|
It now looks like
we were a little too bullish
in the last update, for the way silver
has acted over the past week suggests that another sharp drop is imminent before the dust finally settles on this reactive phase, that it likely
to take it to or some way below
its recent panic lows.
On silver's 4-month chart it is now
apparent that a bear Pennant has been forming since the panic bottom, with the weak upside volume portending an
imminent breakdown and steep drop. A reader pointed out to me during last week that silver's panic lows occurred in thin trading on the Hong Kong market, and for this reason we do not have to factor
in the tail of the "Dragonfly
Doji" candlestick shown on the chart when deciding where to draw the boundaries of the Pennant. The measuring implications of this Pennant call for a drop at
least to the vicinity of the intraday
lows of the Dragonfly Doji and possibly somewhat lower towards the $24 area - at this point the decline should have completely run its course and we will be
looking to buy aggressively. We can see that
a bearish "Harami"
pattern has formed in silver
over the past 2 trading days, implying that breakdown from the Pennant and the expected steep drop that will follow is
imminent. A reason why this next drop should end the decline is that silver
is already deeply oversold as shown by its MACD indicator, and it will of course be even more so after this impending
decline. Those interested in going long silver investments in the near future should "keep their powder
dry" but stand ready to wade
in big time if silver
drops into the bright
green "aggressive accumulation zone" shown on our chart.
On silver's year-to-date chart we can
see that it has suffered 2 massive takedowns this year, that have brought its price
back almost to where it was at
the start of the year. So
why is this?
You may recall that there was
much talk earlier this year amongst
silver bugs about J P Morgan's
massive silver short position, and their cheerleaders encouraged them to believe the fantasy that they could
bring down J P Morgan by buying
physical silver, as expressed by the picture below which was
doing the rounds at the
time...
The idea that a mottley bunch of small highly leveraged speculators can bring down an entity like J P Morgan is of course laughably naive, and what in fact has happened is that the big
players have turned the
tables on the small speculators,
by using their leverage and margin against them. They organised the 2 massive silver takedowns, one in early May and other just finished, aided by friends in high places hiking margin requirements, to run them out of their positions, by triggering their stops and margins calls,
and then covered their shorts at the resulting low prices. Thus, the latest COT charts reveal that Big
Money has largely cleared
out of its short positions in silver,
which is mega-bullish, with the dramatic drop on the last rout being a sign that we haven't
got much further to go before silver reverses, possibly dramatically to the upside, and
this is a train that will leave
the station without all the get
rich quick merchants that were strutting
about proudly earlier this year, who
will be left behind lying
face down in the dirt.
The COT chart above shows
an astonishing drop in the Commercials
short positions in silver over the past several weeks which is
viewed as hugely bullish for the medium and long-term,
notwithstanding the expected
sharp drop over the short-term.
While with this chart some
concern could arise over
the distortion created by
hiked margin requirements, such is not the case with the following chart which has been supplied by
Richard Guthrie of The Scarborough Bullion Desk in England, for this is a ratio chart showing the ratio of the Commercials' short to long positions, and as such is immune from such distortion,
and as we can see this ratio is NOW AT A RECORD LOW, which
is interpreted as hugely bullish, and here we should
note that this chart is only
up to date as of 20th September and does not include the latter
part of the plunge, and so
the ratio can be presumed to be at an even lower
reading now. The message
of this chart is clear - we
are now late into the endgame of the transfer of silver assets from weak
to strong hands, and that,
therefore, the final plunge
that is expected shortly should be seized
upon as a rare opportunity
to go long all things silver
- silver itself, silver ETFs, silver stocks, and options for leverage
in all of these by those who are qualified by experience to handle the risks involved, at low prices
that we are unlikely to see again for a long, long time.
Clive Maund
|
|