-- Posted 18 September, 2006 | |
Two weeks ago, I posted an article describing why I thought that silver would suffer a correction before continuing its advance to new highs. Several days later, silver failed to push through the top of its upward trending channel near $13 and sold of abruptly, taking out the $12 support at the bottom of its trend channel. Now silver is at $10.72, right where I expected it would be after the correction, near its 200 day moving average (MA) and with an RSI level in the low 30’s. In that article, I said that this would probably be an excellent time put your remaining cash into silver. So, do we jump back into silver now, or are further declines likely in the near future?
Right now, I think we are nearing a low risk buy point in silver and close to the bottom. Gold and silver are below their 200 day MA's, which seems like a buy, but the sentiment in the commodity sector is on the bearish side, so caution is warranted. Oil, gasoline, and base metals are all falling in price right now, and gold and silver are falling along with them. However, geopolitical tensions are still uneasy, and the United States continues to spend money in a fiscal deficit and just achieved a record trade deficit of $68 billion in July. Eventually, these twin deficits will resume taking their toll on the exchange rate of the dollar verses world currencies and gold and silver will benefit from the dollar’s decline. Some analysts think the commodity bull market is over, but the worldwide demand for resources will continue to increase, even if it takes a breather in the intermediate term due to a recession in the United States. I have many reasons to be bullish long term on silver (and gold), but right now, I would like to focus on what I am seeing in the short term.
One reason that I expect we are near a bottom in silver is that the Commercial Traders (commercials), also know as the “smart money” in the futures markets are again not far from a historically low point in their overall futures short position. When they are heavily short, you can expect that a price decline is likely soon, and vice versa when they are not heavily short. Take a look at the graph below, which is updated with Commitments of Traders data for silver through last Tuesday 9/12. The Sum of $ Short tracks the changes in their short position while factoring in the price of silver. In the past, whenever the Sum of $ Short was at a low point, it was a low risk, profitable time to buy silver. We hit this point last in mid June when silver reached a low of $9.69 on 6/14. Again, we are at a low level of commercial short selling, which has always been a great indicator of when to buy.
The candlestick chart and RSI trend on the chart below is showing that silver is close to oversold (readings of 30 and lower) and near a great buy point. Typically, silver does not remain near an RSI of 30 for more than a few trading days. This chart does not prove that silver will rebound sharply, because it could trade sideways to down over the next few months if the sentiment remains weak towards commodities. However, it is another indicator that I watch closely to see when to buy silver. Usually, there are not many times in a year when silver’s RSI hits 30 and, in the past 5 years, those have always been good times to buy.
I updated the simple trend chart from two weeks ago below. On the chart, we can clearly see how silver did not make it to the top of the upper channel and how it fell through the bottom. It is now nearing a longer term support trend line which links the bottoms of August 2005 and June 2006. If silver does not hold support of at least $10.50, then it will likely retest the $9.70 lows of June and this may delay the resumption of the bull market in gold and silver. However, if it does fall that low, it will most likely be the last time we see silver that cheap. Buy all you can afford.
Summary
First, I want to see if this slide in precious metals is going to continue this week. We should know in a few days. Silver needs to hold support at $10.50 or else we are entering territory that is more bearish in the short term. Second, When silver can get back above the 200 day MA for three trading days in a row, then I would expect the worst is behind us and I would like to be fully invested. Like last year, it is possible that we will not see silver start moving up strongly again until November. I plan to purchase more myself in the next couple of weeks.
As always, I recommend that you dollar cost average your purchases since it is mostly luck if you happen to buy on the day of the absolute bottom. For example, if you want to invest $1000, then maybe you buy $250 this week, $250 next week, and so on, until you have purchased the entire amount you want to invest. I am still expecting silver to close the year above $15. We shall see how it all plays out. Best wishes on your investing and future.
God Bless,
Timothy Silvers
Disclaimer: This article represents the opinions and personal views of Timothy Silvers and is not intended to be investment advice. If you choose to use this analysis for your personal trading, Timothy Silvers assumes no liability for the direct or indirect losses you may incur due to using this article to make your investment decisions. You are totally and completely responsible for your own investments. At any given time, Timothy Silvers or his friends and relatives may have positions in silver related investments that may or may not follow the recommendations contained in this article. The information in this article may not be completely correct and accurate. Even though Timothy Silvers has done his best to review the content and accuracy of this article, he is in no way liable or responsible for any mistakes or omissions.
-- Posted 18 September, 2006 | |
