Technical and Fundamental Analysis for Trading Silver

Silver dramatic reversal

Silver closed 12 cents up on the day. Open 11.99, low 11.81, high/close 12.11.
Silver closed higher after an earlier drop down to 11.81(which is the top of a support region that has now held 3 seperate times.) We have now been trading almost 4 weeks between 11.70 and 12.65. That is an extremely small range considering that silver commonly moves 30 cents in a day. As of this writing, silver has already gone up another 10 cents to 12.21.

Today was a big day in financial news. Consumer Confidence report came out today and was the worst number since last september.
http://www.conference-board.org/economics/consumerconfidence.cfm

Then there were two Fed related news items-a release of the FOMC minutes from the last meeting, and a speech by Dallas Fed President Richard Fischer. Both the minutes and the speech were viewed as dovish-neither seemed overly concerned with inflation. This resulted in a sharp upward spike in almost everything traded-Bonds, Energies, Precious Metals, Equities.

The S&P stopped at the 1207.75 resistance point. Bonds fully retraced their sell-off and made a new five-month high at 110-09. Silver and gold both bounced off of support levels to come back dramatically in the last two hours of trading. And even the energies managed a little come back for the last hour of trading.

How would I trade from here?
Silver is still the least clear of the markets to me. I think it could easily trade up to 13 dollars from here, but the price action lacks vigor to my mind. I would like to see at least one more week of distribution before I would go long. If it does break past 12.65 I think that it would be a weak and ineffectual move. Same goes for Gold. If the XAU breaks above 151 I will have another look but until then I am on the sidelines.

I still think that bonds have a significant resistance (110-12) directly above their current levels so I think this is a great short opportunity for bonds. Today's close was VERY strong though and so I would put my stop directly at 110-13.

Equities are in much the same situation as bonds. They are close to breaking out-but their momentum indicators are overbought, and they have significant resistance to get through. If you are long equities from the end of last week I would take your profit and maybe even put a short on with a tight stop.

Finally, I think it is worth taking a look at Gasoline(HU.) It is trading at $1.78 which is at a very low premium to Crude Oil. Shorting 1 contract of Crude Oil and Buying 1 contract of Gasoline might be a good play. However, since I think that a recession is coming, I would prefer to wait for a better pure buying opportunity. At some point people will relax about fossil fuels, the price will drop signifcantly, and set up a good opportunity to load the truck!

The stock market is funny-it just loves it when people are worried. It is rationale to "love" other people being worried. It is analogous to traders who short Natural Gas when a hurricane is headed toward the Gulf of Mexico. The idea is that the fear(represented by longs) is worse than the actual event-and most of the time in Natural Gas this is true. One can see an example of this concept by looking at the price of NG over the past week. Wednesday through Friday last week, when Ernesto looked like it might hit the Gulf as a hurricane, NG prices went nuts. Over the weekend, Ernesto turned to the East and by this morning NG had lost 15 percent from its intraday Friday high! This trading practice is like selling health insurance-people are willing to insure a potential disaster to get the premium out of the market over and over.

So the equity market rallying on Fed worry is totally understandable. Additionally the Fed has control over money supply and has a presence on the Plunge Protection Team. All of these factors should help the stock market rally when the fed is worried. However, the worry that is coming out of the Fed and that everybody feels represents a real problem. This real problem has its roots in the high price of fossil fuels and the large amount of subprime mortgage debt which has been create in the past 3 years. These are real problems, and have NOT been fully factored into the market yet. The Fundamental problem is that the consumer has no way to increase her spending at this moment. Let me repeat that. As we stand right now, there is no avenue through which the consumer can increase his consumption. And since the economy is so dependent on the consumer, that means we will have a recession. The writing is on the wall.

The Silver Lining is that the economy will shake out a lot of its bad debt and readjust itself more realistically to current conditions.

Good Trading,
Matt Millar

Silver, Gold, Crude Oil, dollar, Bonds up

Silver up 36 cents. Gold up $3.10. Treasuries up 16/32. Crude Oil up $1.42. The dollar index also finished UP .3 at 85.3. What a week! Bonds, Precious Metals, AND the dollar all going up. Smells fishy. The only thing that was down were the equity markets-but less than one percent on the week. S&P finished the week down 9.5 @ 1297.

Precious Metals and bonds increasing in value is consistent with an economic contraction. But the dollar strengthening is NOT and neither is Crude Oil. Crude's move could have more to do with short-term effects(continuing problems with Alaskan Crude+Hurricane season.) Also, although Crude OIl gained on the week, Gasoline continued to sell off which usually is a leading indicator for Crude. As far as the dollar's stregth, I chalk it up to weak economic numbers out of Germany this week, as well as continued implicit support of the dollar as a pillar of the world economy. Regardless, it was a week of weak economic news-and the markets reflected that fairly well.

Prices are at a crossroads in treasuries and in the precious metals. In Precious Metals, we have silver leading gold and the XAU close to new three-month highs, but momentum is still a little overbought, and the XAU and silver both were turned back from previous resistance this week(12.65 in silver and 151 in the XAU.) I would still be surprised by an immediate upturn in silver and gold and would feel much more comfortable recommending a buy if prices experienced some distribution.

In treasuries, we moved through the 200 day moving average this week almost as if it weren't there, and in general-from a technical point of view- everything seems a little bit too easy. The correction at the beginning of this month wasn't very deep, and this week's price action traded up in almost a straight line. There is a serious(at least in my mind) set of resistance points at 110-12 and the December contract(which replaces the September contract) is already trading above that point. Also the yield is now sitting at 4.80 percent which was an area of significant resistance on the way UP. So-I'm betting on a reversal in bonds as well-purely from a technical point of view.

Economically speaking, it makes sense that bonds and precious metals are going up because the economy is clearly in peril. But if the economy was already in decline then I think we would see more of a break-down in stocks. That doesn't look likely.

My predicitions for next week are down on precious metals(low confidence) down on bonds(medium confidence) and up in equities(medium confidence,) and up in the dollar(high confidence.) The energy market depends on hurricane activity, but my prediction for that would be neutral.

It is one of those weeks where Monday will probably shape the direction of trading for the rest of the week. Watch for a break-up or break-down in Silver on Monday morning. And watch for treasury close on Monday.

Have a good weekend and hope you see a silver lining,

Matt

silver down

silver down 29 cents on the day. Opened 12.24 high 12.38 low/close 11.95
Silver sold off today in spite of continued stregth in the equity markets. A break below 11.70 would be bearish.

I am confused by the recent equity strength, but it is incontrovertable that we have closed above the friday high from August 5th. Because of this, I am neutral on Stocks. I would be bullish, but I just see and have heard of too much technical damage to individual stocks. There hasn't been a significant correction in stocks for 3 and a quarter years now. Additionally we are coming up to the weakest performing months of the year for stocks(September and October.)

US bonds pushed through to new highs, indicating the bond market believes that the Economy is weakening and accepting a lower yield to invest in bonds. The dollar meanwhile has stabalized above 84 which indicates that it is not totally comfortable assuming that the Fed is done raising rates. I wish there was some chart which combined the dollar index with the bond index so that a bond move up was amplified by a dollar move up and vice-versa, whereas it was cancelled by a dollar move down and vice-versa. Right now, it is clear that the dollar/bond are moving up. To be perfectly frank, I have no freaking clue what is going to happen next. I have long thought that the bonds would head for 111 and that the dollar would make it back to 89-90 area. But I don't see how that could happen without the equity market taking a bath.

Gold has been selling off and will probably continue to do so until it gets to at least 605 dollars on the cash charts. Silver has support at 11.70. If silver and gold break these supports than an argument could be made that we are still in a correction which started in May, with the old lows to be revisited(i.e. 540 in gold and 9.45 in silver.)

I don't have any particular recommendations today and I am feeling confused. I am neutral everything.

May you see the silver lining,

Matt

Equities Rally

Silver closed down on the cash market by 4 cents today. Open 12.08 low:11.82 high:12.10 Close:12.04
Today was an inside day for silver. In the middle of the 2-week range and at the high end of the 2-month range.

Gold closed down again today increasing the strength in the silver/gold ratio.

Equities shot out of a rocket today and posted >1% gains. The S&P closed at the top of a two-month trading range. I was surprised at this but will not change my bearish views on equities unless the Doji high from August fifth is exceeded.

The Treasury also staged an impressive rally today(both rallies were on the back of data which was viewed as non-inflationary.) On the chart, this looks like it could be just a correction within a bearish move downwards and I will treat it as such for now.

The dollar(predictably) sold off on the data.

Energies continued to be weak, closely mostly lower(with the exception of products.)

It looks like a pretty boring trading week until next Wednesday's release of consumer prices.

I remain neutral/bearish on silver although I do note with interest, the recent strength compared to gold and also today's rally in the equity market.

Silver up/Gold down

Silver closed up 20 cents today. Open:11.88, low:11.70, High:12.16, Close:12.08. Silver is in the middle of its two week range and at the top of its two month range.
Silver performed quite well today compared to Gold(which closed down on the day) which is generally a bullish sign for the precious metals. However, the precious metal stocks sold off today which is a bearish sign for stocks.

Treasuries continued to sell off which is not a surprise but should be viewed with some amount of alarm for people who have Adjustable Rate Mortgages ready to reset. The potential drain on the economy that billions of dollars of reset mortgages represent is currently underemphasized.
The US dollar continued its rally in a meager way today.
The equity markets closed slightly higher today but dramatically off their intra-day highs. The equity market still looks particularly vulnerable to me beginning with the doji candlestick on Friday August 4th.
Crude oil and Gasoline violated previous support and appear headed to lower values.

Silver outlook. Nothing new. Neutral/bearish-looking for an entry at 10.70.

British Terror attempt foiled

Silver down 46 cents on the day. Open:12.48 High:12.65 Low:12.02 Close:12.02
A new 2-month high was set this morning, and then a pretty convincing sell-off carried through the rest of the day. Bull wave is now 8 weeks old-and the sub-wave is 3 weeks old.

The attempt by terrorists to blow up airlines over the Atlantic ocean was foiled this morning by British Police. After an initial scare to markets and boost to the precious metals, both markets turned around and went the other direction(Equities up, PMs down.) The magnitude of the sell-off in Gold and Silver today adds to my impression that there is weakness in the PMs. Also, insider knowledge about a terrorist scare may have been behind yesterday's otherwise confusing run-up in prices in PMs. Today's action leads me to resume my neutral/bearish stance on silver.

My newest theory about the Fed's meeting on Tuesday is that it was manufactured in an attempt to save the dollar. They paused-which was already priced into the markets-and then they made an opaque statement threatening further rate hikes in the future. This uncertainty turns into strength for the dollar since future rate hikes would be dollar positive. Of course "saving the dollar" is a relative thing since commodity prices will reflect actual money supply in the long run and will give a truer measure of the dollar's power. For now though, it might be possible to keep the dollar on par with other currencies and to simultaneously increase money supply.

My theory for the next couple of months is that consumer credit will be fairly easy to come by and that the Fed will monetize a fair amount in Open-Market operations. The stock market will sell off but its downside will be limited by the Plunge Protection Team. And finally, commodities will complete their correction that started in May. Note that the commodity index failed to break through chart resistance today. The bond market is the wild card. Look for Crude Oil to correct to about 66 dollars. Silver corrects to 10.50 area. Gold corrects to 575, possible all the way back to 540. CRB index back to 370. The stock market is harder to call but I think 1140 is likely and 1050 is possible. If the stock market does correct that far, I think it will do so violently and that a major intervention will be needed like 1987. The Bond market is the tricky bit and the potential crisis. More on that another time.

I reiterate my position to be neutral or short on silver. If you are short, you can now use today's high  + 2 cents as a stop and 10.70 as a targer. If you are neutral, look for buying opportunities around 10.70. If you are long, good luck to you.

As always, may you see the Silver Lining,

Matt

Still neutral/bearish

Silver closed up 30 cents today. Open-12.18 Close-12.48 High-12.58 Low-11.94
Silver had an impressive rally today, reversing last nights falling prices into a thirty cent gain on the day. It also made a new 2-month high at 12.58 which is the highest price since May 31st.

Although the precious metals were able to make impressive gains today, it was in the face of declines in the stock market and a flat oil market. I am a little bit confused about why today's action was so strong.

Reasons for being wary of this silver bull
1)Falling stock prices
2)Stalling energy prices
3)XAU(which is usually a leading indicator) has stalled below it's July high
4)Silver lease rates are down
5)Silver inventories are not being drawn down any further than 100 million ounces

Any reversal in these categories would be viewed by me as a bullish development.

I am confused by the strength of today's move and I respect the price chart more than any of my fundamental ideas-so I would recommend being flat the market right now. If you are short, use a stop around $13. If you are long, I would sell immediately or use a stop around 11.90.

Good trades and may you see a silver lining,

Matt

Pause, look left, look right

Silver closed out cash trading little changed at 12.18. Open:12.20 High:12.31 Low:12.04. Two month high continues to be Friday's 12.52, and Monday and Tuesday both traded inside the Friday's intraday range. There is still positive momentum in the silver price with prices advancing >10 cents a day for the past three weeks.

The Fed announced a pause today, but their accompanying language was viewed as hawkish-that is to say-they continue to hold the possibility of further tightening over the market's head. http://www.marketwatch.com/news/story/Story.aspx?guid=%7B0FEF68F2%2D6156%2D4BCB%2DB903%2D8B2D44C2E2EB%7D&siteid=

I view this statement as being unusually opaque. It will not give the market any new information beyong today's pause, and I think that more than anything the market wanted future certainty from this meeting. This is why the equity markets sold off even though they originally jumped at the news. My view on equity markets is that they are exceedingly vulnerable.

In the oil market, oil did not follow through on yesterday's price advance leaving a rather noticable chart resistance at $77. When hurricane Rita hit New Orleans last year, oil was trading at $70 dollars. In the days following the hurricane, gasoline ran up almost a dollar per gallon-a 50% rise. In that same week, crude oil was unable to rise above $71. I remember being shocked at this since a huge amount of crude had been taken off the market indefinitely, and watched in fascination as a "sell-the-news" phenomenon occured. Crude oil proceeded to sell off to 55 dollars and didn't manage to make a new high until 7 months later. I would not be surprised if the BP announcement on the Prudhoe Bay closure provides a similar top in the oil market.

Given weak price action in PMs both yesterday and today, and my outlook for Crude and equities decidedly bearish, I am going to advise to be out of any silver longs at this point. If you have not managed to close your silver long in today's trading, I recommend you do so immediately. My recommended target for anybody who is short silver is $10.70.

Fed's August meeting

Silver closed down today 17 cents. The two week and two month high was last Friday at 12.52, and was not challenged today. Today's candlestick was a small bear with a small upward tail. Friday and today both have upward tails starting at 12.37 which creates a good resistance at this point-also very close to 50% retracement of the May/June correction from 15.21 to 9.45 which would be 12.33.

Many eyes are cast toward the fed as they meet to decide to hike lending rates to 5.5% tomorrow.
The futures pits are pricing in a low probability of a rise(~20%.)

Other major financial news today was the announcement from BP that they would close Prudhoe Bay for 3 weeks or more due to pipeline corrosion.
http://thescotsman.scotsman.com/international.cfm?id=1147952006
A 20 day shutdown would only lower yearly production by 8 million barrels or .025 MB/d. If it is shutdown for the rest of the year it would reduce yearly production by 60 million barrels or .18 MB/d
Futures for oil rose by two dollars on the day.

With oil at $77, and the Commodities close to its all-time high, it would be a strange time indeed to end a rate-raising cycle. This really is a critical meeting. If the Fed continues to raise rates, it will signal that they are determined to decrease money supply, even at the expense of the economy. If they pause, it is more ambiguous, but leaves the door open to more inflation.

What does this all mean for trading silver? Well, we have had a seven week advance, and last week alone prices jumped more than a dollar. To me, this means that prices are vulnerable. That being said, there is strong positive momentum in silver prices right now, and $13 seems to be reasonable target. So. . .strong positive momentum with vulnerability means enter a limit sell above current prices. If you are currently long silver enter OCO limit sell order at 12.30;  stop sell at  11.70.  If you are flat on silver, you could consider a short at 12.30 or could just continue to sit tight and wait for the next good buying opportunity(10.70). If short silver, stop buy at $13 and target to close short at 10.70.

As it stands, silver is an excellent 5 year bull market, but is in the midst of a sizable correction from 15.21 that started in May. My opinion is that better entries will be found in the next few weeks. If the fed surprises the markets with a rate hike tomorrow, I think that will have a negative bias toward silver prices over the next couple of weeks. If the Fed pauses tomorrow, I think that will be neutral to prices, and given the current vulnerability of prices. . .I'm still bearish. If the Fed surprises markets with a rate cut tomorrow, then silver will probably continue higher to at least $13.

Silver and Gold not responding to oil's $2 advance today also leads me to believe that there is inherent weakness in the PMs this week.

Good Trading and may you be the Silver Lining,

Matt