12.27.09
For Silver bulls, the current rally might appear to be the start of a new up leg that might challenge previous major highs near $19 or even $21, those given to longer-term chart analysis might be hard-pressed to reach the same conclusion. In fact, the current up thrust might even be offering the bulls a final opportunity to exit at a profit (or a loss?) before a more substantial period of corr3ction ensues. Surely, there are a number of conflicting technical and fundamental forces at work in the Silver market, but we may be able to learn most of what we need to know by simply examining a long-term (monthly) chart of the continuous Silver futures contract.

Graphic credit: Metastock v. 11

Negative divergence
During the course of Silver’s recent year-long uptrend, prices covered a lot of ground, rising steadily from a low of $8.78 all the way back up to $19.42, which was surely good news for those convinced of a long term, secular bull market in the white metal. However, when we examine the money flow on the monthly chart, it becomes clear that Silver has been losing steam for some time now. Notice how negative the slope of the 34-month Chaikin Money flow (CMF) (34) is compared to the bullish price action since last December; this is known as a bearish divergence, one that will usually resolve itself by following through with a noticeable decline in prices. Additionally, take a glance at the current configuration of the StochRSI indicator (in the horizontal panel beneath the price bars); it’s very close to a bearish signal line crossover (see the upper red line). Taken together, this combination of money flow and momentum/cyclical confirmation paints a fairly convincing picture that Silver is likely due for more declines in the months ahead.

Battle of the Titans
Of course, there are additional factors to consider in the Silver market, and an equally negative fundamental factor is the current posture of the commercial and large speculator (hedge funds) positions in the Silver futures market – the commercials are still heavily net short even as the large specs are net long. Large speculators typically employ trend-following systems and methodologies in order to enter/exit the commodities markets that they trade, and it seems clear that they are still believers that Silver’s intermediate-term uptrend still has legs. The commercials aren’t buying that (pardon pun), at least not in large quantities, and seem more intent on keeping some powder dry so as to enable the scaling in of fresh long positions as Silver begins a widely-anticipated corrective move back down toward major support between $15.82 and $15.42.

Technical support for Silver comes in strong in the price zone between $15.42 and $15.82 and then down between $13.50 and $14.00, but daily-based traders might very well find that a decline into the mid-$15s will create some attractive short-term swing trading ops.

Even better, right now you can sell an out-of the money March 2010 Silver $21 call option for more than $500; should Silver reach the mid-$15s during the next month, the value of the option will lose substantial amounts of value and could probably be bought back for a fraction of the sale price. Given the lopsided standoff in the futures market between the commercials and the large specs, this could be a very attractive, fairly low-risk play for those who’d prefer not to trade futures contracts in this market.

Bottom line:
Initiating fresh long positions in the Silver market right now is probably not the best play, given the likelihood of a major A-B-C corrective pattern developing on this commodity’s daily chart. The down wave ‘A’ has already occurred (the drop from $19.42 to $16.80), the ‘B’ wave up is still in progress and all that’s needed now is something to trigger the selling that should start a noticeable ‘C’ wave down toward major support in the upper to mid $15s. The next few weeks should be very interesting in the precious metals market, so stay tuned for more updates as situations evolve.

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By Donald W. Pendergast Jr.
Contributing Market Analyst
www.ETFTradingPartner.com

October 22, 2009

Everyone would agree – the broad markets have made an astounding turnaround in 2009, with the S&P 500 index up as much as 65% from the March 2009 lows to the recent highs made just a few days ago. Hopefully, you’ve been able to profit handsomely as the market reversed from bear to bull mode, but if not, don’t despair – the broad market is made up of many sectors and industry groups, some of which are on an even hotter bull market rampage than the S&P 500. Hard to believe? Take a look at the charts below for proof positive:

Graphic credit: Metastock v.11

Custom Index
This is a custom silver stock index, one comprised of many of the major players in the primary silver mining industry, names such as Buenaventura (BVN), Coeur d’Alene (CDE), Hecla (HL), Mag Silver (MVG), Pan American Silver (PAAS), Silver Wheaton (SLW) and Silver Standard Resources (SSRI). It’s a simple price-weighted index, one designed to give precious metals equity traders an easy way to track the dominant trends in this highly volatile and frequently profitable industry group. The index made a major, enduring low in late October 2008, bottoming out at $5.27. Just a couple of weeks ago, this index reached nearly $20.00, topping out (for the time being) at $19.85. For those who love interesting statistics, that’s a gain from trough to peak of about 277% in less than 12 months. Even better, one of the index components, BVN, has an annual dividend yield of .29%, adding a few extra dollars of profit for long-term holders of the stock.

The trend of the index is clearly ‘up’, as the blue up trend line plainly demonstrates, and until this particular line is violated on a weekly close, this powerful uptrend should be given every benefit of the doubt. In fact, should the index approach the uptrend line, a significant new buying opportunity may present itself to traders who believe in the long-term prospects for Silver and its related mining shares.

Now, let’s take a look at the S&P 500 weekly chart to compare the two charts:

Graphic credit: Metastock v.11

Good Returns vs. Great Returns – It’s Your Call
Sure, it’s a great looking chart, and it’s not likely that anyone would complain about a 65% gain in less than eight months, but wouldn’t you rather have had the bulk of your money in the sectors and industry groups that were actually outperforming the S&P 500?
With your money in the silver stock index (spread equally across all seven component stocks), you would have increased your money at a rate three times faster than the return generated by the S&P 500 index – for an average gain of nearly 24% per month since October 31, 2008. And while no one knows what the future holds for the broad market indexes or for the seven silver stocks in the index, we do know that industry groups that outperform the broad market tend to continue to outperform. Further, we also know that both Gold and Silver are in major primary bull markets, the likes of which have not been seen in a generation, and that Gold and Silver mining shares typically increase in price at a rate that is usually 200-400% greater than the gains posted by physical (real coins, bullion and bars) Gold and Silver.

Joe Average or Savvy Investor/Trader

So, the choice is yours; you can continue to plow money into an S&P 500 index fund and settle for ‘average’ returns, or you can monitor the various stock sectors and industry groups to determine which are outperforming the S&P 500 index and reap profits that are consistently better that the broad market indexes. And right now, the stocks in the silver mining industry group are among the hottest of all, far outperforming all of the major US stock indexes by a wide margin.

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Mark Brown