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!
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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