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Although you wouldn’t know it from
listening to all the bearish commentary out there, silver is actually
enjoying a strong young upleg. Its technicals are very bullish, contradicting the prevailing
pessimism gripping traders. This glaring disconnect
between price action and sentiment won’t last forever. It has hammered
silver stocks to depressed levels that offer a smorgasbord of opportunity for
brave contrarians.
As a hyper-volatile speculators’
playground, silver has always been exceptionally sensitive to prevailing
sentiment. While all prices are affected by their traders’ collective
greed and fear, silver’s emotional roller coaster has higher peaks and
deeper valleys. Silver can skyrocket on greed like no other commodity, but
the other end of the sentiment pendulum’s arc is equally extreme. Fear
can depress silver for a long time.
And lingering fear is what is plaguing
silver sentiment today. For over a year leading into this past summer, silver
suffered a massive correction following a near-parabolic surge to
dazzling new secular-bull highs. Such a long period of crumbling prices
naturally spawned incredible fear. So even after silver bottomed and birthed
a major new upleg, traders remain depressed and
skeptical of its potential.
But despite today’s rampant silver
pessimism, this metal’s technicals are
crystal-clear in showing a strong young upleg now
underway. Gradually this bullish price action will bleed away the
correction’s residual bearishness, and fear will eventually yield to
greed. Corrections’ fear shadows always linger into the initial months
of their subsequent uplegs, and are a huge boon to
contrarian speculators and investors.
The mission of trading is to buy low
and sell high, and the only times prices are low within ongoing bull markets
is when they are deeply out of favor following corrections. But it is
risky to buy before technicals confirm a correction
has almost certainly ended. As the bottom is reached, fear and pessimism peak
so no one believes a new upleg is being born. That
bearishness persists into the subsequent young upleg.
This fear shadow creates a sweet spot for
contrarians. As new uplegs stealthily gather steam
with little fanfare, price action eventually confirms these
major trend changes. But the great majority of traders still remain bearish,
their minds staying clouded by the sentiment paradigm of the preceding
correction. This leaves a window where excessively-cheap silver-stock prices
don’t yet reflect silver’s bullish technicals.
And silver’s latest young upleg has already been confirmed by a variety of major technicals as this chart reveals. Its price action since
its summer low has been very bullish. While it amazes me more silver traders
don’t pay attention to longer-term charts, sentiment always remains
poor as new uplegs first start advancing. But as
silver continues to power higher on balance, residual bearishness fades away.
The seeds for today’s price action
were sown in early 2011. As silver rocketed higher in its secular
bull’s last massive upleg, greed waxed
euphoric. I warned about that coming
topping in advance in March 2011 as silver grew overbought, and we
realized big silver-stock profits. With the largest upleg
by far of silver’s entire bull still screaming higher, the inevitable
correction following it promised to be ugly.
And it was, in spades. When prices advance
too far too fast, one consequence is they suck in all near-term buying like
black holes. Surging prices put tremendous pressure on non-contrarian traders
to buy immediately or miss the boat. This pulls forward months’
worth of buying that would have happened in the future into the
topping. And once all the buyers are in, only sellers remain so a price
starts falling.
Silver’s correction began with a
brutal near-crash, killing greed and ramping up fear
very rapidly. Many of the new buyers who had foolishly succumbed to the
euphoria to buy high as silver was topping started to panic. They wanted out
immediately at any price, spawning fear that continued to snowball and trap
more traders. The ultimate result was a massive 45.5% silver correction over
the subsequent 14 months!
That correction formed a giant technical
formation known as a descending triangle, shaded yellow
above. Silver couldn’t break above this descending triangle’s
sharply-downward-sloping resistance line no matter how bullish conditions
grew. Not even the summer of 2011’s last US debt-ceiling debate, which
ignited a massive summer rally in gold, could break
silver free from its correction’s sentiment chains.
And descending triangles are bearish
formations, heralding even lower prices ahead. So the technicians
understandably wanted nothing to do with silver. But no matter how intense
the fear and selling got, this metal refused to fall below $27 or so. New
buyers emerged around these levels to create a multi-year support line that
formed the triangle’s base. But silver still remained trapped in this
bearish formation.
Until this past August. After hitting its
usual summer-doldrums lows, silver surged sharply.
The start of its biggest seasonal rally of the year corresponded with
widespread expectations that both the European Central Bank and US Federal
Reserve would launch major new bond-buying programs. These would be highly
inflationary, the central banks creating money out of thin air to
directly monetize government debt.
This August surge accelerated into
September when the ECB and Fed indeed announced major new debt-monetization
campaigns as expected. The result was silver utterly shattered the correction
resistance line of its huge descending triangle! And provocatively in
technical lore, if a descending triangle is resolved in a major upside
breakout (instead of a downside failure) the outlook is very bullish.
Another big clue silver’s
intermediate trend was reversing from correction to upleg
came through its 200-day moving average. During the massive correction
following that massive upleg, silver’s 200dma
nosed over to head south and became overhead resistance. Not even last
spring’s strong seasonals could overcome
this. But soon after silver’s triangle breakout in August, a decisive
200dma breakout followed.
Silver rocketed well above its 200dma as
the ECB pledged to buy sovereign bonds and the Fed launched its unprecedented
open-ended
third
quantitative-easing campaign. In just over a month, silver had
gained nearly a third which is a fantastic early-upleg
gain. But like a smaller version of an upleg
topping, this sharp initial advance proved too far too fast. So silver needed
to pull back to rebalance sentiment.
Pullbacks within ongoing uplegs are healthy and common. The faster and higher
prices rise, the more greedy traders as a group become. Unchecked greed
threatens to pull forward too much buying, which has the potential to kill uplegs prematurely. So once all near-term buyers have
been sucked in, sellers gain control sparking a pullback. And silver obliged
right on schedule, during a normal seasonal
lull.
But this pullback was very telling
technically as it bounced right at silver’s critical 200-day moving
average. What was resistance during the correction had become support during
the subsequent upleg! This was another major
technical confirmation that silver’s intermediate trend had stealthily
reversed from correction to upleg. And since then
silver has continued to advance on balance, even ignoring gold.
Silver traders have always looked to gold,
so its price action dominates their sentiment. When gold is up big, they rush
into silver. And when gold falls sharply, they dump silver aggressively.
Provocatively last month when gold slipped 0.4%, silver ignored its primary
driver to rally 3.7%! This big upside divergence is an impressive
show of strength, and really emphasizes that silver has fully transitioned
into upleg mode.
And this is crystal-clear on silver’s
chart. As you can see above, since early August this metal has enjoyed its
longest advance since its last upleg. And this
recent months’ rally has also been very upleg-like
in character. Despite the new ECB and Fed inflation that ignited some
excitement, silver’s latest run has been measured. This contrasts with
sharp and short-lived short-covering rallies in corrections.
Taken together, all this technical evidence
virtually guarantees that silver is indeed in a young new upleg.
The lingering bearish commentary arguing for silver’s correction to
reassert itself is simply wrong. Gradually it will abate as the
correction’s fear shadow fades and silver’s bullish technicals win over new converts to the young-upleg thesis. And boy, a young silver upleg
offers vast opportunities for traders.
At best so far, silver’s latest
advance is 32.6% over 3.2 months. This would sound impressive for most
commodities and stocks, but silver is in a league of its own. The reason
silver perpetually fascinates speculators and investors
despite its extreme volatility is the sheer size of its uplegs. As this next chart shows, silver uplegs tend to accelerate and mushroom to enormous size
in fairly short periods of time.
Silver’s last upleg
that nearly went parabolic before cresting in spring 2011 was gargantuan. We
are talking about a mind-boggling 176.6% gain in just 9.0 months! Of course
that was atypically large, so the subsequent reckoning led to the massive
correction we just weathered that ultimately nearly cut silver in half. But
even silver’s normal uplegs are quite big,
showing the huge potential silver has today.
Its secular bull’s first four major uplegs before that colossal fifth one saw gains of 71.5%
in 6.0m, 124.0% in 8.5m, 80.5% in 6.5m, and 115.4% in 12.4m. These first four
that ignore the recent outsized beast average out to gains of 97.9% over 8.4
months each. So you can see why I call today’s 32.6% over 3.2m young.
If silver’s new upleg merely proves average,
we have only seen a third of its gains so far!
And despite silver’s sharp surge in
late August and early September on the anticipation of and then realization
of new central-bank inflation campaigns, it was nowhere near hitting upleg-ending levels of overboughtness.
Remember that the reason uplegs ultimately die is
greed grows too extreme. While this emotion can’t be measured, it can
be inferred from how fast a price advances beyond an established baseline.
Many years ago I developed a powerful and
profitable trading tool to quantity whether a price was oversold
(the time to buy low) or overbought (the time to sell high). It is called
Relativity, and simply looks at a price as a multiple of its own 200-day
moving average. Over time in ongoing bull markets these multiples form horizontal
trading ranges. Read my latest essay on Relativity
Trading to learn the theory.
The chart above shows Relative Silver, or rSilver, in light red. Since the early days of its
secular bull way back in 2003, the rSilver trading
range has run between 0.95x to 1.40x. At the support
end when silver is trading near or under 95% of its 200dma, it is oversold
and a fantastic buy. Note above on the chart how silver surged in new uplegs soon after such low oversold extremes were
reached. Silver was too cheap.
Provocatively the last time rSilver fell down under support was this past
summer, when silver’s current upleg
was stealthily born. This is yet another technical confirmation that its huge
correction ended and the intermediate downtrend has reversed into an uptrend.
For those of you keeping score, I wrote about how
undervalued silver was at the time. So we started buying and
recommending cheap silver stocks.
The upper resistance of silver’s
relative trading range has been 1.40x. Once silver
rallies far enough fast enough to surge 40%+ above its 200dma, there is a
high probability of an imminent major topping. You can see the rSilver levels of past major toppings in this chart. They
range from 1.29x on the low side (a weak upleg) to 1.75x on the high side (a massive one). Uplegs don’t fail until silver gets too
overbought.
Silver’s young new upleg indeed had a sharp initial advance in August and
September thanks to the big new inflationary central-bank bond-monetization campaigns.
But despite this surge silver came nowhere near being overbought in upleg-killing context. The best rSilver
levels seen at silver’s latest interim highs were only 1.14x. This is less than half the overboughtness that ended even silver’s weakest upleg!
So not only do silver’s technicals currently argue overwhelmingly that
a young new upleg is underway, this metal’s
bull-to-date upleg precedent shows it is nowhere
near being mature. Silver’s newest upleg has
lots of room to run yet just to grow to average proportions. And there are
plenty of reasons to expect silver investment demand to surge so dramatically
in the months ahead that merely average is unlikely.
This week just 3 months after the Fed
launched QE3, it already felt compelled to more than double the size of its new
open-ended debt-monetization campaign! It just added $45b per month of
longer-term Treasury buying to QE3’s existing $40b per month of
mortgage-backed-securities purchases. This is not only highly inflationary,
which is very bullish for silver, but it is directly monetizing Obama’s
epic deficits.
Last week I wrote a popular and
highly-praised essay explaining the US
debt crisis. In his first term, Obama averaged annual deficit
spending of $1274b. This fiscal year’s deficit is expected to be at least
$1100b. Incredibly this week the goofy Fed committed to buying $540b worth of
Treasuries over the next year. This means Bernanke is directly
monetizing half of Obama’s record overspending going
forward!
Our out-of-control government is borrowing
such insane amounts of money in order to spend it immediately, so all the
new dollars the Fed will create out of thin air to monetize Treasuries will
be injected directly into our economy. Big
inflation is coming, which makes silver incredibly attractive to
investors. The implications of this crazy QE3 expansion (QE3X) will drive
major silver demand as 2013 wears on.
For many smaller investors who feel priced
out of the gold market, silver is the only option for a physical inflation
hedge. Provocatively silver’s last upleg,
that massive 177% one, really started accelerating in late 2010 right after
the Fed announced QE2. And QE2 was merely $900b in Treasury monetizations, compared to QE3X’s $540b per year
for what looks like at least several years to come. Talk about inflation!
And all of this overlays strong
silver seasonals between now and spring,
which ought to really amplify this new upleg’s
advance. As I ponder all of this, it is hard to imagine all the silver bears
today not soon changing their tune to bullish. And of course bullishness
quickly feeds on itself, leading to more buying and higher prices which
entice in still more capital. Silver is enjoying one heck of a bullish setup
today!
At Zeal we’ve been anticipating this upleg since summer, so we’ve spent many hundreds of
hours since then digging into silver stocks. Our goal was to uncover the
silver companies with the best fundamentals to soar in silver’s new upleg. Just this week, we finished the latest stage of
this project. Due to popular demand, we undertook our first-ever
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juniors.
We investigated nearly 100 silver juniors
trading in the US and Canada, and gradually whittled this universe down to
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The bottom line is silver is almost
certainly in the early months of a major new upleg
today. The correction technicals that spawned all
the recent bearishness have all reversed. And after correcting by half, all
the greed that necessitated that massive correction has long since been
eradicated. This past summer’s fear was the perfect birthing ground for
a major new upleg, and silver’s bullish technicals indicate one is underway.
This is all happening heading into a
seasonally-strong time when central banks are ramping money creation
dramatically. Big inflation is coming, and as awareness of this grows among investors silver will be a prime go-to destination as
always. The last time the Fed aggressively monetized Treasuries, silver
enjoyed its biggest upleg of its secular bull by
far. And this latest QE3X will dwarf the QE2 monetizations.
Adam Hamilton, CPA
December 15, 2012
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