35% in just 6 weeks, silver has driven trader enthusiasm to a fever
pitch. Naturally after such a magnificent surge to new multi-decade highs,
silver bullishness is off the charts. Expectations for continuing
near-parabolic gains are nearly universal, with ebullient commentators coming
out of the woodwork to predict spectacular near-term price targets.
exuberance is certainly understandable, traders
crave big gains which silver can provide in spades. I’ve been a
big fan of silver for a long time. Way back in November 2001 when
silver traded just over $4, I started recommending physical silver coins to
our newsletter subscribers as core long-term investments. Boy let me
tell you, back then almost no one was bullish on silver as this secular bull
was being born!
we’ve realized 108 silver-stock trades in our weekly and monthly
newsletters. Across all of them, which include all losers and the
brutal stock panic’s impact, our average annualized realized gains ran
+45.3%. After this decade of successful silver-stock trading, a
critical lesson dominates my mind. Like all bull markets, silver
doesn’t march up in a straight line forever. It flows and ebbs.
Though its bull indeed powers higher on balance, silver’s massive uplegs are followed by brutal corrections.
Now if you
are crazy enough to subscribe to this theory that the silver zealots think is
heretical, that silver is not going to soar indefinitely, then
doesn’t it make sense to look for toppings? At some point after a
massive upleg, silver is going to need to
correct. Period. It doesn’t matter how bullish
silver’s fundamentals may be, how greedy silver enthusiasts get, or
what is going on in the physical silver market.
corrected hard in the past despite bullish fundamentals, wildly-bullish
enthusiasm, rumored supply shortages, tightness in certain coin markets,
foreign buying, and every other silver-to-the-moon argument getting rehashed
today. In fact, the more bullish, optimistic, and enthusiastic
investors and speculators get, the greater the odds for an imminent
sharp correction. These psychological conditions seduce in everyone
interested in buying anytime soon. Once they are all in the rally burns
out, and only sellers remain.
So how can we
recognize dangerous topping conditions in real-time? By studying
silver’s technical and sentimental conditions at its well-known past
major interim highs. If you know how past silver toppings played out,
then you can identify current episodes where the probabilities heavily favor
a correction. And this is priceless knowledge to have, as
silver’s corrections are wickedly fast, large, and unforgiving.
If someone is
attempting to convince you silver is going to shoot higher without
interruption indefinitely, this chart ought to be very sobering. Silver
is no safe haven, no magical investment. It is one of the most-volatile
and risky commodities in existence. Yes it can rally very fast, which
is a lot of fun. But after its mightiest uplegs
it literally plummets and eviscerates the gullible who bought in near
the latest topping.
stock panic of late 2008 was the epic discontinuity of a lifetime, so
it is best to consider silver in pre-panic and post-panic terms. During
the pre-panic years of this secular bull, silver enjoyed three enormous uplegs that rocketed up to near-parabolic climaxes.
Then silver was ripped to shreds in the stock panic, traders rushed to
abandon this hyper-speculative metal. Then it recovered after the panic
with everything else, and its first true post-panic upleg
began last summer.
definite technical (price-action) characteristics of past major toppings that
silver shares today. The most-obvious one is silver’s
near-parabolic vertical ascent. Note that the major pre-panic uplegs accelerated the same way, rocketing skywards in a
final manic gasp before collapsing under their own psychological
weight. These near-parabolic terminal ascents can be measured and
market including silver, when prices surge too far too fast they
simply need to correct. This is a psychological phenomenon,
supply-demand fundamentals are completely irrelevant. Any price rising
too far too fast generates tremendous greed. This unbalanced sentiment
sucks in all traders interested in buying in anytime soon. Once all
these buyers have bought, only sellers remain. And then some minor
catalyst ignites initial selling pressure which quickly snowballs, resulting
in a full-blown correction.
But how can
we measure this amorphous concept of “too far too fast”?
Many years ago I developed a simple trading system that quantifies it.
Some kind of objective baseline was needed from which to measure the rapidity
of advances, and the perfect one happened to be any price’s 200-day
moving average. 200dmas are not static, they
gradually rise to reflect an ongoing bull market. Yet they still move
slowly enough to filter out all the day-to-day volatility, which can get
pretty extreme in silver’s case.
trading system considers prices as multiples of their 200dmas. Over
time, any price in a bull-market trend tends to carve a horizontal
trading range relative to its 200dma. This is readily evident in silver
above. If you take the blue silver price and divide it by its black
200dma line, the light red Relative Silver (rSilver)
line is the result. Since 2003, silver has tended to trade between
0.95x its 200dma on the low side to 1.40x its 200dma on the high side.
This relative trading range defines “too far too fast”.
The best time
to buy silver is when it is low, near its 200dma. Thanks to this very
tool, back in mid-August when silver was near $18 I wrote an essay claiming a
big autumn silver rally was coming. I encourage you to read it,
as most analysts were very bearish on silver last summer as it made
its usual seasonal lows. But our subscribers were ready in advance for
this latest mighty silver upleg.
The best time
to sell silver is when it is high, stretched far above its 200dma.
Historically in this secular bull, once silver ran 40%+ above its 200dma it was
pushing unsustainable advances. How do I know? Check out the
chart. Silver soon collapsed each time after exceeding this
metric, it had simply rallied too far too fast. And where is rSilver today? This week it hit a breathtaking
1.513x, which is crazy-high. Enthusiastic traders have bid silver over
50% above its 200dma! These levels are unsustainably extreme.
technical terms, silver’s recent price action looks very much like past
major toppings. Silver has shot vertical in a near-parabolic
spike. And it has rallied so far so fast that it has far exceeded its
bull-to-date danger zone of 1.40x its 200dma. What happened in the past
after these very conditions? The chart doesn’t lie, silver plummeted
like a rock. And if you are a newer silver player, you can’t
imagine how brutal these post-topping corrections were. They literally
ruined countless traders not prepared for them.
summarizes some of the price action surrounding these major past
toppings. The topping numbers below correspond with the ones in the
chart above. While silver’s post-panic recovery in 2009 was very
different from a true silver upleg, I threw in its
topping for good measure. This table looks intimidating at first, but
it is simple and easy to understand. Heeding its hard lessons could
save you from massive losses in your silver-related trading positions.
toppings to consider are the first three of this bull, April 2004, May 2006,
and March 2008. They were normal silver bull-market advances to new
bull highs. The fourth one was a recovery from an abnormal and overdone
stock-panic selloff, so its technicals are
atypical. In addition, that fourth upleg
didn’t carry silver to new bull highs like all the other ones.
Let’s walk through those early uplegs.
Over an upleg duration averaging 7
months, silver shot 92% higher on average in its massive pre-panic uplegs. So a doubling in silver over such a
short period of time is actually par for the course. Many traders are
surprised to learn that silver’s entire bull-market gains are
won in a handful of relatively-short periods of time. For the vast
majority of its bull, silver wasn’t very exciting at all. This
curious metal drifts listlessly for a long time, then
awakens to surge.
daily gains over the entire spans of these uplegs was 0.62%. In the final 6 weeks
before these toppings, silver surged almost 30% on average. In the
terminal 4 weeks, it rallied nearly 20%. In the final 2 weeks, it
blasted over 14% higher. And in its final week before its upleg-ending topping, silver averaged big gains exceeding
7%. The average daily volatility ran 2.1% over this final week.
Relative Silver peaked above 1.40x, and exceeded
this danger zone for a varying number of days.
are hard data, not opinion or theory. So it is fascinating to compare
what silver has done in its current upleg with what
it averaged in its massive pre-panic ones. As of this week, silver has
rocketed over 106% higher in just over 7 months! This is a
considerably-greater gain than its past uplegs’
average of 92%, over about the same period of time. Distilled into a
daily average, this silver upleg’s 0.69%
gains were among the biggest ever seen in this bull.
Over the 6
weeks before silver’s latest high this week, it shot up nearly
35%! This is a near-parabolic ascent that almost equals the biggest one
yet seen ahead of the May 2006 top. Provocatively, back then silver
sentiment and exuberance were as bullish as we’re seeing today.
Over the past 4 weeks before its latest high, silver shot up over 19% which
is close to the 20% average. So at least over terminal 6-week and
4-week spans, silver’s latest ascent certainly matches past
silver has failed to rally much over the past week or so, its final 2-week
and 1-week gains aren’t as extreme as past averages. We are
talking almost 8% versus over 14% on the 2-week metric, and just over 4%
compared to over 7% on the final-week one. This lackluster action has
also dragged down our current upleg’s latest
volatility read, but silver has been really volatile in recent weeks as traders
And in rSilver terms, today’s upleg
is the most extreme since the massive one topping in May 2006. Silver
trading at 1.513x its 200dma earlier this week was the highest seen since
that month! Silver has also enjoyed more days above 1.4x
recently than at every other major top since that one as well. So when
we look at measures of the magnitude and late speed of silver’s current
upleg, they track very well with what we’ve
seen at past major toppings. And that May 2006 topping is the closest
match by far.
after that one? Silver plummeted so fast that many traders called it a
crash. It was brutal beyond belief. If you weren’t
trading silver or silver stocks back then, it is hard to even communicate how
ugly it was and how many traders were wiped out. Silver plunged over
35% in just over a month, a mind-blowing selloff. And lest you
think that’s extreme, it really isn’t for silver. Its
average post-top correction ran about 30% over a span of less than a month
and a half. Yes, under 6 weeks!
A 30% to 35%
loss sounds academic to some, so consider it in absolute terms. If
silver indeed topped earlier this week, falling by a third would
hammer it back down to $24 within a couple months on the very outside!
Though this degree of correction would be totally normal and expected, and
wouldn’t even come close to jeopardizing silver’s secular bull,
the damage $24 would do to silver psychology and silver-stock levels would be
catastrophic. Silver stocks usually leverage silver selloffs, amplifying
these pre-panic corrections saw daily losses approaching 1.2%.
By the first week after their tops they had fallen over 11%, nearly 18% by
the second, over 22% by the fourth, and almost 24%
by the sixth. When silver falls 10% a week for a couple weeks,
it scares silver speculators to death. They rush to abandon their
recent love with blinding speed. And selling begets ever-more selling,
as prices spiral lower more and more traders capitulate.
And today we
are in a unique situation that makes this potential silver topping even
riskier than most. Believe it or not, a major driver of silver’s
fortunes is the state of the general stock markets! As such a
hyper-risky commodity, silver is heavily buffeted by the sentiment winds
emanating from the stock markets. When general stocks enter a
correction, silver tends to fall with stocks unless gold is exceptionally
strong. And even then silver drifts sideways, torn between following
gold (its normal driver) and stocks. As I’ve warned in recent
weeks, the US stock markets are due for a major correction today.
splash damage from this alone will hammer silver lower, but now stock-market
traders have direct access to silver via the popular SLV silver ETF.
This vehicle is a direct conduit between the vast pools of stock-market
capital and physical silver bullion. As stock traders get scared by the
stock selloff, they will likely sell all their risky trades including SLV.
If they dump SLV at a faster rate than silver is being sold in the futures
markets, this ETF’s custodians will be forced to sell silver bullion
(intensifying the silver selloff).
selling pressure forces physical ETFs to sell their underlying assets to
raise enough cash to buy back the excessive shares offered for sale. If
they don’t do this, the ETF will decouple from its
underlying to the downside and fail in its tracking mission. SLV
didn’t even exist at the April 2004 topping, was just 2 weeks old at
the May 2006 one, and wasn’t super-popular yet by the March 2008
one. So today’s topping may very well be the first one where
stock-market selling directly hammers silver prices.
silver’s secular bull still has awesome potential in the coming years,
today silver is very overbought and looks to be
topping. It needs to correct to rebalance sentiment, to eradicate the
excessive greed and irrational exuberance today. And silver corrections
tend to be unbelievably brutal, they are hard and
fast and take no prisoners. When most silver enthusiasts hear this
message, they get depressed.
corrections are actually very exciting and bullish! Our goal as
investors and speculators is to buy low and sell high, right?
The best times to buy low, whether we are talking physical silver coins or
great silver stocks, is just as one of these massive corrections
matures. Would you rather add new silver investments at $36 or
$24? Would you rather buy silver stocks at recent highs or 35% to 50%
lower? Corrections are the best buying opportunities ever seen within
ongoing secular bulls, they are a great blessing.
At Zeal we
are locked and loaded and ready as always. After realizing our large
gains on several-dozen commodities-stock positions in this upleg, we are mostly in cash. The resulting bargains
after the general stock markets, commodities (including silver), and
commodities stocks correct should be awesome. When the time to buy
arrives, I will explain why and exactly what we are buying in our acclaimed
weekly and monthly newsletters. Our trading track record since 2001 is
stellar, 583 stock trades with average annualized realized gains of
+52%! Subscribe today and start thriving in these markets.
If you are
into silver stocks, times like these when the odds heavily favor a major
correction are perfect to craft your shopping list. If silver stocks
are soon at fire-sale prices, you need to know which ones you want to buy before
the time to pull the trigger arrives. A few months ago we published our
latest comprehensive fundamental report on our favorite silver stocks.
We researched the entire universe of publicly-traded silver stocks in the US
and Canada, and wrote fascinating profiles on our dozen favorites in a
34-page report. This is now available for just $75 ($55 for subscribers).
Buy yours today.
line is silver looks to be topping based on bull-to-date precedent. The
odds are very high that silver is in store for another one of its brutal and
unforgiving corrections. These are dangerous events not to be trifled
with, as silver tends to plummet by nearly a third in less than 6
weeks! Silver stocks usually amplify these losses. Traders caught
unaware by a major silver correction are ripped to shreds.
these are very healthy and necessary events. They rebalance away
hyper-bullish and greedy sentiment, resetting the stage so silver’s
secular bull can continue powering higher. And corrections yield the
best buying opportunities ever seen within ongoing bulls. So investors
and speculators looking to add silver-related positions have a rare and
valuable opportunity to buy low.
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
Adam? I would be more than happy to address them through my private
consulting business. Please visit www.zealllc.com/adam.htm for
comments, or flames? Fire away at email@example.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!
- 2006 Zeal Research (www.ZealLLC.com)