprint that
we'd expect to see in the initial months of a major new upleg.
This week I would like to update
the tactical silver trends from two perspectives, both learning
from the past and attempting to divine the highest-probability
course of action for the future. Silver can move so fast that
it deftly illustrates major speculation principles over a couple
months rather than the generally longer timespans of other markets.
There are few, if any, major
markets other than silver that have enough inherent volatility
to react so quickly and aggressively to major technical buy signals
triggering. And silver's well-behaved following of bull-to-date
precedent on these latest technical buy signals certainly bodes
well for its near-future course of action in this new apparent
upleg.
Both of our charts this week
are updates from early January's "Tactical
Silver Trends 2" essay. If you compare these latest
versions to the charts from two months ago, the accuracy of silver's
technical buy signals of early January is nothing short of outstanding.
While investing is concerned
with long-term supply and demand trends, speculation is concerned
with relative pricing. Speculators strive to throw long silver
when it is "relatively" cheap and go short or neutral
when it gets "relatively" expensive. Sentiment, or
the prevailing popular attitude on silver in any given week,
is what ultimately drives these short-term pricing extremes.
And while sentiment cannot be directly measured, a technical
price chart certainly captures its essence.
In nicely trending bull markets
like silver's shown above, several factors contribute to a price
being relatively cheap and signaling the time to go long. First,
bull markets tend to surge ahead before periodically retreating
back to their 200-day moving averages in healthy corrections.
Second, these corrections also tend to end at long-term linear
support lines. Finally, these periodic corrections are often
similar in duration and magnitude.
Back in early January, I was
really excited about silver because it met all three criteria.
Silver had not only fallen below its key 200dma, but it had also
just hit its linear support line drawn above. Bull to date it
had never fallen far below its 200dma nor had it ever decisively
broken its major support. Silver was relatively low and looked
like a great buy as long as its core supply-and-demand fundamentals
remained intact.
Silver's wickedly sharp correction
in December was in character as well. Silver is probably the
most volatile major metal on the planet, and it can rise and
fall with blistering speed. Its corrections, in particular, tend
to be lightning fast. Last spring silver plummeted like a skydiver
with a parachute failure for about a month in correction 1 rendered
above. December's correction 2 also plunged for about a month.
As students of the markets,
it is our duty to understand the character of any market before
we place our capital at risk. Silver's extreme volatility should
surprise no one. It always amazes me that after any sharp
silver correction I get a flood of e-mails from folks who are
shocked that silver plummeted so fast. Some wonder if
the bull is over, some blame a consortium of powerful players
arrayed against them, and others wander around in stunned disbelief.
Yet, like the vicious hailstorms
I remember while growing up in the plains, silver's corrections
are violent but very short-lived. While gold corrections can
take over four
months for sentiment to shift from euphoric to neutral to
pessimistic, silver's extraordinary volatility accelerates this
cycle into a compressed timespan running about a month.
If silver corrects hard for
a month, plunges by 20%+, then odds are that particular correction
is essentially finished. Silver did just this in December, falling
by 20% and eviscerating unprepared longs before it tunneled under
its 200dma and slammed into its bull-market support. And with
a sharp correction, sub-200dma plunge, and major support approach
in place, January just looked like the perfect time to throw
aggressively long again.
So if you are a silver speculator,
remember these simple technical clues for the next time silver
inevitably corrects. Whenever one of silver's periodic corrections
in the future returns it to this technical position, the odds
are very favorable that it will soon claw back higher and start
carving its next major upleg, as long as its core bullish fundamentals
remain intact.
This next major upleg, which
I suspect is already underway this very day, brings us to the
reason I find these latest silver chart updates so fascinating.
Just as silver's corrections 1 and 2 were so similar in duration
and magnitude, the initial couple months of uplegs 2 and 3 are
also uncanny birds of a feather. 2005's silver price action is
a virtual carbon copy of that of late spring/early summer 2004
which ultimately led to awesome 45% gains in silver!
In both cases, silver tended
to drift around its 200dma and gradually consolidate its way
higher after its sharp corrections. Both of these episodes are
highlighted above with the blue ovals. This technical behavior
does make sense from a sentiment perspective. Following such
brutal and unforgiving corrections, some leveraged speculators
are unceremoniously booted out of the game and the surviving
ones understandably grow very cautious.
Buy-side commitment after a
20%+ drop in merely a month is low since no one at the time can
be certain that silver's correction has ended. And sell-side
fervor also fades dramatically since speculators don't want to
sell short at major support. Whether you think technical analysis
has inherent validity or not, you cannot deny that it is widely
followed in the futures world and that countless speculators
trade based on these support and resistance lines.
As these modestly uptrending
consolidation zones near support mature, gradually the terror
of the recent sharp correction fades and more longs return to
test the waters. The long-term bull-market support continues
to hold after repeated tests and silver supply-and-demand fundamentals
remain bullish. Capital returns to the relatively tiny silver
market and soon demand for the metal outstrips supply at relatively
low support-zone prices. Then an interesting event happens.
In both uplegs 2 and 3 above,
after consolidating near support for a month or two silver suddenly
shoots higher in a sharp initial spike. These spikes are labeled
in this chart, and the recent February spike looks a great deal
like what we witnessed early last July. Interestingly, even two
years ago in July 2003 a similar phenomenon occurred before the
utterly massive upleg 1 that ended in a speculative
anomaly far above silver's probable bull resistance line.
I am not sure why these early-upleg
spikes occur, why all of a sudden after a 200dma consolidation
speculators suddenly flood into silver as a flock after eyeing
it warily for a month or two. Nevertheless, these spike events
tend to herald the unofficial beginning of the season of serious
silver gains in each new bull-market upleg. The fact that we
saw one in February in line with precedent certainly increases
the probability that silver's third major upleg in this bull
to date is now underway.
Before we explore the actual
technical long and short silver signals in more detail in our
final chart, there are a couple of miscellaneous technical observations
that I would like to share on silver.
First, in January silver's
200dma was declining which spooked many technically oriented
silver players. While it is true that 200dmas tend to
run parallel
with an asset's primary trend, it is not true that 200dmas
are always ascending in bull markets. A temporarily descending
200dma, taken in isolation, is not conclusive enough to sweat
about a bull market possibly being over.
200dmas are just mathematical
constructs of course, and with every month having roughly 20
trading days a 200dma can be thought of as a ten-month moving
average. In silver's case, its lofty speculative anomaly of early
2004 dragged its prices up so high that its 200dma was skewed
to the upside for most of 2004. While not yet witnessed in silver
until recent months, the HUI gold-stock index has already seen
this phenomenon.
In both early 2003 and late
2004 the HUI's 200dma slope moderated. After this event in the
former case its bull market continued higher unabated, and I
suspect today's case will end the same way. If any particular
upleg in a bull market shoots parabolic
and carries prices far over trend, it is possible for its 200dma's
slope to moderate or even go negative for a spell in the ensuing
ten months of consolidation without jeopardizing the viability
of the bull in any way.
Just as 50dmas rise and fall
throughout a secular bull, the 200dmas can do it too with the
right conditions. Interestingly silver's 50dma turned up again
in February, another strong technical clue that a major new silver
upleg is already underway.
Second, note silver's probable
bull-market resistance line rendered above. While silver temporarily
spiked above it during the climaxes of both major uplegs 1 and
2, I suspect this is where resistance lies since both of these
previous uplegs initially had trouble breaking through before
speculative fervor finally broke them over this line. Extended
to today this probable resistance is currently hovering near
$8.
Thus, silver's current upleg
should hit at least $8.00, and this linear resistance is rising
at about $0.50 every four months. So if silver generally runs
higher for five more months following its initial spike as it
did back in late 2004, then we have a conservative upleg target
above $8.50 this time around. And, given silver's proclivity
to temporarily rocket above resistance at the climax of each
upleg, it could certainly spike above its resistance again
before this latest upleg gives up its ghost. Silver probably
has a ways to run yet in this new upleg 3.
And, amazingly enough, an entirely
different technical approach based off of the distance silver
stretches away from its 200dma during its major uplegs yields
similar target regions. Relative Silver (rSilver) uses Relativity,
the idea of dividing a price by its 200dma as a baseline to define
high-probability turning points. We have been using an rSilver
band of 0.99 to 1.25 to analyze the probabilities of silver being
near major interim turning points.
On the buy side, whenever silver
trades under 0.99x its 200dma it has been a fantastic time to
throw long. Last spring, last September, and this latest January
all witnessed silver trading significantly lower than 0.99x its
200dma. It was this very technical buy signal that led me to
write my bullish silver essay in early
January as well as start layering in actual real-world silver-related
speculations in our newsletters.
During a bull market speculators
have the highest probability of launching successful long trades
when silver languishes under its 200dma. Conversely, the
farther silver stretches above its 200dma the higher the
probability that a major correction looms. Depending on speculative
fervor surrounding each individual upleg however, these terminal
stretch distances can vary greatly between individual uplegs.
Back in early April 2004, silver
stretched a stupendous 1.45x above its 200dma before its blistering
correction 1. But in December it only approached 1.20x its 200dma
before plunging in major correction 2. While relative targets
evolve along with a bull market, for now we are using a conservative
middle point of 1.25x to define our moments in time when it looks
like silver is due for a major correction. As additional silver
uplegs unfold, we will be able to more precisely tailor this
technical signal to the character of this particular silver bull.
If silver marches above 1.25x
its 200dma, the time to be neutral or short has arrived. You
can sell your longs and throw short or at least ratchet up the
trailing stops on your longs if you are a speculator. If you
are an investor, it is not prudent to add new long positions
when silver stretches 1.25x above its 200dma. Every bull market
claws two steps higher before retreating one step back so corrections
are totally normal and should be expected. It is futile to fight
them.
So with silver's 200dma currently
running near $6.70, our next neutral signal in silver should
occur about 1.25x above this level, or near $8.40. This target
level for a merely average silver upleg is very close to the
$8.50 mentioned above from conventional technical analysis. And,
of course, as silver rises in the months ahead its 200dma will
also rise pushing up the absolute silver price at this
next 1.25x neutral signal.
During major upleg 2 last year
silver's 200dma rose 14% from May to December. If this current
silver upleg runs for a similar duration and sees a similar arc,
another 14% gain in silver's 200dma from January's low would
put it at $7.50 at the climax of this upleg. The Relativity band's
neutral signal for silver, 1.25x, with this kind of 200dma would
put it up at $9.40 or so. Thus, even though silver's latest upleg
is probably already underway we ought to still have plenty of
room to run yet.
Speaking of room to run, in
the shiny new March issue of our acclaimed Zeal
Intelligence newsletter just published this week I recommended
two new primary silver stock trades that ought to thrive in this
new upleg. This is the third layer of new silver trades we have
launched in as many months. One of our layer-one picks from early
January already has 32% unrealized gains and our early February
trade is already up 15%.
If you are interested in playing
this upleg using leveraged silver stocks, please
subscribe today because it is probably not too late to deploy
capital yet at this early stage. As an added bonus, our subscribers
gain exclusive web access to a large long-term version of this
Relative Silver chart that we update twice a week or so. You
can easily follow the silver upleg's progress through its relative
trading band with your own eyes.
The bottom line is since silver
behaved so well relative to precedent in its latest sharp correction
and interim low, odds are it will continue to generally follow
precedent in what looks to be its third major upleg. These technicals
are confirmed by outstanding silver fundamentals where global
industrial and investment demand continues to far exceed world
mined supplies.
Since silver is such a volatile
and relatively tiny market, ultimately its gains will probably
vastly dwarf those of the ongoing secular gold bull. If you can
stomach silver's extreme volatility and enjoy a good speculative
roller-coaster ride, the best of this third major upleg still
looks like it is yet to come.
March 4, 2005
Adam Hamilton, CPA
Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!
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