Silver - All Quiet Before A Storm?

|
About: VelocityShares 3x Long Silver ETN (USLV), Includes: AGQ, DBS, DSLV, PSLV, SHNY, SIL, SILJ, SIVR, SLV, SLVO, SLVP, USV, ZSL
by: Andrew Hecht
Summary

Silver sits at just under the $14.45 level.

Open interest takes a nose dive.

$13.86 is just above the line in the sand on the downside.

A recovery above $15 could set the stage for 2019.

USLV on a dip with a stop below $13.50 on March silver.

The silver market has been a real snoozer these days. Silver has a long history as a highly volatile commodity. When it starts to move higher or lower, it often attracts lots of speculators looking to hop onboard a trend that will offer a significant percentage change in the price.

Silver can also go to sleep for extended periods, frustrating longs and shorts with false breaks to the up and the downside. Recently, the silver futures market had been probing below the $14 per ounce level on the nearby COMEX futures contract. The decline to a low of $13.86 on the expired December contract in mid-November likely caused those looking for a break to the downside to short the market in hopes of a break below the December 2015 low at $13.635, which is the critical support level for the price of the precious metal. However, silver failed to experience follow-through selling, and the price bounced back over $14 per ounce and was trading at the middle of its trading range on Thursday, December 6. The December futures rolled to the new active month which is March as we are now in the final month of 2018. The silver market is sleeping as the holiday season is upon us, and the trend of lower highs and lower lows remains intact in the silver futures market.

With the trading ranges in the silver market so narrow these days, those who are devotees of the silver market are turning to leveraged products to magnify the small price bands these days. The VelocityShares 3X Long Silver ETN (USLV) and its bearish counterpart VelocityShares 3x Inverse Silver ETN (DSLV) are products that can make a dull market more interesting during periods of low price volatility.

Silver sits at just under the $14.45 level

Silver was trading at $14.52 per ounce on Thursday, December 6, on the March COMEX futures contract.

Source: CQG

As the daily chart shows, silver has been in a range from lows of $13.985 to $15.055 since the end of August with a midpoint at $14.52 per ounce. At $14.52, the price of the metal is drifting around the middle of its trading band.

Source: CQG

The weekly chart highlights that silver has been in a bearish trend since it traded to a peak of $21.095 per ounce in July 2016 following the surprise of the Brexit referendum. At the same time, the silver market has been making lower lows. The most recent failure to fall below its critical technical support level at $13.635, the December 2015 low, combined with the roll from December to March futures caused many frustrated market participants to exit their risk positions.

Open interest takes a nose dive

It is now looking like the latest rejection of prices below the $14 level caused speculators and traders to throw in the towel when it comes to a significant price move in the silver market in 2018.

Source: CQG

Open interest is the total number of open long and short positions in a futures market. In the silver market, the metric reached its last peak at 224,619 contracts during the week of November 12 when the price of the metal attempted to break to the downside. Silver moved to a low of $13.86 per ounce, and the rejection of the sub-$14 per ounce price led to a mass exit from the market by those holding futures positions. As December futures rolled to March, market participants closed out their risk rather than rolling to the next active month, and the open interest metric dropped to 178,543 contracts as of the close of business on December 5. The metric declined by 46,076 contracts or 20.5% since November 12.

$13.86 is just above the line in the sand on the downside

The most recent low in the silver market at $13.86 came at a time when the dollar index rose to a new high at 97.53 on the active month December futures contract. Other technical metrics highlight just how boring the silver market has become over the recent weeks and as we head towards the end of this year.

Source: CQG

The weekly chart illustrates that both the price momentum and relative strength metrics are in neutral territory. Weekly historical volatility which is the measure of price variance has declined to 11.91%, which is an extraordinarily low level for the typically volatile metal. The one benefit of periods of low volatility is that it causes the prices of put and call options to decline which offers market participants looking for an eventual move to the up or the downside to position using options which limit their risk to the premium for the instrument.

Meanwhile, short-term technical support is at the $13.86 level which was the recent low. Below that level, $13.635 stands as the line in the sand as it was bottom established in December 2015 and the lowest price for the precious metal since 2009. Silver came within 22.5 cents of the support, but it ran out of selling, and the price moved back to the middle of its trading range.

A recovery above $15 could set the stage for 2019

When it comes to the upside in the silver market, the price has been unable to make a higher high since the middle of 2016. After reaching a high at $21.095, the next peak came in April 2017 at $18.655 followed by a succession of lower highs at $18.16 in September 2017 and $17.705 in January 2018. After making a lower high at $17.36 in April, the price rallied to a peak at $17.34 in mid-June and failed which sent it down to the mid-November low. Silver has not tested above the $15 per ounce level since mid-August. Technical resistance on the weekly chart now stands at $14.95 where there is a double top that occurred during the weeks of August 27 and October 1. A move above that level would break the bearish price pattern in the silver market, and a rally over $15 per ounce could bring lots of trend following speculative longs back to the silver market. With silver trading in the middle of its trading range and sleeping, it may just be resting before it decides if 2019 will be the year that it breaks its bearish trading pattern or moves to the lowest level in a decade.

USLV on a dip with a stop below $13.50 on March silver

The old saying, the trend is your friend, in the futures market is always good advice for traders and investors. However, over time, trends are made to be broken which is where markets can become highly volatile. When silver awakes from its current period of volatility hibernation, we will see a return of market participants to the precious metal. While silver continues to reject highs, its most recent rejection of the low that failed to reach critical technical, support at the $13.635 per ounce level could be a sign that the price is getting ready to go the other way and test the high end of its trading range. Additionally, silver's failure to break lower with the dollar index holding near its highs for the year could be a bullish sign. When the price of a commodity should head lower, and it does not, it is often an indication of underlying strength and a harbinger of higher prices in the future.

Trading silver is boring these days, so the leveraged ETN market offers market participants the opportunity to magnify the trading range when it comes to percentage moves.

The VelocityShares 3X Long Silver ETN and its bearish counterpart DSLV are tools that can come in handy for those wishing to trade the range in the silver market these days, or to keep on your radar when the market finally decides if it is going to break to the up or the downside. The fund summary for USLV states:

The investment seeks to replicate, net of expenses, three times the S&P GSCI Silver index ER. The index comprises futures contracts on a single commodity. The fluctuations in the values of it are intended generally to correlate with changes in the price of silver in global markets.

The DSLV bearish 3X ETN works inversely to the USLV product, and it achieves triple leverage with inverse positions. The price for leverage is time decay, so the values of both USLV and DSLV wither away over time, and the products are only appropriate for short-term positions. However, for forays into the market that last a couple of days or even two weeks, they can offer the opportunity to turbocharge short-term moves in the price of silver.

March silver moved from a low of $13.985 on November 14 to a high of $14.66 on November 21, a rise of 4.8%.

Source: Barchart

Over the same period, USLV moved from $55.31 to $62.67 per share, a rise of 13.3% or just under triple the move to the upside in the COMEX silver futures market.

After trading to the high on November 21, March silver declined to a low at $14.115 on the final day of last month, a drop of 3.7%.

Source: Barchart

DSLV climbed from $33.93 to $37.72 or 11.2% over the same time frame which was three times the move to the downside in the silver market on a percentage basis.

Those who are addicted to trading silver can use USLV and DSLV on a short-term basis to magnify performance in a silver market that trades in a narrow range. At the same time, they can become highly volatile tools when the price eventually decides to break out of its trading range. Both USLV and DSLV are susceptible to reverse splits and their values decay with time. Therefore, those who overstay their welcome in these ETN products risk having them become worthless dust collectors in their portfolios.

Silver looks like there is not much chance of a significant move in 2018, but next year could be an entirely different story for the precious metal. Volatility will return to the silver market sooner rather than later, and the USLV and DSLV tools could serve as useful instruments when a trend develops and magnifying a volatile market becomes an exercise that results in enormous returns on a percentage basis. I will be looking for a spot to buy USLV but will get out quickly if the price drops below the $13.50 level. At the same time, I will use a two-week time stop on any positions in either of these products as I hate to dust.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.