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.
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.
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:
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:
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.