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Tactical Silver Trends

Adam Hamilton
September 10, 2004

While the month between late August and late September typically exhibits the strongest seasonal tendencies for silver, this first full week of September 2004 has been a rough one for silver investors and speculators.

As summer unofficially ended on August 31st, silver was trading at $6.75, only about 1.5% off of its upleg-to-date high of $6.85 achieved on August 20th. During the subsequent two trading days surrounding the long Labor Day weekend in the States though, the silver market suffered a miniature implosion.

Last Friday, silver fell 3.4% ahead of the traditional end-of-summer vacation weekend for the markets. This Tuesday, when American traders returned, silver plunged another 5.5%. Together these two dark days in the recent annals of silver history witnessed a sharp 8.7% decline, from $6.77 to $6.18.

Just how ugly is an 8.7% loss in only two trading days? Well, if you are a NASDAQ investor imagine if the index fell from 1850 to 1690 in a couple days. In gold terms, imagine if the Ancient Metal of Kings plummeted from $400 to $365 in only two days. Ouch! Any way you want to compare it, a nearly 9% plunge in only two trading days is a nontrivial market event and very worthy of note.

Thus it is not surprising that silver players are sweating a bit this week. Silver's sharp slide straddling last weekend led it to slice through its key 50-day and 200-day moving average support lines like a hot knife through butter. As I hammer out this essay on Thursday silver remains under its key 200dma bull-market support, not a bullish development by any means.

This bloodshed leads to the key question burning in many silver players' minds today is this silver bull market in jeopardy? As a silver investor and speculator myself, I have certainly not enjoyed this carnage either but I do want to understand it. As such, this week I would like to survey the current silver technical scene, post plunge, to attempt to determine if this young silver bull is now in mortal technical danger.

In order to accomplish this mission, we need to take a look at the tactical silver trends now in force, from both long-term strategic and short-term tactical perspectives. While a 9% plunge over two days certainly feels horrific on those two days, it may or may not be significant when viewed from within the crucial perspective of existing price trends. Considering price action in isolation usually leads to poor decisions, context is essential.

As you examine this first longer strategic bull-market graph, consider just how volatile that silver can truly be. For many decades now silver has had a well-deserved reputation for its exceedingly great volatility. Major price moves unfolding rapidly with little or no warning, both to the upside and downside, are just par for the course in the world of silver. Since the global silver market is so incredibly tiny, even relatively small amounts of capital moving in or out can spawn stunning price swings.

First, and without a doubt most importantly, even after this week's unpleasantness the silver bull market remains quite intact and not in any mortal technical peril. This all-important fact is evident due to silver remaining well above its linear primary bull-market support line, the lowest (and longest) blue line in this chart. Extending back to last summer, so far this major support has not been violated in silver's bull to date.

The foundational solidity evident in this major support line is amazing. Silver has already bounced off of it no less than five times, marked by the red arrows above. This strong support zone has now survived a parabolically accelerating upleg, a wickedly brutal correction, and the budding second major upleg in which we sojourn today. I suspect that every technically-oriented silver player on the planet armed with a ruler and pencil is watching this particular major support line.

This primary bull-market support line now intercepts the present near $5.90. And it is also crucial to remember that the support and resistance lines used by technicians for convenience are more properly zones, or bands, in reality. A price does not formally risk breaking out of one of these zones unless it falls more than 2% away from the actual line. Thus in silver's case the metal could trade down to 98% of $5.90, or $5.78, and still be considered "supported" and in line with its primary bull-market uptrend. This is another 6.2% lower than Wednesday's close.

Now with silver's primary bull-market uptrend thankfully intact at the moment, we silver folks can breath a collective sigh of relief and dig deeper into the technical carnage. First I would like to discuss silver relative to its shorter-term tactical trends, and then wade into the vexing issue of its key 50-day and 200-day moving averages failing to hold as support in the past week.

As this chart reflects, silver is just like any other bull market in that it flows and ebbs over time. While the primary trend marches relentlessly higher as the lower support line illustrates, over the short-term the tactical trends can be up or down depending on prevailing general greed and fear in the silver market. A great sentiment pendulum swings back and forth from greed when silver is too overextended to fear when it meanders near its support like today.

These short-term emotional waves have led to four distinct tactical trends in silver in the last year or so. All four are numbered above, with the first two representing an accelerating upleg, the third a sharp correction, and the fourth our current tactical upleg. Acknowledging the reality of these varying tactical trends is important because it preemptively removes any potential anxiety that we could feel if our current tactical uptrend was to fail tomorrow.

If you look at the far right side of this graph, there is a red question mark. This notes that silver is right on the verge of breaking down out of its short-term tactical uptrend established so far in this upleg. Tactical support is running near $6.15 or so today, so a silver close more than 2% lower than this, about $6.03 or so, would put the tactical upleg, but not the strategic bull, in jeopardy.

While certainly no one long silver wants to see such a tactical breakdown, it really is no big deal in the grand scheme of things as long as silver's bull market remains intact. As the sentiment waves flow and ebb, silver periodically breaks out of tactical trends both to the upside and downside, as the four red X's drawn above mark. Unlike strategic trends which run for years, tactical trends only have an expected lifespan measured in months so it shouldn't be a shock to see them change periodically.

Tactical trend one, labeled above, broke out to the upside late last year as silver demand and excitement accelerated, ratcheting up this first major upleg's upslope. Tactical trend two then continued to rapidly climb higher until silver broke out to the upside in March. A mini-mania was brewing, at least among the precious-metals crowd, and the unsustainable parabolic rise in silver was making contrarians like me nervous.

On April 1st just before silver crossed $8 I wrote the following in the April issue of our monthly Zeal Intelligence newsletter for our subscribers, "Stretched 42% above its 200dma bull-market support, a major correction is due in silver. It makes no sense to buy silver stocks or physical silver today. A typical bull-market pullback would drag the metal back down near its 200dma, and I am sure that silver stocks would be hit hard in a silver retreat back down under $6."

And indeed silver's next trend failure, marked by the red X in April, was to the downside as a nearly vertical tactical trend three emerged. Silver had simply become too overbought and greed abounded in the small silver community, so a correction was necessary to bleed off this gross sentiment imbalance. By the time this wickedly sharp correction ended a month later in May, short-term greed was obliterated and dark fear was spreading like the plague.

Out of all the tactical trends on this chart, I think the third one framing this correction is the most illustrative of the extreme nature of silver. Silver always has been and probably always will be a relatively tiny hyper-volatile market. It can rise and fall blisteringly fast as this is just the nature of this beast. There is no sense getting emotionally impressed by a sharp silver rally nor getting discouraged by a sharp silver correction. Silver truly is the "restless metal" as Dr. Roy Jastram wisely wrote decades ago.

This past spring's brutally sharp correction also helps to put this week's 9% plunge into perspective. The spring correction's first gut-wrenching plunge in April plummeted 14.8% in only five trading days, and 12.7% came from two trading days alone, April 13th and 14th. After a very short consolidation near its 50dma, silver's freefall resumed in earnest. The metal then plunged another 16.3% in only three trading days in late April. Talk about gut-churning volatility!

Thus, compared to the immense short-term pain in April, the 8.7% drop over two days this week looks rather anemic. If you want to leverage silver's fantastic gains to the upside when it really gets moving, then you just have to accept that it can fall even faster. Big potential wins and losses are two sides to one volatility coin. High potential returns are only found with high risk, so silver speculators who live by the sword must be ready to die by the sword too when silver careens lower.

The other major technical development that spooked silver traders this week was the failure of both silver's 50-day and 200-day moving averages to hold as support. Considered in isolation, this is indeed bearish, especially in 200dma terms since the 200dma usually forms the most foundational bull-market support. You can see silver abruptly knifing through these major moving averages in both of the graphs in this essay.

If we step back to look at the broader picture however, the failure of the major moving averages as support is not as ominous as it sounds. First, note above that both of these moving averages are still trending higher. This is particularly important for silver's black 200dma line since it runs parallel with silver's bull market. As long as silver's 200dma, which deftly filters out all of the incessant short-term market noise, continues to climb then there is nothing to fear technically.

In fact, silver has traded under its 200dma quite a bit recently between May and June. The powerful upleg shown above in tactical trends one and two dragged silver's 200dma considerably above its primary bull-market support line. Thus silver can now trade under its new higher 200dma while still remaining well above its long-term support. Our next graph really helps highlight silver's current relationship with its 200dma, which really isn't too dysfunctional at all.

In addition to zooming in to only the current tactical trend, number four, we also added a red Relative Silver line slaved to the left axis. Relative Silver, or rSilver, is defined as the silver price divided by its 200dma. It normalizes the percentage distance that silver swings relative to its key 200dma over time. An rSilver reading of 1.10, for example, indicates that silver was trading at 110% of, or 10% above, its 200dma. A sub-1.00 reading, like 0.90, indicates that silver was trading at only 90% of its 200dma.

So the red rSilver line below, relative to the 1.00 level highlighted in dark gray that corresponds with silver trading exactly at its 200dma, allows us to easily see absolute normalized silver performance relative to its key 200dma over time. Interestingly, so far the rSilver trend remains positive even in light of silver's disconcerting slump this week.

Continuing with our rSilver thread of analysis first, please note the rising trend of rSilver lows in red. When silver bottomed in early May after its wicked correction, silver traded down to 0.937x its 200dma. A month later in June, a slightly higher relative high was reached at 0.943. As of the data cutoff point for this essay, Wednesday night, rSilver had only retreated back down to 0.969 this time around. This trend is up!

Thus, in relative terms, each time silver fades below its 200dma in its current tactical uptrend it is not falling quite as far below as during its previous trips south. This creates a bullish positive trend and suggests that silver's 200dma is working to reestablish itself as a primary support zone. Sooner or later, if this rSilver trend continues, then silver's trend channel will shift higher so silver's 200dma runs along the lower support line as it has done for much of silver's bull to date.

In trend terms, this zoomed-in tactical view more clearly shows current long-term and short-term support levels. The fat blue line is the long-term primary bull-market support line from the first graph, and silver thankfully remains well above it. The slimmer support line marks the bottom of silver's current tactical uptrend channel. And there is no doubt that silver is now flirting with this support line and it could very well be broken if silver doesn't bounce right here. But it is the long-term support that really matters, not the short-term.

This short-term perspective also helps put silver's sharp recent decline into context. All that really happened, regardless of how distressing it felt a few days ago, was silver knifed through its current uptrend channel from top to bottom. Transiting from resistance straight down to support is not at all uncommon during bull-market uplegs. It can actually be really healthy if it bleeds off any popular greed that started taking root as silver challenged its upper resistance last month.

If you look back at late May, you see a similar phenomenon. Silver slammed into its upper resistance zone and then immediately fell back down to its lower support zone. While this previous fall through silver's trend channel was not quite as severe as this week's, it still helps illustrate that prices falling all the way down through a trend channel are nothing to write home about. Generally any intra-trend price movement in either direction, regardless of its cause, is nothing to grow excited over.

In light of all this analysis, the bottom line is silver really looks fine technically, in spite of the intense weakness earlier this week. It remains above both its tactical short-term support, which is really not too important in the grand scheme of things, and also its strategic bull-market support, which is very important. In addition both of its key moving averages continue to migrate higher, and silver seems to be reducing the distance it travels below its 200dma with each higher interim low, a bullish omen.

If you are a silver investor or speculator, rather than being concerned you should be salivating at today's enormous opportunities to add to your silver-related positions. The best time to buy both investments and speculations technically is when silver is trading near its lower support zones, like today. If silver's current upleg, and its bull market, remain intact, then silver has a far higher probability of heading higher from here than lower. Buy near support!

In our acclaimed Zeal Intelligence monthly newsletter, I am currently recommending buys on four elite silver stocks that should thrive as this upleg recovers and heads higher. Two of these recommendations are more short-term oriented, and two are found in our long-term investment portfolio. Naturally great unhedged silver stocks can leverage the raw gains in silver tremendously.

If you are interested in knowing which silver stocks I own and recommend, now and in the future as new opportunities arise, please consider honoring us with your subscription today. Not only will you support our ongoing precious-metals research work at Zeal, but you will gain access into all the silver timing decisions and logic that undergird our actual trading recommendations going forward.

If you join me in believing that this young silver bull market remains in force for fundamental reasons as global demand continues to exceed mined supply, then there is no better time to buy than when silver trades near its lower support zones, like today. Even after its ugly slump this week, silver's technicals look fine and remain quite bullish.

September 10, 2004
Adam Hamilton, CPA
email: zelotes@zealllc.com

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