This Silver Chart Has Bulls Running Scared
The last time I predicted a top in silver prices, it unleashed a fury of hate mail. But that’s not going to keep me from speaking up again. (What can I say? I’m a glutton for punishment.)
Yes, I’m convinced silver could be setting up for another correction. What makes me so sure? The same indicator I relied on last time: trading volumes.
Before you cue up another nasty-gram, at least hear me out…
Volume Leads Price
As Peter Brandt, a longtime commodity trader, says, “Volume nearly always leads price in silver.” And no one can deny that volumes are currently spiking…
Trading in the iShares Silver Trust (NYSE: SLV), the largest silver ETF, topped 91 million shares last Wednesday. Which is nearly five times the average daily trading volume.
And over on the COMEX, trading volumes in silver futures hit their second-highest weekly total since the April 2011 top in silver prices. And their highest weekly total since the August 2011 top.
So what does it all mean?
Well, the precious metal bulls are bound to argue it’s nothing to worry about. That it was merely a knee-jerk reaction to Fed Chairman Ben Bernanke’s testimony before Congress. (In case you missed it, he didn’t announce any new stimulus efforts – i.e. money printing – like many investors expected.)
But I wouldn’t be so quick to write off investors’ reactions to the Fed. Or the spike in trading volumes. Not after looking at this chart.
As you can see, if we look at the market tops and bottoms in silver over the last year, two trends are readily apparent.
First, official statements from the Fed tend to coincide with precipitous short-term declines in silver prices. Consider:
- The Fed issued a statement on April 27, 2011, which contained no new stimulus measures. Two trading sessions later, silver prices began a two-week, 35% decline. (Ouch.)
- The Fed issued another statement on September 21, 2011, which also contained no new stimulus measures. Silver’s response? It cratered 30.1% over the next three trading sessions. (Double ouch.)
- And finally, the Fed issued a statement on November 2, 2011, which also included no new stimulus measures. A day later, silver began an eight-week, 25% selloff. (Triple ouch.)
The second trend – indicated by the arrows in the chart – is that spikes in trading volumes tend to precede short-term tops and bottoms in silver prices.
Bottom line: Volume does indeed lead price when it comes to silver. So, instead of flippantly dismissing it, it’s imperative we consider the latest spike as another sign of a market reversal.
Based on history, a big move in silver prices is likely afoot. And given silver’s 27.8% rise in price already this year, the lack of additional stimulus and steadily improving economic conditions in the United States, the most likely direction of that move is down.
Ahead of the tape,
Louis Basenese
Related Topics: Commodities, Market Analysis, Think Contrarian
Sorry, but this is a load of crap, whether or not youre bullish or bearish in this situation.
First off, The major dips weren’t caused by fed announcements, they were caused by the CME raising margin requirements which forced a lot of people to liquidate their positions.
2nd of all, silver is in the latter processes of correcting as we speak.
Why are you coming out here saying this could be the “start” of a correction.
Pick another topic pal, this one ain’t for you.
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Louis Basenese Reply:
March 6th, 2012 at 12:20 pm
I wasn’t attributing the moves to the Fed. I was simply pointing out the coincidence. The volume spikes are more important.
And as I wrote in my original write-up, margin requirements were to blame…
“The main culprit? Exchange operator CME Group (Nasdaq: CME). It’s jacked up the margin requirements for trading silver futures three times over the past week. And there’s only one way to interpret such moves…” http://www.wallstreetdaily.com/2011/05/05/silver-prediction/
So we agree on that front.
As for your “2nd of all” – what makes you so sure silver is in the latter stages of correcting? That’s a strong prediction without any backup (yet). So send it along and I’ll review it and will gladly amend my statements if necessary.
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hey , I love opinions, did you listen to what the fed said? I did ! I really dont care I just sayin if your going post content study the markets more before you post a graph that silver only moves by the fed, there is much larger forces moving silver than his monthly talksit does pivot and move coming up to fed days but this is short lived . again lets watch and see were the price is by the end of month… have great day remember … price action will tell you everything you need too know . good day todd
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as much as i love my silver im afraid i have to agree with your article sir !! especially when i see comments by mr turk that silver will be at 50-65 dollars an ounce in the next 3 months. such crazy predictions usually means the price will go in the other direction lol ! the only way i can see silver and gold going that high is a nasty war in the iran region. the fed would need to print more money which would mean a lower us dollar and higher commodities !!
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I’ve been making this point on my blog for weeks now and actually advised readers to go short on the bounce day after the major reversal last Wednesday.
The problem as I see it is that the permabulls will only pick out bits and pieces of commentary to support their belieft system while selectively dismissing the other factors.
I am a big supporter of the volume preceeds price rule. You don’t get that type of volume without it confirming a reversal.
As for the manipulation talk, there is yet to be any proof submitted but I note that the usual permabull suspects acted swiftly to regurgitate the same excuse to their readers. I find it odd they never advise to lighten up or hedge, only to buy. Strong advice (sacasm) considering one of the biggest permabulls, Sprott sold a chunk of silver near the May 2011 top without advising his readers until after the collapse.
I see the analogies you are trying to present in your chart and I agree with your reply to the first comment that you didn’t say that the FED statements were the cause of the reversals but instead they were coincidentally linked to the start of downturns.
I may differ with you on this latest FED statement to the extent that the market wanted to hear more QE talk but didn’t get it. The reality is, with the US economy showing signs of improvement, QE has to be placed on the backburner.
Silver permabulls will argue that the silver that changed hands last Wed was more than annual production but don’t point out that the silver traded was contract form and not physical ounces.
There are so many inconsistencies and half-truths in the permabull argument but going through them requires hours of discussion.
Good job on the chart. I clearly see the point you were trying to convey.
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If the fed could just find a way to put silver in my gas tank I am sure the MPG would do better than the GNP but that would be 2 G,s and 2 P,s and only 1M and 1 N so you would have to print some more MoNey to get the SLV to pump and dump. Good chart especially the volume part.
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Silver is strongly supported right now with less downside risk than upside potential. More average investors are starting to consider silver. Only a few percent of investors would change the price of silver dramatically by purchasing. People are just waiting for an excuse to buy. Why not buy now instead?
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