Tactical Silver Trends 6

By: Adam Hamilton | Fri, Mar 23, 2007
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Much has been said and written about all the chaos that buffeted the financial markets several weeks ago in response to the selloff in the parabolic Chinese stock markets. The mini-panic's impact on the US stock markets and commodities in general has been analyzed from countless perspectives.

Silver, perhaps speculators' most beloved commodity, did not escape this carnage unscathed. With the relatively tiny size of the global silver market combined with considerable interest among speculators leading to its extreme volatility, it should not be surprising that silver sold off too. Speculators were quite scared for a few days there and they liquidated everything indiscriminately.

While it makes sense to be concerned about the selloffs in some markets, in others it is totally unjustified. In general stocks for example, very compelling arguments exist suggesting that a major cyclical bear may be starting to flex its muscles. If such an event indeed comes to pass, many are wondering what it may portend for silver and silver stocks.

Based on my studies of market history, I seriously doubt silver has anything to fear from a general-stock bear. During the brutal cyclical bear of 1973 and 1974 when the Dow 30 fell 45% for example, silver rose 115% over this entire two-year period and soared 241% at best within it! Like gold, silver is an alternative investment that shines the brightest when paper assets are struggling.

But although every contrarian understands this deep down, that precious metals usually thrive when the general stock markets suffer, it is easy to be overcome by the fear of the moment. With silver plunging 14% within five trading days as this month dawned, even some among the hardcore silver faithful experienced doubts about silver's ability to weather a general-stock downleg despite the metal's incredibly bullish fundamentals.

Endless tomes have been penned discussing these fundamentals, describing how and why global silver supplies are unable to keep pace with accelerating global demand and why this trend is likely to persist for a decade or more into the future. But as it is not the fundamentals that have spooked silver traders, but the technicals, it is into the latter I want to delve today.

While you wouldn't know it from reading the wailing and gnashing of teeth on Internet forums regarding silver's struggles of late, this restless metal looks absolutely awesome today technically. Not only did the mini-panic-induced selloff several weeks ago not damage silver technically, but its tactical trends have rarely looked better.

The fantastic tactical silver trends unfolding today are readily apparent in this chart. It encompasses the last 15 months of silver action. As always, considering the silver selloff of several weeks ago within its longer-term context immediately removes any ability for it to generate fear. Silver is near a technical point today that has nicely rewarded silver investors and speculators who went long when it was approached previous times.

To gain proper strategic perspective before considering recent tactical action, it is best to start with the big picture. Since the dawn of 2006 the silver market has been in three distinct states. The first, running until May 2006, was the culmination of silver's biggest upleg of its entire bull market by far. From August 2005 to May 2006 it blasted 124% higher. But roughly 5/8ths of this entire upleg's gains happened from March to May, during its final parabolic ascent.

Parabolas have nasty reputations in the financial markets, and rightly so. When a parabola happens at the end of a secular bull market, like in the NASDAQ in 2000, it can take decades before the old parabolic high is decisively broken. But thankfully silver's parabola did not occur at the end of a bull market, but at the beginning. With silver's fundamentals still so strong, its parabola aftermath would be relatively limited.

On a sidenote, we have already seen a number of parabolas in young commodities bulls that did not witness collapses afterwards. Why? Because their global fundamentals were still dazzlingly bullish even after the parabolas topped. If you are a Zeal subscriber, log in to our private charts on our website and check out the base-metals charts. Aluminum, copper, lead, nickel, zinc, and uranium have all gone parabolic in recent years yet none have crashed. Corrected, yes in most cases, but certainly not crashed.

Silver's incredible parabola witnessed a year ago also corrected, and hard. In roughly one month ending last June, silver shed 35% in a hard correction. Even more interesting than the magnitude was where the slide ended. When the dust settled, as you can see above, silver was back down to where its parabola had started in late February. Its entire parabolic ascent was completely erased technically.

If you were long silver back then as a speculator, this couldn't have made you very happy. Yet this hard correction was very necessary. Way too much euphoria had been baked into the precious metals by early May and a correction was inevitable and expected. At Zeal we pulled in our horns and waited for the coming correction to run its course. While very unpopular at the time, we were right.

Silver's sharp correction that totally erased its whole parabola also largely eliminated the excessively euphoric sentiment generated by the parabolic ascent. In most markets I wouldn't expect to see a new bull high yield to a deep interim low in just one month, but silver is probably the most volatile major commodity market on the planet. While it took gold until October to shake out its own euphoria and bottom, silver radically compressed this process and cleansed its own euphoria rapidly.

The reason speculators so love silver is because it can move so fast, in either direction. Extreme volatility can yield fantastic gains in very short periods of time if traders are betting in the right direction. But whenever speculative capital is deployed in silver for short-term trades, traders must be ready to lose money fast if they are wrong.

Silver traders live by the sword and die by the sword, especially if leveraged via futures. After every major silver correction in this bull, I've received sad e-mails from traders who were seriously burned when silver turned on a dime and plummeted. So if you are a leveraged speculator instead of a margin-free long-term investor, please be careful in silver and realize your capital can multiply or disappear incredibly rapidly.

But silver's apparent manic/depressive behavior mirroring that of the consensus of its speculators does have benefits. After silver bottomed in June its fledgling correction was already finished. It did not need to go any lower because the euphoric traders had already been driven away or slaughtered. Its current upleg began the very day after it bottomed in June. Silver has not looked back since.

Note above that since that June low, silver has carved a beautiful uptrend with rock-solid support and resistance lines. Before we delve into the tactical mechanics of this upleg, please consider the sum of its efforts. Just one month ago, on February 26th, silver had meandered 51% higher since June to within a mere 2% of its dazzling bull high achieved in May! And this time its approach was not parabolic, but a long, steady upleg built on a solid foundation of patient fundamental-based buying.

The fact that silver has spent nine months climbing back up to bull highs that it initially carved in just two should do more than anything else to underscore silver's dazzlingly bullish fundamentals. If the silver parabola of last year had been purely sentiment-driven like the NASDAQ in early 2000 with no fundamental underpinning, then silver would still be falling. But with silver back above $14 last month without any euphoria or parabola, global supply and demand truly justifies today's silver prices.

So strategically, what on earth is there to fear in silver? Even on its worst day early this month when silver traders were duped into believing that Chinese stock-market speculators are the primary drivers of the global silver market, silver was still up 27% to the day year-over-year! Over this same period of time the S&P 500 rose just 7% and change. Thus silver investors, long-term buy-and-holders, certainly had nothing to fear in early March. At Zeal we started recommending physical silver as an investment back in late 2001, at $4.20 per ounce.

But speculators caught in silver's fast 14% decline were certainly scared. I received a surprising number of e-mails on silver over the last couple weeks, which is why I wrote on it today. Interestingly though, even for gunslinging traders the tactical silver trends look excellent on balance. Considered in context there is nothing to fear.

In the beautiful new silver uptrend that has been relentlessly powering higher since June, silver has rallied and retreated three separate times now. The rallies lasted two to three months each and carried silver from its lower support to its upper resistance. The mid-upleg pullbacks, as is silver's style, were much faster and usually only took a matter of weeks to drag the metal back down to its lower support. The result of all of this was a series of higher highs and higher lows, a textbook-perfect upleg.

The mid-upleg rallies ran 34%, 32%, and 21% respectively. The latter didn't quite make it up to resistance as shown above so I suspect it met an untimely demise as it was swept aside in the Chinese-stock-market-plunge-induced mini-panic. When particularly emotionally-compelling news hits the wires, it is not at all uncommon for it to briefly short-circuit prevailing sentiment and lead to temporary unforeseen swings.

After each of these mid-upleg rallies there was a sharp correction, in typical silver fashion. Over the short-term silver prices are so dominated by speculators that prices fall fast when these speculators flee. The three sharp pullbacks in silver since this upleg began ran 18%, 14%, and 14% respectively. And as you can see on this chart, there was nothing out of the ordinary about our latest sharp pullback. It had a similar magnitude and similar duration to its two predecessors making it look quite ordinary and unimpressive.

Now when any price swings unexpectedly and is apparently driven by unforeseen news, the first thing speculators should do is evaluate its technical impact within proper strategic context. In silver's case several weeks ago all that happened is the metal fell back down near support, just as it had done prior times in this upleg, and then stabilized. Moves within a well-established uptrend channel, no matter how sudden or sharp, are seldom worthy of concern.

And perhaps most exciting of all is where silver ended up when it emerged from this minor scrum. Silver fell right to its uptrend support line and remained above its 200-day moving average. The former, of course, is where past silver pullbacks within this upleg have ended and powerful new rallies have begun. If you want the highest-probability-for-success time to add new long silver positions within an upleg, it is when the metal is plumbing support like today.

And within a far broader strategic bull context, the best times to buy within an ongoing secular bull are when a price retreats back near its 200-day moving average. This is especially the case for long-term investors who plan on deploying capital in silver for years. Time your buying to occur when silver is near its 200dma as it is today and your entry points on balance will be far superior to haphazard buying timing.

With silver looking fantastic and very bullish over both the short-term and long-term time horizons, now looks like as high-of-probability-for-success time as any to add new long silver positions. If you are a conservative long-term investor, you can call up your favorite coin dealer and buy new physical silver positions. Our favorite type of physical silver at Zeal has always been old US 90%-silver coins, bags of "junk" silver.

Speculators can consider going long silver futures and silver futures options, as well as silver stocks and silver-stock options. Personally I prefer the stock side of this game to the futures side for a variety of reasons. There are many more stocks to choose from, much more imperfect information, and a far greater proportion of naïve traders in silver stocks than in silver futures. These combine to create more pricing anomalies that we can exploit in elite silver stocks than exist in the singular silver futures markets.

And of course silver stocks have fantastic profits leverage to the silver price. Profits growth and hence ultimate stock-price performance in the best-performing silver stocks will utterly dwarf that of silver. They should even be much larger than the gains won in futures using maximum leverage. Of course there are countless company-specific risks in stocks that don't plague futures, but bearing these is just the price of shooting for truly legendary gains.

The biggest challenge with silver stocks is picking the right horses to bet on. Not only do you have to have a good grasp of where silver is within its tactical silver trends so you can time your buys well, but you have to wade through oceans of information to find the highest-potential plays in which to deploy. This task is Herculean and intimidating, as there are literally hundreds of publicly-traded silver stocks worldwide. Burning off the dross takes an enormous amount of time and knowledge.

Thankfully at Zeal we are blessed to study the markets full time to support our own personal trading, so we are constantly evaluating stocks to find the very best fundamental prospects. We used to keep all our fundamental research internal and merely use it as the basis to recommend new trades to our subscribers, but demand for pure fundamental research was high so we decided to start selling it a year ago. We launched a new business line, Zeal Reports, to formally offer our deep fundamental research.

Just this week my business partner Scott Wright finished months and hundreds of hours of research into the world's silver stocks. He profiled our 20 favorites out of the hundreds in the world in a brand-new Zeal Favorite 20 Silver Stocks Research Report now for sale. It is fascinating reading. These 20 silver stocks are the elite population from which we are going to choose new silver trades in our newsletters and buy into personally. Ranging from large to small, investment-grade to hyper-speculative, they all have excellent fundamental prospects and tremendous potential to thrive with silver.

So if you are interested in understanding our favorite silver stocks to bet on for the continuation of this upleg, which is likely to accelerate considerably once enthusiasm finally builds, please buy our new report today. It will save you hundreds of tedious hours of wading through mind-numbing SEC reports, financial statements, project documentation, websites, and marketing propaganda. We did the hard work so you don't have to.

We also plan to recommend specific silver stocks out of this report in our acclaimed monthly newsletter in the future as long as silver's technicals remain favorable for buying. Please subscribe today if you don't want to miss the next stage of this silver upleg, which should be the larger one if long-lost silver euphoria finally returns.

The bottom line is the tactical silver trends look fantastic today, despite the turbulence of several weeks ago. Silver is not driven by the fortunes in the Chinese stock markets, but by its worldwide supply and demand fundamentals which remain incredibly bullish. Any setbacks within such a fundamental backdrop will only be temporary, great opportunities to add new long positions.

Since silver is such a relatively tiny market, its ultimate gains in this secular bull will probably far exceed gold's just as happened in the 1970s. By adding long positions whenever silver is near well-established support zones as well as its 200dma, such as today, both investors and speculators stand to reap truly legendary gains by the time this bull ultimately matures.

 


 

Adam Hamilton

Author: Adam Hamilton

Adam Hamilton, CPA
Zeal LLC.com

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Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing delivered from an explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to subscribe.

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