Silver market exuberance gains momentum

After soaring 35% in just 6 weeks, silver has driven trader enthusiasm to a fever pitch. Naturally after such a magnificent surge to new multi-decade highs, silver bullishness is off the charts. Expectations for continuing near-parabolic gains are nearly universal, with ebullient commentators coming out of the woodwork to predict spectacular near-term price targets.

This exuberance is certainly understandable, traders crave big gains which silver can provide in spades. I’ve been a big fan of silver for a long time. Way back in November 2001 when silver traded just over $4, I started recommending physical silver coins to our newsletter subscribers as core long-term investments. Boy let me tell you, back then almost no one was bullish on silver as this secular bull was being born!

Since then, we’ve realized 108 silver-stock trades in our weekly and monthly newsletters. Across all of them, which include all losers and the brutal stock panic’s impact, our average annualized realized gains ran +45.3%. After this decade of successful silver-stock trading, a critical lesson dominates my mind. Like all bull markets, silver doesn’t march up in a straight line forever. It flows and ebbs. Though its bull indeed powers higher on balance, silver’s massive uplegs are followed by brutal corrections.

Now if you are crazy enough to subscribe to this theory that the silver zealots think is heretical, that silver is not going to soar indefinitely, then doesn’t it make sense to look for toppings? At some point after a massive upleg, silver is going to need to correct. Period. It doesn’t matter how bullish silver’s fundamentals may be, how greedy silver enthusiasts get, or what is going on in the physical silver market.

Silver corrected hard in the past despite bullish fundamentals, wildly-bullish enthusiasm, rumored supply shortages, tightness in certain coin markets, foreign buying, and every other silver-to-the-moon argument getting rehashed today. In fact, the more bullish, optimistic, and enthusiastic investors and speculators get, the greater the odds for an imminent sharp correction. These psychological conditions seduce in everyone interested in buying anytime soon. Once they are all in the rally burns out, and only sellers remain.

So how can we recognize dangerous topping conditions in real-time? By studying silver’s technical and sentimental conditions at its well-known past major interim highs. If you know how past silver toppings played out, then you can identify current episodes where the probabilities heavily favor a correction. And this is priceless knowledge to have, as silver’s corrections are wickedly fast, large, and unforgiving.

If someone is attempting to convince you silver is going to shoot higher without interruption indefinitely, this chart ought to be very sobering. Silver is no safe haven, no magical investment. It is one of the most-volatile and risky commodities in existence. Yes it can rally very fast, which is a lot of fun. But after its mightiest uplegs it literally plummets and eviscerates the gullible who bought in near the latest topping.

The horrific stock panic of late 2008 was the epic discontinuity of a lifetime, so it is best to consider silver in pre-panic and post-panic terms. During the pre-panic years of this secular bull, silver enjoyed three enormous uplegs that rocketed up to near-parabolic climaxes. Then silver was ripped to shreds in the stock panic, traders rushed to abandon this hyper-speculative metal. Then it recovered after the panic with everything else, and its first true post-panic upleg began last summer.

There are definite technical (price-action) characteristics of past major toppings that silver shares today. The most-obvious one is silver’s near-parabolic vertical ascent. Note that the major pre-panic uplegs accelerated the same way, rocketing skywards in a final manic gasp before collapsing under their own psychological weight. These near-parabolic terminal ascents can be measured and compared.

In every market including silver, when prices surge too far too fast they simply need to correct. This is a psychological phenomenon, supply-demand fundamentals are completely irrelevant. Any price rising too far too fast generates tremendous greed. This unbalanced sentiment sucks in all traders interested in buying in anytime soon. Once all these buyers have bought, only sellers remain. And then some minor catalyst ignites initial selling pressure which quickly snowballs, resulting in a full-blown correction.

But how can we measure this amorphous concept of “too far too fast”? Many years ago I developed a simple trading system that quantifies it. Some kind of objective baseline was needed from which to measure the rapidity of advances, and the perfect one happened to be any price’s 200-day moving average. 200dmas are not static, they gradually rise to reflect an ongoing bull market. Yet they still move slowly enough to filter out all the day-to-day volatility, which can get pretty extreme in silver’s case.

My Relativity trading system considers prices as multiples of their 200dmas. Over time, any price in a bull-market trend tends to carve a horizontal trading range relative to its 200dma. This is readily evident in silver above. If you take the blue silver price and divide it by its black 200dma line, the light red Relative Silver (rSilver) line is the result. Since 2003, silver has tended to trade between 0.95x its 200dma on the low side to 1.40x its 200dma on the high side. This relative trading range defines “too far too fast”.

The best time to buy silver is when it is low, near its 200dma. Thanks to this very tool, back in mid-August when silver was near $18 I wrote an essay claiming a big autumn silver rally was coming. I encourage you to read it, as most analysts were very bearish on silver last summer as it made its usual seasonal lows. But our subscribers were ready in advance for this latest mighty silver upleg.

The best time to sell silver is when it is high, stretched far above its 200dma. Historically in this secular bull, once silver ran 40%+ above its 200dma it was pushing unsustainable advances. How do I know? Check out the chart. Silver soon collapsed each time after exceeding this metric, it had simply rallied too far too fast. And where is rSilver today? This week it hit a breathtaking 1.513x, which is crazy-high. Enthusiastic traders have bid silver over 50% above its 200dma! These levels are unsustainably extreme.

So in technical terms, silver’s recent price action looks very much like past major toppings. Silver has shot vertical in a near-parabolic spike. And it has rallied so far so fast that it has far exceeded its bull-to-date danger zone of 1.40x its 200dma. What happened in the past after these very conditions? The chart doesn’t lie, silver plummeted like a rock. And if you are a newer silver player, you can’t imagine how brutal these post-topping corrections were. They literally ruined countless traders not prepared for them.

This table summarizes some of the price action surrounding these major past toppings. The topping numbers below correspond with the ones in the chart above. While silver’s post-panic recovery in 2009 was very different from a true silver upleg, I threw in its topping for good measure. This table looks intimidating at first, but it is simple and easy to understand. Heeding its hard lessons could save you from massive losses in your silver-related trading positions.

The most-important toppings to consider are the first three of this bull, April 2004, May 2006, and March 2008. They were normal silver bull-market advances to new bull highs. The fourth one was a recovery from an abnormal and overdone stock-panic selloff, so its technicals are atypical. In addition, that fourth upleg didn’t carry silver to new bull highs like all the other ones. Let’s walk through those early uplegs.

Over an upleg duration averaging 7 months, silver shot 92% higher on average in its massive pre-panic uplegs. So a doubling in silver over such a short period of time is actually par for the course. Many traders are surprised to learn that silver’s entire bull-market gains are won in a handful of relatively-short periods of time. For the vast majority of its bull, silver wasn’t very exciting at all. This curious metal drifts listlessly for a long time, then awakens to surge.

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