On October 20, we outlined several
divergences and hurdles for the stock
market to overcome. Since silver has more real world uses than
gold, silver tends to be a good economic barometer, similar to copper. As we
have mentioned in the past, silver tends to be in greater demand when (a) the
economy is expected to grow, and (b) when inflation expectations are high.
According to the Silver Institute:
Silver has a
number of unique properties including its strength, malleability and
ductility, its electrical and thermal conductivity, its sensitivity to and
high reflectance of light and the ability to endure extreme temperature
ranges. Silver's unique properties restrict its substitution in most
applications.
When silver is weak it is logical to
question (a) the expectations for future economic growth, and (b) if
investors are concerned about future inflation. If inflation is not a
concern, then deflation fears are most likely increasing. When silver is
weak, it is not a good sign for the economy or stock market.
Bearish divergences occur on charts
when silver (SLV) makes a higher low (see green line at the bottom of the
chart), but the indicator makes a lower low (red line). The divergence
indicates an increasing negative bias by investors. In 2008, silver made a
higher low accompanied by a bearish divergence in MACD (top). The blue line
in the chart below is the 22-week moving average. Healthy markets tend to
stay above the 22-week. The 22-week also tends to have a positive slope in a
healthy market. Notice when (a) price was below the 22-week and (b) the slope
of the 22-week rolled over below, silver prices tended to decline.
The bearish divergence in 2008 said
"be ready for the strong possibility of lower
lows in silver." Divergences that appear on a weekly chart are much more
meaningful than those appearing on a daily chart. Note the 22-week (blue
line) also rolled over early in the bear market.
A similar and ominous bearish
divergence in silver occurred between the summer 2010 lows and recent 2011
lows. This divergence may foreshadow more pain for stock and precious metals
investors in the coming weeks and months. Bearish divergences on a weekly
chart need to be respected, as they can be powerful signals. Do all bearish
divergences lead to new lows? No, it is possible silver goes on to make higher
highs, but it is a lower probability outcome, especially given the current
fundamental and technical state of the financial markets. The blue arrow
below denotes the recent negative turn in the 22-week, which tends to be
associated with a weak market. Our recent review
of the 2008 and 2011 daily charts of silver also lean in a bearish direction.
Is it possible silver has already
made the lower low? Yes, but the indicator (see blue bars) also made a lower
low, which tends to "confirm" the downtrend. Some type of bullish
divergence would increase the odds of silver finding a bottom; something that
has not occurred yet. It also appears to be early in the rollover cycle for
the 22-week - it has a look associated with continued weakness. We are open
to a rally in silver (and stocks) should conditions improve, but given what
we know today, the bears seem to have an upper hand over the next few weeks
and months. Silver's weakness aligns well with deflationary outcomes, which
favors bonds (TLT), the dollar (UUP), and shorts (SH) (see analysis).
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