Bottom Fishing Silver

Is it time to “bottom fish” for silver? Not quite yet, but IMHO “soon”.

We’ll look at three charts with three different views of the time scale. The huge bubble in Silver has passed, and we’re now in the the flattening tail phase. Typically these can take a few months and up to a year+ to finish flattening, have the “dead cat bounce” as the shorts leave, and then have the “confirmation” where price crosses the SMA stack, returns from above to “kiss” it, and then rises away. That’s the final confirmed bottom action.

Yet Silver is a very volatile commodity, and we are likely in a very bear market for other assets (such as stocks and as soon as The Fed tightens hard bonds will roll down too). In those kinds of situations, folks often run to precious metals (despite them just being Yet Another Highly Volatile Commodity…) as though that was safety. So Silver might move faster than expected if some surprise news flow hits. For that reason, it’s worth looking early and preparing.

The Context

First off, lets look at the context. This is the “All Data” chart that runs back about a decade. It captures the “bubble” very nicely, and it shows the more or less stable low prices before that.

SLV Silver vs a set of Safe Haven tickers, All Data from 14 January 2015

SLV Silver vs a set of Safe Haven tickers, All Data from 14 January 2015

One interesting point to note is that the price is on a percentage scale when comparisons are done, and the present is at a 0% gain compared to the starting point of the chart. Silver is a sterile asset and does NOT grow over time all on its own. There are no dividends, and it does not have retained earnings to reinvest… In fact, you often must pay someone to store it. It is NOT a long term investment, it is “money” and a store of value. Yet look at the peak in the middle of the bubble… It is a very volatile store of value. Buy during an exponential bubble rise phase and hold, you find a store of value can lose a lot of value before it starts to store again…

Long time readers here will remember my calling that bubble and saying not to jump in. How to spot one? Price pulls away from the Simple Moving Averages. In the final ‘blow off’ phase, it does so in a nearly exponential curve kind of way. Then there is the story. “There is always a story. -E.M.Smith”. When folks are all repeating the same Story, and it is in the news, and they are excited about it, walk away. That’s the fad talking. Kind of like all the story and hype about Global Warming (and part of why my alarm bells went off about it fairly quickly… the huckster pushing The Story is well worth skeptical examination.)

But now that bubble has passed. What happens after that? Well, first off, prices plunge, then the plunge flattens out as folks give up The Story and have mostly all sold. Finally, with nobody pushing the hype, prices slowly return to their longer term trend. For sterile assets, that is the cost to mine / produce plus inflation of the currency. With the $US presently showing “strength” (as the best whore in the whorehouse) relative to other currencies, nominal inflation is near zero.

So look at the tail on the right hand side. Nearly flat slope. The SMA line (20 week or 100 day) is still above price, so trend is still downward, but only slightly. At about $13 / ounce, not a bad price. Notice, though, that a few years back the same price sometimes had dips down to about $6 / ounce. We could easily have dips like that again. But that pretty much sets the lower bounds on prices. We’ve got about a 40% downside during “dips” and at any price under $10 / ounce it is likely an OK buy for longer term holdings. Personally, I’m going to wait for the charts to show clearly that the downtrend has ended and reassess things then.

After a bubble, it can take a year+ in the tail of the decline before prices rise again. Folks got burned, and are NOT going to return in droves over The Story again. It takes a new crop of folks, and that takes a long time. And a new Story. Like an inflation scare. Inflation is not the Worry Of The Day just yet (the Talking Heads are nattering about deflation and that has to change first). But it doesn’t hurt to start looking early. IFF inflation scares heat up, owning silver can be a nice handle on things. Just not quite yet…

Also on that chart are some other “traditional” Safe Haven tickers. TLT is long term government bonds. Essentially flat over the last 4 years. When The Fed starts to raise interest rates (we’ve had one dinky rise so far) that makes the interest on old bonds worth less, so bond prices tend to drop during Fed Hike periods. We are entering a Fed Hike period. Only use very short term bonds or paper as a safe haven, not the 20 year kinds. It’s ‘dead money’ at the moment anyway, so might as well hold cash. Speaking of cash, who’s cash?

The Japanese Yen FXY and the Swiss Franc FXY are the two typical alternatives to the $US as a ‘safe haven’. They both show a rise with the silver bubble (though much flatter) as the $US was suspect, then a drop to now as the $US recovered some. You can see that FXY is more volatile with news flow (note the peak mid 2011 when silver was peaking on inflation mongering) while the Yen is much more staid. Yet the last 4 years has both in a slow slide. Japan more than FXF as Japan tries desperately to print its way out of a shortage of workers, high costs, and expensive government and management. Oh, and hopes that cheapening the currency will stop China from winning. I’d not use FXY just now as a safe haven. But watch the FXF ticker. It will show when the $US stops strengthening. Also note that it is up about 20% over the decade. The Swiss know how to manage their money.

Note that RSI is lifting off of a ‘near 20’ showing that the fall is ending. MACD is approaching zero from below, but in a mostly sideways run, showing “not yet”. It will need to have “blue on top” and crossing zero to the positive side to show the end is here. DMI- (red) is still on top showing “not yet” and it, too, must turn to “blue on top” for a confirmed end of the down slide. Yet ADX is ‘near 20’ and that’s a very weak downward drift, not a drop. Overall, “time to watch” is here.

Let’s look a bit closer at some of those lines:

Silver vs Safe Havens 2 year Weekly chart from 14 Jan 2015

Silver vs Safe Havens 2 year Weekly chart from 14 Jan 2015

This is a 2 year long “zoom in” on the end of the chart. Relative positions of lines will shift as the ‘zero point’ of the starting comparison is now just 2 years back. But we can see things like the SMA line vs price better, and the shape of price bars is more clear.

First off, an apology. I’ve been leery of bonds for the last couple of years and repeatedly warned that The Fed could hike rates any time and cause them to fall. In the last 2 years you would have made 20% on them. Yet note that they peaked at a 30% gain then dropped back to 20% (based on news flow of risks in the world and The Fed, no doubt) so it’s not like it was a low volatility ride in long term bonds. Still, I said I was going to stay away from something that made money. Not good.

Note, too, how FXF closely follows the shape of the GLD Gold curve. The Swiss manage their currency to stable prices via comparison to a basket with a lot of gold in it, and some Euros and some… The Yen also looks fairly stable the last year, but still with a modest down drift relative to the $US. Both are in agreement with GLD that the $US is showing (unwarranted?) strength and all three track each other more than the $US, so in their own framing, will look more stable. (That is, some of those wobbles and falls are due to the $US moving, not them.)

We can also more clearly see how the SLV ticker is just crossing over the SMA 20 week line. Using a 40 line would have the price just touching it before falling back to trend. (I did the graph but didn’t upload it). So it looks like “whoever” is the market maker in silver is managing to the 200 day moving average line (or it is the natural period…) When SLV moves up to the 40 week / 200 day line, do NOT buy, but sell, until such time as the SMA stack inverts and price approaches it from above, not below. We’re in “bear market rules” still until that happens.

Here, too, we can better see the RSI ‘near 20’ and rise toward the zero cross, the MACD nearing zero from below and with the blue just about to cross over red, maybe ;-) Also that ADX is ‘near 20’ showing flattening trend and with red / blue starting to approximate. (they will weave a bit before a clear blue on top happens, most of the time)

Now look closely at the price bars. They are starting to get little “kangaroo tails” (don’t blame me! that’s what they are called and they were named by others!) where price excursions were to the downside, but didn’t hold, and the close was above them. “Price springs off the kangaroo tail” so the tail points away from the bias direction. We’re starting to see upward bias creeping in to the buy side on dips down. There are still a few kangaroo tails and ‘price stars’ (where a tail is on each side of a nearly flat open / close price spread) at the tops of rises, so still some arguing between the factions, but the tops are weakening and the bottoms showing more spring. Soon that battle will resolve to the upside. (Where “soon” could be a couple of weeks, or months, or a year… depending on news flow and world events.)

We are approaching the phase I like to call a ‘flat roller’, where price has wiggles up and down, but trend is flat. That can hold for a long time if there is no ‘catalyst’ (aka “The Story” pushed by talking heads…) During those times, trades can make money as ‘swing trades’ where you buy on those bottom kangaroos and sell on the tops at the halt of the rise. But for that, it takes a faster time frame. This can make a bit of money, but IMHO is mostly useful as it keeps you looking at a flat on the bottom chart so you can catch the moment of ‘lift off’. (Otherwise my attention wanders to ‘other things’ and I find out that bottom fish started rising 6 months ago and I missed it… A computer would really be better at this…)

So lets look at a daily chart with very fast tick marks:

SLV Silver vs a Safe Haven basket with Daily tick marks from 14 Jan 2015

SLV Silver vs a Safe Haven basket with Daily tick marks from 14 Jan 2015

Here I’ve gone back to my “usual” three period SMA stack for daily tick marks. You can see a ‘bottoming weave’ attempt about the first half of 2015, then in falls away again. That’s common. It takes a while to crush all the greed and enthusiasm out of prospective buyers (and for Goldman to collect the maximum gold…) That is also why I have my “confirmed bottom” rules. These “false bottoms” are common on the way down and you simply MUST wait for the fat lady to really sing loud to know for sure.

Still, you can see that buying on the MACD cross to blue on top and selling on the crossover to red on top (perhaps using a trailing stop loss) can often pick up a nice trade. Watching DMI “blue on top” helps too. Note that right now ADX is nearly 10. Almost dead flat trend. MACD is slowly approximating zero, but with a woven sort of look, not a clear nice slope ‘blue on top’. That’s a flat market, not a trade. It often happens when the bottom is near. What we need now is for RSI to have a ‘higher low’ off of that near 20 point, for MACD to cross over zero to the positive, and for a clear ‘blue on top’ not weaving look with decent slope to it. Yet look at May – June at the start of the chart. That was a very nice trade as a very similar ‘flatish rising MACD’ with ADX near 10 had a break out on some kind of news. A “buy if touched” order can help catch those if you don’t live on the financial news channels and do charts 2 x a day…

But the “confirmed bottom signal” is when those price jumps that cross the SMA stack and then drop back through, instead, stop at the SMA stack from above and reverse to the upside. Bouncing of the SMA stack from above. So it’s not quite a bottom just yet. But it looks like ‘soon’.

The ‘traditional’ advice is to ‘scale in’ with a series of small buys. Now look again at that starting May – June. Had you started to ‘scale in’ then, you would now be down 30%. I don’t consider that a good safe strategy. That is why I wait, and wait, and wait until it is clearly a real confirmed bottom. It can take weeks or months. Don’t expect to see it tomorrow.

But IMHO, it’s time to start watching silver as a safe haven trade. WHEN, and it is a when, the $US starts to reflect the money printing going on and WHEN, and it is a when, The Fed starts to do more than a symbolic 1/4 point rate hike, look for the $US to fade, and ‘real assets’ to rise. Silver ought to participate then as well, and while it has returned to the historical base price, gold has not yet. Gold may need to drop a couple of $hundred more before we reach that point, so I’m not yet doing a bottom watch on gold. Just my opinion, and worth the price you paid for it (i.e. nothing), so watch the charts for what really happens.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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17 Responses to Bottom Fishing Silver

  1. p.g.sharrow says:

    @EMSmith; Looks like the last backing of the US dollar is under fire:
    http://www.foxnews.com/us/2016/01/14/lawsuit-demands-us-remove-in-god-trust-from-money.html?intcmp=hpbt4
    “Sacramento attorney Michael Newdow filed the lawsuit Monday in Akron, Ohio. He’d unsuccessfully sued the government at least twice challenging the use of the phrase “under God” in the Pledge of Allegiance. The lawsuit represents 41 plaintiffs from Ohio and Michigan, including many unnamed parents and children who are atheists or are being raised as atheists.”

    Atheists are such hateful people in their drive to force people into adopting their dark religion …pg

  2. PaulID says:

    I find it interesting that for an ounce of open pollination seed you will pay more than for an ounce of silver depending on the seed of course there are some seeds that are over 60 dollars per ounce

  3. p.g.sharrow says:

    I have watched precious metals for many years, although they are not something I would invest in.
    Silver and platinum look to be considerably under valued at present retaliative to gold. Not sure about the Real value of gold. Smiths yardstick of a good suit as a solid base of value might be applicable. I still think that he could create a solid yardstick, A “Credit” of exchange value that people could use as a yardstick to make judgments.
    I do have a stockpile of seed in the freezer. The value of some are dollars per each. ;-)…pg

  4. Larry Ledwick says:

    My favorite indicator for precious metals is the late night broadcast TV advertisements. When you start seeing Buy gold advertisements on all the channels and all the time, you know the gold bugs are trying to bid up the price and sell out their holdings to folks who don’t realize how volatile metals can be. When the advertisements start to shift to push folks into silver you know the same thing is happening in silver and that shortly gold will start to tank.

    The basic rule is run the opposite direction they are telling you to run. The louder they wail the faster you run.

  5. Terry Jay says:

    All the commodities are down sharply, the $CDN is down to $1.44, oil is down in the $32 range. Looks like they are all (possibly excluding $CDN) regressing to the mean. Your analysis is appreciated. There is considerable opinion that demand is down, and opinion that the US$ strength is driving prices. Or you could just say bubbles must burst. I suspect that another year must pass to see anything approaching a bottom, and it could be longer.

  6. E.M.Smith says:

    @Terry Jay:

    Isn’t it about 70 US ¢ per Looney, or $ looney 1.45 / $ US?

    Yes, bottoming is often long, slow, and lower than expected. Tops are easy, bottoms not so much. That is why I do the “bottom watch”, “bottom call”, “confirmed bottom” trillogy of stages. We’re just at the ‘watch’ stage now.

    @Larry:

    I use that one too! 100% reliable so far. Doesn’t call bottoms, though…

    @PaulId & PD:

    I have a freezer full of seeds :-)

    I’ve also moved to growing my own seeds. Were I to do farming for a living, I’d be a seedsman…

    Yeah, I ought to formalize a real inflation index…

  7. Larry Ledwick says:

    Aaannnd today we have this little item backing up bad day on wall street. ( 15,940.48 Down 438.57(2.68%) @1:44PM EST)

    http://www.zerohedge.com/news/2016-01-15/recession-confirmed-industrial-production-crashes-most-8-years

  8. PaulID says:

    I wish I had that knowledge to harvest my own seeds one more thing to learn

  9. p.g.sharrow says:

    @EMSmith; I think your “average hours of labor to earn” – X , a suit, might be a good concept to consider. Then create classifications of stuff “X” to be evaluated to make up a basket to average into a credit. If your suit was worth 1 EMScredit then, 1 barrel of oil is worth #0.02 EMScredits. Down from it’s high of #0.08 EMScredits.
    It would seem to me that the average amount of human labor required to purchase with, would be a yardstick that can not be stretched and it would allow for technology and energy inputs that would improve efficiencies. As long as the labor is freely tendered it should work. Even slave labor was of such cost and inefficiency that it’s only saving grace was availability. Free men worked for lower actual cost. They were sometimes not dependably available where and when you needed them. Over priced labor in 1 area tended to draw in more labor that reduced the local price. Modern computers with a proper spreadsheet should make this work easy once the inputs were standardized..pg

  10. p.g.sharrow says:

    The cost of a suit is about 40 hours of average American labor. About 100 hours of Chinese labor, about, so American labor, in credits, cost more then Chinese…pg

  11. Larry Ledwick says:

    Looks like the DOW does not want to break above 16,000 today as it tries to recover from the mornings drop.
    NASDAC is doing the same thing, approaching 4500 but keeps falling back
    The S&P is holding right at 1880 and change even though it was higher earlier in the day.

    Is this the sort of behavior you talk about where the prices tend to resist going above a benchmark where folks are likely to put a sell point as they try to get out of a bad situation by taking a little rise but getting out after only a short interval to take the gain?

  12. E.M.Smith says:

    @PaulID:

    It’s usually easy. Mostly the plants already know how to do it, having a few million years practice. For keeping varieties ‘clean’, it’s harder, as they like to get in each others pants a lot… for many kinds at least, like squashes. (Beans not so much).

    http://www.amazon.com/Seed-Growing-Techniques-Vegetable-Gardeners/dp/1882424581

    Has all you really need. Oh, and I put seeds in jars in the freezer and they keep for decades.

    https://chiefio.wordpress.com/2011/04/20/seed-saving/

    Start with beans and squash. Corn can work too, if you aren’t too picky about just what it slowly turns into over time as ‘things blow in’ from a mile or two upwind… Pick a non-hybrid sweet corn and you ought to be OK for many generations. It will likely not ‘breed true’ after a few years, but will still be a nice sweet corn (unless someone upwind is growing hard corn like flint, dent, or “indian corn” and popcorn).

    Big seeds are easier than small ones. Cabbages and kales are easy too, but take 2 years. Beets and related are easy also.

    @Larry:

    Yup. Close to free fall, but not quite there yet ;-)

    @P.G.:

    It’s not quite that easy, but close. One needs to have a way to allow for labor cost variations and for technological advance. Using, for example, $/compute as a yardstick is just way wrong. $/pound of wheat much better. $/ton of iron, pretty strong. ;-)

  13. Larry Ledwick says:

    You also run into the substitution problem that the CPI has, where they try to account for people substituting nearly as good products, for example quit buying sirloin stakes and start buying eye or round, go from 90% lean ground beef to 70% lean ground beef, as they try to cut costs.

    You also have changes in population behavior. Lots of folks today would have no clue how to cook from scratch ingredients. The buy chili in a can rather than cooking pinto beans from a bag of dried beans, or buy pancake mix rather then blending their own from flour.

    I think the best market basket would be composed almost exclusively from “must have” products which have very limited substitutions.

    For many years there was an almost perfect relationship between the cost of a pack of cigarettes and a gallon of gasoline, but that is breaking down as smoking is rapidly falling out of favor and shifts in our transportation options change. Lots of younger people in urban areas today don’t even get a drivers license any more, and depend exclusively on mass transportation or bikes. This makes living costs for urban dwellers much different than some guy who lives in the west (Montana, Wyoming, Colorado, Utah, Idaho etc.) who might have to drive 50 – 100 miles a day to get to work. My current daily commute is 40 miles and change, without driving on any major highway mostly major thoroughfares with 40-45 mph speed limits. There is in a very literal sense no other option for me. If I take a 60 mph highway I drive 5 miles farther, if I take a bus I lose 2+ hours each way and no buses run when I get off work late at night in that area. To cut my travel expenses I either need to move or get a different job, since at my age 20+ miles each way on a bike is not high on my fun list year around. I once did it 17 miles each way and that got old really quick even in the summer.

    The current glut in production capacity for base materials and the resulting price deflation for things like a ton of smelted iron is also a major distortion, while artificial constraints on building are pushing up rent costs and housing costs as the housing bubble tries to re-inflate. Right now the biggest distortion in the market is probably auto loans, they are peddling long term low interest loans to anyone who can walk into the dealership right now. In a year of two the used car lots will be swimming in near new used cars folks could not afford after the economy nose dives in the next 6 months.

    Maybe instead of a market basket you could use sales figures from major vendors, like all grocery sales at Walmart. That would dial in the effect of substitution as people shift from frozen shrimp to fish sticks.

    You would have to compensate for the total number of shoppers though to get an number for average weekly food bill. Total sales of car tires is another must have purchase, if you include average cost of the tires, you could see substitution of cheaper tires for more expensive tires as folks cut corners, but tire costs are closely tied to cost of petroleum so that is a complicating factor.

    Not an easy nut to crack for sure but the bottom line is as folks lose discretionary income, their spending on non-essentials tend to show in the numbers for things like ski trips, and long vacations, or toys like jet skis or boats.

  14. p.g.sharrow says:

    Yes, you would have to concentrate on commodity / heavy use things, to reduce the chance of someone scamming the outcome. Hamburger is a better proxy for retail beef then steak. A suit a better proxy for clothing then designer dresses. Rebar is a good indicator for steel. Copper wire for finished industrial metals. Bread / sugar for basic food. Not sure on how to reflect shelter as that is terribly locally manipulated. These would be a few for a start. K.I.S.S. The best thing would be simplest to track and reflect the most necessary basic needs. Once a base line is established then other things could be evaluated such as precious metals and currencies. Computers are valuable for “improving” labor efficiency, Not sure if they should be included in the basket to set the base line. Not sure that you would even want to publish the base list just the outcome index. I would think a “Secret Sauce” kind of thing. It is, after all for private use. At least at the start…pg

  15. Larry Ledwick says:

    Perhaps this item suggests a good basis for a really practical pricing index.

    http://finance.yahoo.com/news/5-charts-showing-how-defensive-investors-are-right-now-155718940.html#

    Near the bottom of the article it talks about “consumer staple products” and the index for them. Perhaps tracking the pricing on some of these would be the way to go.
    For example in the early 1970’s a can of Campbell’s Tomato soup cost $0.13
    I remember distinctly because I was eating a lot of it as one of the most cost effective meals I could cook in an electric fry pan in my dorm room.

    It is one of those food products which has not really changed much in 50 years, pretty much identical to what my Mom fixed when I was a kid.

  16. p.g.sharrow says:

    It now appears that the Wall Street people are throwing in the towel and avoiding the falling knife.
    The oil countries Sovereign Wealth funds are now in a sell mood to cover their social net costs in this period of oil surplus and low prices.

    @Larry “Campbell Soup Index” ;-) actually not bad, as an indicator for many of the inputs in its’ creation, distribution and marketing, it reflects a good cross section of costs and utility. Ok, we have canned soup and a mans’ suit…pg

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