Today’s sell-off in silver was triggered by Fed Chairman Bernanke’s comments in Senate testimony. Silver fell with Gold and other commodities, but given Silver’s much more aggressive gains over the past several days, it was more ripe for a hit.
Who sold silver today? We suspect late-to-the-silver-party Momentum Traders, Day-Traders and Small Specs that had positioned themselves near the top of the most recent bullish move. They may have been assisted by large bullion banks, who notoriously conduct raids on the precious metals at key inflection points to support their perpetual naked short in paper silver. Prior to today’s drop in the silver price, short interest had actually declined considerably.
We will be told that traders (more likely High Frequency Trading Algorithms) interpreted Bernanke’s comments to mean that there will be no further monetary easing. No more printing means no more inflation fears, which means commodities like gold, oil and silver become less attractive and no longer necessary.
Don’t believe it. Printing will continue. The drop in silver prices provides a new trading opportunity.
A Speculative Technical Silver Trade Using SLV
True silver bulls advocate buying physical silver whenever possible and to not get cute with timing purchases. Nevertheless, picking an occasional trade can be fun, and sometimes quite profitable. With a 6.4% decline in the price of iShares Silver Trust ETF (Real Time SLV Chart), looking for a trading opportunity in silver was irresistible. Here is a potential setup for consideration:
- Silver broke out of a big descending wedge on the weekly chart in Mid-January.
- The initial measured move target on that breakout is the low 40′s.
- SLV traded up to the top of a channel formed on the climb off December lows.
- On today’s drop, it traded down to the bottom of the rising channel.
- A 38% retracement on the move off the December low is roughly $1 away.
Trading down to the 38% retracement level would be a perfect “overshoot” beneath the lighter lower trend line on the rising channel in our SLV chart above. That overshoot would cause amateurs to position themselves short, expecting a pull-back down to the top of the descending wedge that we broke out of in mid-January. If the 38% retracement level holds, the shorts end up trapped as the pros begin covering, and a new lower trend-line for the rising channel is established – one that leaves us with more of a channel than what previously appeared to be a relatively wide bearish rising wedge.
This silver trade setup is highly speculative and not completely evident in the charts, which means it violates key tenets of technical trading. Who says we have to be “by the book” technical traders anyway? Lately, the obvious setups don’t seem to work, so we will go with our gut, OK? All the same rules apply: Be Patient, Use Stops and Don’t Bet the Farm, etc.
A Note on Silver in the Context of General Market Action
We are told the economy is fine, but we all know that there are some huge underlying problems. Specifically with respect to unsustainable debt. If you listened carefully, Bernanke suggested more help may be necessary for the economy. He’s talking about printing. Central Banks must keep printing in order to devalue their currencies. Central Banks must continue to buy up debt. Bernanke must continue to print, and he will.
More printing may be politically untenable, especially since we are told things are improving daily. Further, with Oil prices well North of $105 per barrel, printing is going to be difficult without first knocking commodities down. Bernanke is currently trapped. Before more printing to further debase the dollar can occur, commodity prices must be reigned in. Today’s comments in Senate testimony may have been designed to do exactly that. It helps to take the wind out of Oil, Gold and Silver sails to set us up for more debt monetization.
Destroying the dollar is the end-game and this is what ultimately takes silver prices higher, when priced in dollars at least. Given that Central Banks around the world are in a race to zero, silver priced in any currency is likely to rise.
Ultimately, printing must and will continue, despite what may have been hinted at in Bernanke’s public pronouncements today. The inflation trade will most certainly resume, and it will do so when nobody expects it. That could be shortly as Bernanke’s position and comments are more closely analyzed.
Liquidity sloshing around will find its way to commodities like gold, silver and oil, whether that is the Fed’s intent or not.
A Word of Caution:
This trade setup may be nothing more than an attempt to catch a falling knife. Today’s sell-off in silver was accompanied by massive volume. Additional selling, down to the top of the wedge, is naturally possible. We are simply looking for the less obvious opportunity.
Further, any drop in silver triggered by a collapse in equity prices or a general market crisis (we’ve been waiting forever) could be severe, but should also be temporary and an opportunity to buy more Physical Silver. A market collapse will result in accelerated printing and dollar debasement (some speculate the ultimate demise of Fiat Currency and a return to gold-backed currencies). For this reason, we characterize this trade as highly speculative and should only occur with fun money.
Perhaps a good hedge for the trade is to simultaneously short the S&P 500, with an intent to plow profits into physical, if and when a massive sell-off kicks in. We might be on the verge – did you see the Evening Star that presented itself on AAPL Shares today? We know that the market IS APPL after all.
March 02, 2012 Update:
Here is an updated SLV chart showing SLV now sitting on a lower trend line. Do we break lower? If so, target is around $32.40 for a less obvious reversal point.
In our last post, we said no further updates on this trade and if action doesn’t look right, we will bail. It worked initially, and it isn’t working now, so did just that. Bailed. Got to love the roller coaster ride. I guess we return to our long-term focus on accumulating physical.
Silver long trade (via SLV) plays out well so far. Silver suddenly surging higher, reaching for that 38% retracement level. The SPY Short (SH Long) also provided cushion before the move in silver began. At this point, no further updates for the trade. If action doesn’t look right, we will bail. If it looks like it wants to do what was originally proposed, we will continue to hold. In any event, managing the trade and remaining patient for a lower price after the initial smash last week paid off.
While a day late, the silver trade setup is complete. We’ve reached our $32.40 SLV target this morning with SLV now trading at $31.90. SLV has now declined 5% from its initial move down, from $33.55 to $31.80. If you went short the S&P 500 late Friday, you have also seen a decent 2-day gain there. The S&P short was actually a “hedge” on the long silver position, which we have not yet taken.
We are at or below our buy price target and looking to get long silver on an upswing, via SLV. The price currently sits between the 38% and 50% Fib retracement. If the trade is going to work, it probably needs to bounce back above the 38% retracement level today and then hold. Given the present decline and overall equity market conditions, this kind of bounce from here is hard to envision, which is why we are watching for it to happen. We are watching for the unlikely scenario that catches the majority off-guard. Nevertheless, it does violate basic trading tenets, so more cautious traders may wish to wait for the bounce and hold. A long bottom tail would be your signal. Those with a greater penchant for risk may wish to buy SLV at the current level right now to capture maximum upside. Continuing to hold the S&P 500 short from late Friday as a hedge on a reversal to a long SLV trade still makes sense.
Real Time SLV chart is here: http://www.pmbull.com/silver-etfs/slv/ – Expected that huge volume bar on the most recent decline on the minute to occur at our target. It is now possible for a reversal, if it will happen, to occur here or at any time, unless silver is going to dump even harder, with massive volume. Congrats to anybody that shorted on the bounce off the initial smash.
May not buy SLV immediately when it hits $32.40 if it looks like an attempt to catch a falling knife. Setup is now very fluid.
Trade is still working. Silver is still working its way down to our reversal / purchase price target. The short S&P “hedge” (haven’t gone long SLV yet, so can’t really call it a hedge) from Friday is now playing out nicely as well.
Add the short S&P 500 Hedge Here, perhaps, using SPY short, or $SH as a short index fund.
Is the target reversal point on this silver trade really “less obvious?” Perhaps not. It is both a 38% retracement level and a gap closer. It is perhaps only less obvious to those trading trend-lines for support and resistance, as the target looks like a total breakdown. That would be a head-fake and it could potentially occur intraday or end of day. A typical panic selling and reversal to close back withing the trend. For that to occur, we’d need to see some major pickup in selling. News driven perhaps, but most of the market moving news is behind us. We’ll have to wait see. Trading is waiting more than anything else.
An updated chart has been added to the original post.
Punched through the rising wedge on the very short term chart (not pictured here). That could now be a head-fake lower. It bounced back up above a lower rising channel trend-line on a longer time frame rising channel, depending on how you draw it (you will have to draw your own charts).
Some die-hard silver bulls may wish to go long silver here and not wait for a decline down to the 38.2% Fib retracement on the silver bull move from late December.
This is a speculative silver trade using SLV. The idea is to look for the less obvious reversal point on this pullback. The thought is that silver prices will drop enough to shake out more weak hands, dipping below the most obvious lower support on a rising channel. This false breakdown would also trap ultra-weak silver shorts. $32.40 is our target if you shorted yesterday’s bounce, at which point we go long.
Caution: PMBull is not a professional trader and is not providing trading advice. Draw your own charts. Real technicians can most likely find many flaws in this setup.
SLV gapped much lower this morning. Anybody shorting near the top of the retrace per above is sitting pretty, but now has a decision to make. The gap took us down to the lower line on a rising wedge which is incidentally a less often recognized 23.6% Feb level on the Wed. drop. The trade setup is looking for it to slice through there and get to the 38.2% Feb level.
We’ve now retraced enough of the initial drop that if I were able to short SLV (hard to do as a silver bug), I’d consider it, with a target down to around $32.40. That would be a nice healthy 5-6% gain, before going long on this trade setup.