The past month has not been a happy time
for silver longs, and the New Year has yet to bring
any respite. After reaching its latest interim top of
$8.01 on December 1st, the always-volatile speculative
metal first plummeted to $6.68 in a matter of days before
relentlessly grinding down to $6.41 earlier this week.
Such brutally sharp declines, while par for the course
in silver, never fail to eviscerate leveraged longs.
In the last few weeks I have received several e-mails
from leveraged speculators lamenting about the unfortunate
travails silver's plunge put them through. Silver can
multiply wealth faster than winning a lottery when it
is soaring, but when it plummets it becomes a black
hole for leveraged capital, virtually inescapable.
Silver has always been a challenging market to trade.
Compared to gold, silver is an incredibly small market.
Small markets are vastly more volatile than larger markets
and popular sentiment waves lead to greatly magnified
price effects. Small markets are also relatively thinly
traded, so it doesn't take a lot of speculators in the
grand scheme of things to move prices dramatically.
The combination of small fast-moving markets with futures
leverage is a merciless double-edged sword.
But, if you are psychologically prepared
protect your speculative capital, hyper-volatile
markets like silver are nothing to fear. In fact, the
opportunities they offer are nothing short of tremendous.
If you know what to expect, if you go into silver just
knowing that it will be wickedly volatile, then you
can remain emotionally neutral and seize the periodic
dazzling opportunities that present themselves.
While silver-investor sentiment is so rotten right
now that it would make a funeral feel like Mardi Gras
by comparison, I suspect silver is presenting us with
another dazzling long opportunity today. As always though,
it takes a lot of guts and taxes one's contrarian psyche
to be looking to throw long in the midst of the bloody
carnage of our fallen fellow speculators ripped to shreds
But as Baron von Rothschild wisely said the best time
to buy is when there is blood in the streets. This week
I would like to once again explore the current bloody
tactical technical scene in silver. When the recent
technical developments are combined with the amazingly
dire sentiment on the white metal, odds are we are looking
at one of the greatest buying opportunities in this
bull to date.
Before we delve into the charts, it is important to
understand why speculators have to be students of the
markets. By studying silver's past behavior, speculators
can gain crucial insights into both what the metal is
capable of and when probabilities are high for a move
in a particular direction. Diligent students of the
markets rarely if ever get flustered or upset because
they know what a particular market could do before they
even make a trade.
If you have been following the price action
of the silver bull in the last couple years, the silver
correction of the past month shouldn't have bothered
you one bit psychologically. As our first chart shows,
there was nothing even remotely anomalous or unusual
about the negative silver action since early December.
We have seen this all before, less than a year ago in
fact, and silver is just playing off of its usual volatile
script. Nothing new under the sun, as the legendary
King Solomon wrote in Ecclesiastes!
The key to understanding the silver action of the past
month, and assessing whether or not it poses a threat
or opportunity to speculators going forward, lies in
seeing the correction within its proper technical context.
The latest silver correction's speed, magnitude, and
relative range appear all but identical to the last
major silver correction in April 2004.
Early last month, silver plummeted 17% in only 7 trading
days, ripping the hearts out of leveraged longs and
leading to the horrifically ugly silver sentiment we
see dominating the market today. Now in any other major
market such a sharp and brutally fast move would seem
like Armageddon. Can you imagine the wailing and gnashing
of teeth if gold fell 17% in 7 days, or even worse the
S&P 500? That would be quite the scene!
But for silver, such massive and rapid moves are typical
and speculators ought to learn to expect them. A quarter
century ago Professor Roy Jastram wrote an outstanding
book on silver called "Silver: The Restless Metal",
a perfect title. If silver has one defining characteristic,
it is its extreme volatility and restlessness. Silver
has always been a volatile and restless metal and it
probably always will be, so speculators deciding to
play in the silver arena need to steel themselves psychologically
and prepare for extreme moves.
For silver, a 17% drop in 7 trading days isn't even
noteworthy! Back in April, during the last major silver
correction, silver plunged 15% in 5 days. After enjoying
a few serene days in the eye of the storm, it promptly
plummeted another 19% in only 8 more trading days. All
three of these wickedly fast corrections are marked
above for easy visual comparison. Just as the double
plunge in April didn't threaten the viability of silver's
long-term bull, neither will this December specimen.
Once we can get past the initial shock at the 17% 7-day
plunge last month and realize it is just par for the
course for this particular highly-speculative restless
metal, all the fear that grips folks who don't diligently
study the markets instantly evaporates. After all, why
get worked up over a move that is little more than garden-variety
average? This realization paves the way for other equally
important technical observations.
Bull to date, silver has now powered higher in two
major uplegs and plummeted lower in two major corrections.
But over this entire multi-year timespan, silver has
never materially violated its primary long-term linear
support. As you can see in this chart, the bull-market
support for silver is just under where silver fell to
earlier this week. So not only was silver's sharp correction
typical, but its apparent bounce point is starting exactly
where it ought to be as well.
In addition to being near its primary long-term support,
silver has also converged with its key 200-day moving
average. Bull to date there are simply no better technical
times to throw long than when silver is near or slightly
below its 200dma. Bull markets, including silver's,
simply always periodically flow higher and ebb lower,
diverging and converging with their 200dmas over time.
Once again this is absolutely nothing new in silver
and we all ought to expect it.
I have written
extensively about these 200dma divergences and convergences
and their extraordinary importance for actively trading
primary trends. In silver's case, I wrote an essay
on April 30th after its brutal double-drop correction
above and correctly concluded at the time, "With
extreme volatility just par for this course, odds are
that April's price collapse was just a bull-market correction
leading to a fantastic buying opportunity to add new
long positions in silver. Get deployed!"
About four months later silver had another
mini-correction in early September. Once again sentiment
grew dark and ill so I felt compelled to write. On September
10th, the day silver bottomed, my original "Tactical
Silver Trends" essay concluded, "If you
join me in believing that this young silver bull market
remains in force for fundamental reasons as global demand
continues to exceed mined supply, then there is no better
time to buy than when silver trades near its lower support
zones, like today. Even after its ugly slump this week,
silver's technicals look fine and remain quite bullish."
Thankfully these earlier prognostications proved to
be right on the money. It is just an ironclad mathematical
law of the markets that trending primary bull markets,
like silver's, are best bought for great profits when
they periodically correct and converge with their 200dmas.
And as our latest charts reveal this week, from all
appearances silver looks to be staging for another one
of those incredibly compelling major buy opportunities
Thus, from my perspective as an active silver speculator
and a student of the markets, nothing atypical or concerning
has transpired. Silver rallied strongly, then it corrected
sharply in line with precedent, and now it is back down
near major support just begging contrarians to buy it
before the majority of investors figure this all out.
Rather than getting upset and succumbing to the terribly
negative sentiment on the forums, the key to shrugging
this correction off is understanding it within its true
Our second chart below digs deeper into silver's current
position relative to its 200dma, but before that there
is one other crucial issue on our first chart that needs
to be addressed. At the end of its first major upleg
silver topped at $8.20 on April 6th. But at the end
of its second upleg silver topped at $8.01 on December
1st. These descending interim tops are causing a lot
of angst even among seasoned technicians.
If silver cannot even exceed its original
interim top, does that mean its bull market is over?
I have received quite a few e-mails agonizing over this
technical development, and wondering how it ought to
be interpreted. The short answer is it is not silver's
price that drives its long-term bull, but its supply
and demand fundamentals. As long as global silver demand
exceeds mined silver supply, its long-term uptrend will
continue regardless of temporary price extremes that
don't fit into nice tidy patterns. And silver demand
has exceeded mined supply for decades
Technically, I believe the anomaly was
not the lower interim high of December, but the
parabolic spike of Q1 2004. If you look carefully
at the chart above, silver looked like it was topping
in January 2004. It had a parabolic ascent, broke way
resistance, and struggled around $6.50 for over
a month, clear topping signs. At the time I thought
silver was due for a temporary
correction, but I held onto our long positions and
recommended the same since bull market surprises are
usually to the upside. We diligently use trailing
stops to allow us to stay long for as long as possible
while still providing ample protection from a correction.
Then, suddenly in February, silver just erupted and
streaked towards the heavens. It rocketed up in an ever-accelerating
slope, a parabola, blasting from $6.50 to well over
$8.00 in a little over a month. The speculative fervor
surrounding this particular spike was incredible. Such
a buying frenzy, even though small by silver's immense
historical standards, still demanded caution. When silver
topped at $8.20 on April 6th analysts and investors
were eagerly looking for $10 by May. The greed was phenomenal.
Like most manias, large or small, it is not obvious
exactly why this little silver frenzy ignited. But it
had all the hallmarks of a mini-mania and called for
extreme caution. If you lop off that huge March 2004
spike on the chart above as a speculative anomaly, you
are left with a nice tight bull-market uptrend. As a
matter of fact, if silver had fallen back from $6.50
in February as it should have without the speculative
anomaly, it would have fallen about 23% to its 200dma.
This is right in line with the 17% correction we saw
And if the speculative anomaly of March 2004 is ignored,
silver's first major interim top would have been near
$6.50 in February while its second exceeded $8.00 in
December. Of course this pattern, if it had happened,
would have led to wonderful warm and fuzzy feelings
in silver technicians worldwide. But when the speculative
anomaly is taken too seriously, indeed silver has carved
descending tops. I am not at all worried about this
though since I suspect the speculative anomaly caused
the first top to be "too high" relative to
trend, laying the foundation for today's great technical
Now the obvious corollary to buying on 200dma convergences
is selling on extreme 200dma divergences. The farther
silver stretches away from its anchoring 200dma, the
higher the probability that a correction is imminent.
Three days before the April top in our 4/04 Zeal Intelligence
newsletter I wrote to our subscribers
"Stretched 42% above its 200dma bull-market support,
a major correction is due in silver. It makes no sense
to buy silver stocks or physical silver today. A typical
bull-market pullback would drag the metal back down
near its 200dma, and I am sure that silver stocks would
be hit hard in a silver retreat back down under $6."
Speculation is certainly not rocket science friends,
it is just using the typical behavior of silver, and
of bull markets, to help us define high-probability-for-success
moments to trade. If you want to go long, odds are you
will reap the highest rewards by patiently waiting until
silver converges with its 200dma like today. If you
want to throw short, your odds of success increase the
greater the distance that silver diverges above its
200dma. Relative 200dma trading is simple and effective.
Our final chart zooms in to just the period
of silver's second major upleg and correction, since
May. In addition to silver prices, it also shows Relative
Silver in red, or the silver price divided by its 200dma.
This expresses silver as a constant multiple of its
200dma over time enabling us to easily compare relative
extremes. I have explained this Relativity theory in
depth in past
essays if it is new to you.
Relative Silver (rSilver) also shows the
white metal to be a strong buy today, solidly corroborating
the conventional technical analysis above.
We have been watching an rSilver range of interest
from 0.99 to 1.25. When rSilver is near or under 0.99
it is a high-probability-for-success moment to go long,
and when it is near or over 1.25 it is a high-probability-for-success
moment to throw short or at least go neutral. Even in
just the past 8 months or so silver has been remarkably
consistent in rallying strongly once it falls just under
its key 200dma. The sub-200dma bottoming zones are rendered
above as transparent blue ovals.
In relative terms, silver fell to 0.937x its 200dma
in May, 0.943x in June, 0.963x in September, and now
0.958x today in January. As you can see with the red
line rendered above, silver tended to rally rather sharply
once it fell 4% to 6% under its key 200-day moving average.
As long as silver's bull market remains intact as it
should be for core fundamental supply and demand reasons,
then today's 0.958 rSilver reading ought to prove just
as bullish and profitable as its predecessors' strong
Now on the topside rSilver's 1.198 apex in early December
near its second major interim top didn't even approach
the massive 1.448 that silver witnessed in early April
at its first major interim top. I realize this also
bothers some folks, but once again I suspect the reason
is the speculative anomaly of March 2004. Without that
strange surge in speculative fervor at what probably
would have been an interim top, April's extreme rSilver
reading wouldn't have been anywhere near as high.
And major topping levels are nowhere near
as inherently predictable as major bottoming levels
anyway. While 200dma convergences are very obvious,
like today's, 200dma divergences at the end of uplegs
can run all over the map in extent. As such, it is best
to buy low near major 200dma convergences and just run
stops so you don't have to worry about selling.
The stops will enable you to ride bullish uplegs as
long as possible but still sell you out sans emotional
angst when the inevitable subsequent corrections finally
The bottom line is silver looks fantastic today technically.
While its sharp December correction nuked sentiment
and slaughtered some leveraged longs, the restless white
metal really didn't do anything out of the ordinary
technically. Silver is behaving just as it ought to
and there is nothing to fear.
As usual, we are starting to scale in
our own trades for this next expected major silver upleg,
the third of this bull market to date. In the shiny
new January issue of our acclaimed Zeal
Intelligence newsletter just published, I discussed
and recommended two new silver-stock trades. Both companies
have excellent prospects in the next silver upleg, and
one in particular is a small junior with staggering
10x+ gains potential if this silver bull continues to
march higher in the years ahead.
Both of these stocks are being mercilessly
hammered now, blood is flowing in the streets, so you
might not have another equally stellar opportunity to
consider adding them to your portfolio. Please subscribe
today before silver rallies and this amazing long
opportunity evaporates. I am also planning on layering
in more silver-stock positions in the months ahead as
silver confirms this third-major-upleg thesis.
Brand new e-mail PDF-edition subscribers will receive
a complimentary copy of this just-published January
newsletter. In addition, in our exclusive subscriber-only
charts section of our website we have a huge rSilver
chart similar to the one above that we update at least
weekly for our subscribers. You can watch this silver
bull unfold as a fellow student of the markets and keep
considering silver's moves within their proper technical
context in order to remain emotionally neutral.
As Rothschild famously said, the best time to buy is
when blood is flowing in the streets. If you listen
to the eviscerated leveraged silver longs and the dreadfully
negative Internet forums, you would think there is more
blood in the silver markets right now than in the Revelation
account of Armageddon.
While December's correction was sharp and harsh, it
was merely garden-variety typical for silver. If silver
remains in a long-term bull market for fundamental supply-and-demand
reasons, then there is no better time to throw long
than when it falls to or under its 200dma, like today.
Carpe diem silver speculators!
Adam Hamilton, CPA
January 7, 2005
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Mr. Hamilton, a private investor
and contrarian analyst, publishes Zeal Intelligence,
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