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.