 Alarming Silver Technicals
Scott Wright
Zeal LLC
Aug 31, 2007
Commodities and commodities-stock
speculators have had quite a rough-and-tumble last full month
of summer. In a season where the markets typically hold traders
in a mire of malaise, various extraneous events have awoken the
volatility beast making for an exciting August.
With general stocks retreating
from record-high levels in mid-July, commodities stocks have
transcended general stock losses and have temporarily bucked
the historically-inverse
correlation with general-stock bears. Precious-metals-stock
traders in particular have endured a session of wailing and gnashing
of teeth. Key tactical support levels of the venerable HUI gold-stock
index were sliced through like a warm knife through butter.
But though the commodities
stocks have taken some abuse of recent, this fearful selling
is seemingly just shaking out the over-leveraged and weak-handed
traders. Far too often traders forget that volatile consolidations
are par for the course within commodities bulls. All this activity
might just be the final rebalancing of sentiment so a powerful
new upleg can emerge.
Now though in the last six
weeks or so this mini-stock panic has looked like the end of
the world for some, the performance of most of the underlying
commodities was nowhere near as bad. But the behavior of
one commodity in particular, silver, has really riled up many
traders.
While gold has weathered this
recent stock-market maelstrom rather well, silver's erratic behavior
has prompted a number of its long-faithful investors to question
its steadfastness. Frankly I was shocked to see some of the wild
commentary and distraught inquiries into the supposed perils
of this white metal. Let's take a look at what this fuss is all
about.
This first chart displays the
2007 performance of gold and silver using daily closing data.
As you can see gold has done just fine so far this year showing
strong support off its 200-day moving average. The Ancient Metal
of Kings is still in the midst of a textbook-perfect uptrend
off of its October 2006 low under $570 and has powered 23% higher
to its highs earlier this year.
But looking at this chart,
the ìas goes gold so goes silverî mantra hasn't
quite played out of late. And this is why silver traders are
up in arms. All this commotion does surprise me though, as experienced
and battle-hardened silver traders should understand the white
metal's fickleness compared to gold.
Regardless, this short-term
chart has many folks scratching their heads. And the apparent
technical breakdown of silver over the last several months has
miffed even some of the silver elite.
Now the undulations of gold
and silver are nearly identical from a quick visual glance, especially
if one data set is transposed directly over the other. The differences
on both the flows and the ebbs though are in the extremes, when
prices move sharply in either direction. And silver's extremes
have given its trend a whole different look than gold's.
Whereas gold has been trending
up bouncing off its 200dma, silver has been in a six-month
downtrend. It has actually spent much of the last couple
months at prices below its 200dma. And where gold is currently
trading above where it began the year, the price of silver is
lower than its opening price.
Even more alarming to silver
traders is the depth to which its price had recently fallen below
its key 200dma. As measured by percentage, it was the lowest
point in its entire bull! Silver's relative weakness has got
a lot of attention recently.
This first very-short-term
look at silver can indeed paint a somber picture. But the picture
that short-term analysis sometimes paints may not always depict
prevailing strategic realities. Even the most beautiful cities
in the world have slums. But if a slum is the first part of a
city you view, the rest won't pique your interest. Perhaps all
you need to do is stroll down the street in order to change this
initial opinion.
If we zoom out a little and
take a look at silver over the last 18 months, things don't look
as bleak. This next chart captures silver's bull-to-date high
achieved in May of last year. And this latest and most powerful
upleg that vaulted the price of silver to nearly $15 occurred
in impressive parabolic fashion.
Though futures and stock speculators
that were long during this parabola saw legendary gains, those
that didn't heed the overbought warning signs were quick to lose
much of these gains during the imminent and sharp correction
to follow.
At Zeal we rode much of the
2005/2006 upleg and scored fantastic gains for ourselves and
our newsletter subscribers. But much to the chagrin of the metals-markets
perma-bulls, we
saw the writing on the wall for an imminent correction. A
correction that was necessary in order to stay the integrity
of silver's awesome secular bull and shed excessively greedy
sentiment.
And of course the downside
of a parabola is never pretty. Parabolas tend to breed equally
sharp movements to the downside. And this sharp correction took
silver to its June 2006 low under $10, a 35% loss in just 23
trading days. Stocks of course fared much worse.
After this sharp correction
it was common perception that silver would either begin its next
upleg off its major interim low or enter into a consolidation
phase. A sideways consolidation would simply bleed off the resonating
euphoria from the previous massive upleg.
Well for a period of about
8 months, it looked as though silver was off to the races as
it carved a beautiful upward trend that in late February brought
it to within 2% of its bull high less than a year earlier. But
in late February the metals and stocks hit a wall, with the Chinese
stock-market selloff acting as a catalyst.
Timing-wise, this Chinese stock
selloff seemed to mark a turning point for silver. Its uptrend
broke and it soon formed a downtrend that we seem to still be
in today. But though silver's initial uptrend from its June 2006
low indeed broke, it is important to view this in context and
seriously consider the time horizon in question.
This upward trend channel was
young, only 8 months old. And support on a less-than-one-year-old
trend channel is not only non-secular in nature, but it lacks
foundational strength. So giving a different look to this chart,
the 8-month uptrend and 6-month-old downtrend can indeed be combined
to form a 14-month consolidation.
As of now this consolidation
could be drawn as an ascending wedge, illustrated by the transparent
red lines. If silver was to drop further though, the support
and resistance lines could simply be redrawn to form a horizontal
trend channel illustrating a sideways consolidation. And there
is quite a bit more wiggle room before silver approaches its
major interim low under $10.
Again, it is important to consider
this consolidation in the context of time. Though a 14-month
consolidation is no fun for investors, let's zoom out yet again
to get an even bigger picture of today's consolidation and see
how it strategically fits into silver's entire bull.
Charts indeed provide an excellent
visual of market conditions, and technical analysis is very useful
on many levels. But no two analysts will paint the same exact
picture. Charts can be interpreted many different ways and lines
can be drawn at various slopes depending on the message that
is trying to be relayed.
When I look at the big picture
of our silver bull to date, I see two massive uplegs capped by
parabolic ascents. And these uplegs are followed by two long
periods of consolidation led off by sizeable corrections.
The first massive upleg took
silver to heights it had not seen since the late 1980s. And after
silver reached its 2004 apex just over $8, a long consolidating
wedge was formed that lasted for about 18 months before it finally
broke out to the upside.
Several times during this 18-month
consolidation silver knifed through its relative support
zone, or below its 200dma. Relativity is a trading tool we use
at Zeal that simply measures where silver is trading relative
to its 200dma. I encourage you to read up on relativity
if you are not familiar with it.
Now in bull markets, prices
tend to soar above their 200dmas in uplegs and retreat to their
200dmas in corrections. This action causes the 200dma to rise
on balance during the bull. And even during this 18-month consolidation
higher lows indeed caused the 200dma to rise as the price of
silver remained high.
Occasionally silver dipped
below its 200dma and relative support zone, but as you can see
this never lasted too long. Even as silver consolidated to bleed
off the greed and prep for the next upleg, its price remained
high compared to its lows in previous years. The sub-$5 grind
in the years leading up to this upleg were history, as silver's
average price throughout the course of this first long consolidation
was nearly $7.
These continually rising prices
and a rising 200dma cemented the case that silver had followed
gold and entered into a secular bull market. This was further
reinforced as silver entered into its second massive upleg toward
the end of 2005. And this latest upleg was something to behold.
The price of silver more than doubled in just 7 months
leading to its May 2006 peak near $15!
Well 14+ months later, our
current consolidation is starting to look eerily familiar to
the previous consolidation that led up to this latest massive
upleg. From this higher-level view, I was able to reshape the
support and resistance lines from the previous chart and draw
a wedge similar to the 2004/2005 consolidation.
Again, today's support failure
is not the first time in this bull, or even consolidation, that
it has happened. Now the extreme piercing of support I'll admit
does warrant some chatter. Panic selling a couple weeks ago brought
rSilver to a low point of 0.88, or 88% of its 200dma. This is
obviously the lowest point in this entire bull, trumping the
previous low achieved in May of 2004.
But what does this new rSilver
low truly mean? Does it mark the end of this bull market? Is
it time to sell? I don't think so! First, let's consider where
silver is today. Now judging by the prevailing sentiment, you'd
think it was trading at $5 an ounce again. But close to $12 today,
silver is still at levels that were unthinkable just a few years
ago.
Even looking at this chart
you can easily see that this consolidation is flagging on the
high side of this latest massive upleg. This is testament alone
that the bull is not over. On top of this, silver today is still
170% higher than its 2003 lows and 43% higher than the high
from its previous upleg.
Just like gold, silver is still
in the first half of a secular bull market that should see it
go much higher. I don't know how this lengthy consolidation will
turn out or when the next massive upleg will begin, but this
recent break in relative support does not damage the integrity
of the bull.
Ultimately silver and silver-stock
speculators should have come to accept volatility by now. This
white metal is by far the more volatile of the PMs as it lies
in a speculators' market. Its market is less than a fifth the
size of gold, so it doesn't take a lot of capital to move this
metal in either direction.
From a fundamental perspective
there have been no structural changes to silver's smashingly
bullish fundamentals. In fact, silver's fundamentals should continue
to buttress the future of this volatile metal and the stocks
that will bring it to market today and tomorrow.
Silver's fundamentals today
are ultimately the same as they were when its bull began. Suppliers
continue to struggle to meet market demand and silver investment
continues to rise. In fact, its indispensable industrial applications
are still seemingly immune to rising prices. This of course makes
sense since only small amounts of silver are used per unit of
a finished product. The silver cost per unit is usually trivial
compared to total manufacturing costs.
This is supported by a recent
GFMS study that marked 2006
as the fifth consecutive up-year for silver's use in industrial
applications. This was led by both China and Japan showing greater
than 10% year-over-year growth with the US up an impressive 6%.
And this all comes on the heels of the major industrial opposition
to last year's launch of the famed silver ETF.
SLV has proven to be wildly
successful for this silver bull since it went live last spring.
So much so that this ETF was a big catalyst to the flurry of
speculative excitement that gave fuel to silver's parabolic rise.
The opposition to SLV was afraid
that an ETF would reduce the silver on the market and cause prices
to rise. In a sense they were right, but the reason their opposition
was thwarted by the SEC simply boils down to their selfish ambitions,
they want cheap silver. Silver is indeed an industrial metal,
but the successful launch of this ETF proves that its precious
aspect should not be taken for granted.
The success of SLV has shown
that there is a wider market for silver as an investment than
originally thought. Since its custodian's initial silver investment
of about 21m ounces in April of 2006, the amount of silver in
trust has grown to greater than 141m ounces. This is an incredible
increase of 570% in just over a year since this ETF went live!
Another report out of GFMS
really bolsters silver's fundamentals. This report identifies
10-year growth for world silver fabrication through 2005 of 37%
for industrial uses and 61% for coins. And though it shows silver's
use in photography down by 22% over this time, there are some
interesting facts that come out of this.
Most interesting is that 2005
marked the first time that silver demand for jewelry was greater
than its demand in photography. This is important because 60%
of the silver used in photography is recycled, whereas a very
small amount of silver is recycled from jewelry. Steady jewelry
demand and shrinking photography demand can be spun in positive
fashion. And because of the differing recycle rates, this trend
could end up creating more overall demand for silver.
So with silver's still-excellent
fundaments and a technical picture that is not as scary as people
think, opportunities still abound for investors. And I believe
silver stocks remain the best vehicle for speculation and investment.
The explorers, developers and producers tasked with bringing
this metal to market offer spectacular leverage to the price
of their underlying metal.
But since three-quarters of
the silver that comes to market is just byproduct revenue for
some of the major global mining conglomerates, it is the other
one-quarter that comes from primary silver companies that warrants
our capital. These primary silver companies are what stock traders
can use to directly leverage silver. They live or die by its
secular price trends.
With the abuse that the commodities
stocks have taken of recent, silver stocks in particular, there
are now excellent buying opportunities available to layer in
for the next run-up in silver. At Zeal we periodically publish
research reports that among many things help feed our newsletter
trades. And this spring we published a report profiling our 20
favorite silver stocks.
In this report are detailed
fundamental profiles of the silver stocks we believe have the
highest probabilities-for-success to prosper in silver's next
upleg. Many of these stocks have been sold off with the markets
and are now at or near oversold technically opportune buy points.
If you would like to have this valuable report at your fingertips
please purchase
it today.
The bottom line is though silver
appears to be weak, especially compared to gold, this shouldn't
come as a surprise due to its hyper-speculative nature. Even
with silver in the midst of a mini-downtrend and relative support
at a bull record low, there is still no reason to panic.
The uptrend and downtrend that
have followed the major interim low off silver's May 2006 top
should be considered in strategic context. These separate trends
are turning out to just be tactical noise in what is panning
out to be a long consolidation similar to the one following silver's
first major upleg.
Investors now have the opportunity
to become true contrarians and deploy speculative capital into
the much-feared silver-stock environment. If silver's last two
uplegs and consolidations tell the story of what is to come,
then legendary gains could be just around the corner.
Aug 31, 2007
Scott Wright
So how can you profit from this information?
We publish a monthly newsletter, Zeal Intelligence, that details exactly
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Please consider joining us each month at www.zealllc.com/subscribe.htm.
Thoughts, comments, or flames? Fire away at scottq@zealllc.com. Depending on the volume
of feedback I may not have time to respond personally, but I will
read all messages. Thanks!
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