Need A Printable Format? Click Here!

Tactical Silver Trends 4

While you wouldn’t know it from watching silver march higher with a vengeance over the last two months, the metal really struggled for the vast majority of 2005.  In late August, when it dipped to an ugly $6.67 close, silver sentiment was about as pessimistic as I have seen it since its current bull started galloping in early 2003.

Four trading days after those troubling late August lows, when silver still languished under $7, we published the September issue of our Zeal Intelligence monthly newsletter.  It was titled “A Silver Lining” and discussed the rather lackluster behavior of silver.  At the time I penned the following thoughts on silver’s plight…

“After watching silver grind lower day after day in August without respite, I was joking around with my partners telling them I was going to write an essay on it, “Silver to Zero”.  It wasn’t that silver was falling particularly fast, it was just falling for seemingly endless days on end. … I suspect such dire misfortune is enough to bring tears to the eyes of even the most fanatical and rabid silver investors.”

“Why is this so irritating?  No other major commodity has more potential for legendary gains in this ongoing primary commodities bull than silver.  Silver is totally unique among all commodities.  The market is extremely small and global silver stockpiles are dwindling.  Its supply and demand fundamentals are dazzlingly bullish.”

“Most of the world’s silver mined today is a byproduct of base-metal operations, so no matter how high the silver price goes the majority of supply is inelastic.  Industrial demand is also highly inelastic, very unlikely to fall on rising prices, because silver sports unique chemical and physical properties that make it irreplaceable in all kinds of products.”

“And since each unit only uses tiny amounts of silver, the silver price could rocket without really affecting the final price of manufactured goods.  And silver has long enchanted speculators.  The higher its price goes the more speculators lust after bidding on it.  This creates a demand curve that is inverted.  Rather than acting conventionally and retarding demand, higher prices accelerate it.”

The rest of this 9/05 ZI letter went on to discuss silver, including why it was stuck in the doldrums, addressed silver manipulation concerns, and offered a thesis explaining why silver should recover and surge in the autumn on renewed speculator interest.  As I rejoiced over $9+ silver this week, I thought about those dark days back in August when the metal seemed to be spiraling into oblivion.  How times change in the always-exciting financial markets!

Since silver was so lackluster for most of 2005, I hadn’t updated this Tactical Silver Trends series of essays since early last March.  But with silver accelerating to awesome and inspiring 19-year highs this week, the time is certainly ripe to take another look at the technical nature of silver’s young secular bull market.  The charts this week are updated from those earlier essays.  Silver’s primary trend remains very bullish.

When studying financial markets, perspective is crucial.  Thus silver’s current tactical trends are most easily understood in the framing context of its strategic trends.  Bull to date silver has generally trended higher in a nice uptrend, marked above by the long bull support and resistance lines.  Within this secular time frame silver has had three major uplegs and two major corrections, all marked above.

While there are a lot of concerns out there that silver isn’t leveraging gold’s gains to the degree that history has led us to expect, the situation really isn’t that grim.  Silver’s bull market has really only been running for less than three years, compared to nearly five years for gold’s own bull.  In monthly terms silver’s bull is 33 months old compared to 56 months for gold’s.  Since silver’s bull is much younger, its gains are understandably more modest.

Yet, since March 2003 silver is up 109% bull to date as of this week.  These gains are nontrivial and have been vastly leveraged by folks speculating in silver stocks like us as well as silver futures speculators.  Even buy-and-hold investors are thriving in this silver bull.  I recommended a couple major silver stocks as long-term investments to our subscribers back in 2002 before this silver bull really started running and one is now up 468% while the other is up 226%.  This averages 347% and has leveraged silver by 3.2x so far.

And silver’s 109% bull-to-date returns, while they haven’t yet reached their leverage potential relative to gold based on history, are already slighter greater than gold’s 108% bull-to-date gains.  And all this has happened in a young silver bull market that isn’t even two-thirds as old as gold’s yet.  I have no doubt whatsoever that silver’s gains will start accelerating as its bull matures and will eventually far outpace gold’s just as we saw a quarter century ago.

Another important strategic aspect of silver’s behavior to consider is its propensity to surprise on the upside.  All three of its major uplegs so far have broken above its resistance before failing.  Indeed with such widely diverging interim tops the positioning of silver’s bull resistance line is not as solid as its support, but regardless of where resistance is drawn silver’s first upleg shot well above it.  This was the speculative anomaly that I have discussed in past Tactical Silver Trends essays.

One thing technically-oriented speculators tend to do that I don’t believe is constructive is to think horizontally.  For example, since silver blasted up to $8.20 in April 2004 but hadn’t yet approached those levels again as of six weeks ago, last year silver’s bull market was doubted by many who should have known better.  By considering extratrend anomalies as more important than the primary trend, some refused to believe silver’s bull was alive and well until $8.20 was finally achieved again the Monday after Thanksgiving 2005.

Interestingly the same horizontal thinking also clouded some gold investors’ minds and caused them to miss out on the dazzling 82% upleg in the HUI gold-stock index since May 2005.  Back in early December I was arguing that the HUI’s own extratrend anomaly of late 2003 was vastly less technically important than its rising primary trend.  While I received a lot of hostile feedback on the idea of not giving much weight to anomalies, I still believe it is most prudent to give priority to center-of-mass primary trends to make sound trading decisions.

In silver’s case its primary trend has been indisputably rising higher.  Its trend channel that was centered on $5 in 2003 is now centered above $8, 60% higher.  The appropriateness of this particular trend channel is also easily confirmed in two ways.  First, it has run roughly parallel with silver’s 200-day moving average.  These 200dmas filter out daily noise to point out where a market is truly heading, like an arrow.  Second, silver’s bull support line has bounced silver higher every year since this bull began, it has several major intercepts.

I bring this up to point out that silver’s bull market has really been quite healthy since 2003 despite the claims that it only recently broke back above its early 2004 spike highs.  While silver indeed languished in much of 2005, its poor performance was really only a tactical consolidation subtrend within its bullish primary trend.  While unpleasant at the time, such consolidations are not abnormal.

Silver surged initially in 2005 along with gold but soon peaked near $7.59 in early March.  This sharp surge higher was probably driven by gold since silver investors and speculators are usually primarily gold investors and speculators.  When gold is thriving they buy silver too and when gold is slumping silver is sold off along with gold.  Oil stocks have a similar dominance over gas stocks, since gas-stock investors tend to be primarily oil-stock investors.  Gold topped at $446 in March within two days of silver and silver followed its big brother lower.

From that initial excitement last year silver slumped into its demoralizing tactical consolidation subtrend.  It ground lower and lower until late August when silver sentiment had turned almost universally rotten.  By the time August rolled around I was receiving lots of e-mails from subscribers and readers expressing grave concerns about silver and worrying that this market would never be allowed to rise by various perceived manipulators.

But as always, regardless of the reasons for the despair, it is at these emotional fear-laden lows that the seeds of powerful rallies are sown.  Silver erupted just after its August lows and started powering higher.  By early October it broke out of its consolidation subtrend and proudly climbed higher.  To really drive home the point that this 2005 consolidation was over, silver briefly retreated in late October and bounced off its consolidation resistance line, effectively turning it into support.  Resistance becoming support is a telltale bull-market event.

Other than its modest correction in December after challenging its bull resistance, silver really hasn’t looked back since.  Its powerful late 2005 upleg driving it to fresh new bull-to-date highs has put the metal back on investors’ radars and sentiment is rapidly growing bullish again.  And, amazingly enough, despite its strong surge in recent months there are strong technical arguments that this particular silver upleg could climb higher still.

Notice above how silver tends to surge above bull resistance when each individual upleg matures.  The silver market is so tiny, relative to the capital that can get interested in it rapidly when it is thriving, that silver can be bid well above resistance.  In early 2004 silver had already hit resistance at $6.50 on a spectacular initial upleg and instead of retreating to support it sparked additional buying that quickly blasted it up another 25% in short order.  With current resistance at $8.75 today, a similar episode now would project an $11ish top for this upleg if speculators indeed grow excited again.

Another measure of uplegs is the degree to which they stretch above their anchoring 200-day moving averages.  Relative Silver expresses silver as a multiple of its 200dma.  This rSilver metric hit 1.448x in early 2004’s upleg one and 1.198x in late 2004’s upleg two.  If we average these two relative extremes it yields a potential silver target for today’s upleg three of 1.323x silver’s 200dma.  This would place the next probable interim silver top just under $10.  Either way there is room to run yet based on bull-to-date precedent.

While I want to discuss relative silver more after the following chart, there is one more crucial strategic point to glean above.  If you examine silver’s two major bull-to-date corrections, you will note that they are blisteringly fast and steep.  Silver is so hyper-volatile that what passes for a correction in its world would be considered a full-on crash in virtually any other market.  Once silver reaches an interim top and speculators temporarily abandon it, it tends to plunge like a millstone crushing anyone in its path.

This tendency of silver is extremely important for speculators to protect themselves from.  It is not wise to add new leveraged long positions after silver is already above its resistance, like today.  Once silver’s inevitable post-upleg correction starts, the metal can plummet viciously in a matter of a couple days with little or no warning.  So please respect silver’s extreme volatility and realize it is a double-edged sword which cuts deeply to the downside.  Fight the temptation to layer in new leveraged longs when it is above its bull resistance!

Back to Relative Silver, we can zoom in on just 2005 and the tactical trends that have dominated silver over the past year become much more readily apparent.  This chart also shows the current Relative Silver trading range that we have been using until more uplegs are complete to generate more reference data.  Silver has generally been an awesome long, the time to buy, when it trades under 0.99x its 200dma and our neutral zone on top remains set at 1.25x its 200dma.

The demoralizing tactical consolidation subtrend of much of 2005, silver’s breakout from its chains in early October, and its bounce turning tactical resistance into support in late October are much clearer at this scale.  And as the red rSilver line shows, until the last couple months silver hadn’t been able to stretch more than 13% or so above its 200dma all year.  As silver finally started surging in the last couple months though rSilver shot as high as 1.23x in early December.

Despite the fact that rSilver is fast approaching its neutral line at 1.25x, this is not necessarily a cause for concern for investors and speculators with existing silver-related longs.  Due to silver’s strong tendency to shadow gold, the preliminary nature of this arbitrary 1.25x level, and prudent bull-market trading strategies silver investors probably don’t need to fear silver suddenly crashing after it moves 25% above its 200dma.

As I have been discussing recently, the gold markets have been radically changing.  Gold is transitioning into Stage Two of its bull market where it moves independently of the US dollar on growing global investment demand.  As investors drive up gold prices globally, they are breaking out above immensely psychologically important levels worldwide that are enticing in new investors in droves.  This is creating a virtuous circle where rising gold prices attract in more capital which pushes prices higher and brings in even more capital.

Since silver tends to mirror gold by rising when it is strong and falling when it is weak, today’s silver upleg really has the potential to persist for as long as gold’s does.  And with gold now over $500 in the States as well as other major milestones worldwide for the first time in decades, this first gold upleg of Stage Two could really surprise us to the upside.  I would not want to bet against silver before gold enters its next major correction.

And with only two completed uplegs for reference, our arbitrary rSilver topping level of 1.25x does not have a lot of precedent under it.  The first upleg topped way above this at rSilver 1.448x while the second was far more anemic at 1.198x.  As mentioned above these average out to 1.323x but their standard deviation is huge since the range between them is so great.  Tools like rSilver must evolve to conform to an individual bull market as it unfolds.  The top of today’s upleg three, wherever it materializes in relative terms, will help us calibrate a better rSilver neutral zone going forward.  It’ll probably have to be revised up.

Finally, regardless of technical tools suggesting silver becoming overbought speculators must remember that bull markets have a far higher probability of surprising to the upside than the downside.  Selling long silver-stock positions outright at the first hint of silver challenging its resistance risks missing any spike higher on increased speculative demand.  I continue to think traders are better off just tightening their trailing stops as markets grow overbought and letting positions slide back down into these stops when the corrections start.

Ratcheting up trailing stops provides us the best of all worlds.  It removes the intense greed and fear that cloud decisions to sell outright.  It keeps us silver-stock investors in our stocks until the last possible moment granting us the most exposure possible to one of the spectacular upside breakouts that is so typical of silver.  And once silver does slide, which happens fast, these silver-stock positions are automatically sold by computer when the stops are hit so no human intervention is required.

Please realize that all these strategies are for existing silver-stock positions.  Once again it is probably not wise to buy new silver-stock positions today with silver above its long-term resistance line again.  When a market is exciting is not the time to buy, instead buying should be done when it is dull like last August.  If you want to add any new silver-stock positions at all you will have a far higher probability of success if you wait until silver once again corrects back down to its 200dma sometime in the coming year before pulling the trigger.

At Zeal we have long preached only layering in positions when prices are low relative to their 200dmas.  Of the four pure silver stocks we currently own in our Zeal Intelligence newsletter portfolio, which were purchased between April and early October before silver heated up, their average unrealized gains as of this week were 34%.  And silver stocks will almost certainly surge even higher if silver launches a new spike.

While it may be too late to prudently add new positions in this particular silver upleg, there will likely be many more silver uplegs to come.  If you want to receive cutting-edge silver-stock research and recommendations in the future when prices are relatively low and odds of winning are high, please subscribe to our acclaimed monthly newsletter today.  We are already looking forward to the next silver upleg and are researching the best companies to buy when the next interim silver lows arrive.

The bottom line is silver is really looking fantastic technically.  Its new bull-to-date highs this week confirm that its young secular bull is alive and well despite last year’s naysayers.  While silver’s gains haven’t leveraged gold’s yet, they almost certainly will in the years to come yielding vast riches for prudent silver investors.  Silver still has the potential to ultimately witness the biggest gains out of all the major commodities.

And while silver is above its resistance now, today’s upleg certainly has the potential to surge higher still especially if gold’s own upleg persists.  While it’s probably not wise to add new positions today with silver stretched above its 200dma, existing positions can still thrive if silver continues higher in a typical bull-market upside surprise.

Adam Hamilton, CPA

January 6, 2006

So how can you profit from this information?  We publish an acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research.  Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam?   I would be more than happy to address them through my private consulting business.  Please visit www.zealllc.com/financial.htm for more information.

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!

Copyright 2000 - 2006 Zeal Research (www.ZealLLC.com)

Return to top of page!

For more Commentaries go here!