I was about a month premature and about 19% in missed gains when I flagged the potential start of a parabolic move in silver. Or perhaps my definition of a parabolic move should have been more expansive. Either way, silver’s behavior over the past four trading days definitely has taken on the tipsy look of a parabolic move. I am sure silver is on “everyone’s” radar if it was not already before Tuesday.
A parabolic move is important to understand because it typically marks the end, not the beginning, of a bullish run. At the end of the move, buyers finally exhaust themselves as the fever or panic to buy finally runs its course. In many cases, this is also the moment where the last shorts finally cut their losses and close out positions.
I am using SLV (iShares Silver Trust ETF) as a proxy for silver because it shows the tremendous surge in volume that marks a climactic topping pattern (I ran through several examples of others in March of this year). The chart below shows silver gapping up on higher than average buying volume the day after the Fed’s announcement on quantitative easing. The buying volume persisted and pushed SLV further and further away from the upper-Bollinger Band (BB). At Tuesday’s high, SLV was stretched even further away from the upper-BB, rounding out the parabola before the selling finally began. With the close below Monday’s low, SLV has punched in another bearish engulfing pattern. Tuesday’s fade is arguably more significant (and dramatic) than the similar, but smaller, pattern in early October.
(Click for a larger view)
The intra-day view of SLV confirms that volume picked up AFTER the high of the day. This signifies that sellers won the day in price and volume.
Silver’s latest attempt at a climactic top has not yet been confirmed with follow-through selling, so I am calling it “tipsy” for now. My big mistake last month was not waiting for confirmation of the topping pattern before unloading my last positions in silver, especially given the fundamentals for silver (and gold) remained extremely strong given the market was still pricing in QE. I recommended (or reminded) in May that traders and investors making anti-dollar bets add silver to any holdings in gold. My idea was that silver was lagging gold and was due to catch up. After a bumpy start, silver finally picked up momentum over gold in July. Note that silver is now trading at the same ratio to gold as it did in early to mid-2008. I strongly suspect this event marks, for now, the end of silver’s out-performance versus gold.
Silver even played catch-up to the U.S. dollar. Remarkably, this latest run peaked at exactly the same ratio (1.7) as the last run which ended in early 2008 (measuring from the base where the last phase of the move started). Yet one more sign that silver is due for a rest here.
Gold, as represented by GLD (SPDR Gold Shares), also printed a topping pattern but nearly as dramatic as silver’s. After seeing silver’s strained stretch in the morning, I decided to relinquish my position in Goldcorp (NYSE:GG) – my last gold/silver play. Suddenly, I feel very naked.
With the dollar looking strong for a third straight day, the prospects for a sustained relief rally are looming ever larger. If the dollar breaks through the immediate resistance formed in late October, the all-important 200-day moving average (DMA) could quickly come into play after a tussle with the 50DMA.
All things considered, the short-term risk/reward for silver and gold (and other anti-dollar bets) is about as poor as I have seen it in a long time. Assuming today’s selling gets confirmation, I will be looking for a sustained move downward. However, as long as the Federal Reserve is printing money through quantitative easing and so much of the developed world hopes to increase exports through devalued currencies, I will be looking for the next spot to buy and accumulate gold and silver (if the dollar makes fresh lows from here, I will start nibbling again on gold and silver right away). If gold and silver continue their strong upward moves, either sooner or later, it will be interesting to see whether the market will force the Federal Reserve to respond in some way (most likely with jawboning first).
Until then, be careful out there.
Disclosure: No positions