Thursday, June 10, 2010

Silver: Likely Market Top

Figure 1 is a weekly chart of the i-Shares Silver Trust (symbol: SLV).

The pink labeled price bars are negative divergence bars. The divergence is between an oscillator indicator (called value charts) and price. (Of note, there is nothing unique about value charts as an oscillator other than I can program with it; as a matter of record, this is the same oscillator I use in all my charts.) As I have shown on numerous times, the presence of negative divergences tend to suggest slowing upside momentum, but they do not guarantee a market top. However, what we do know is that they tend to occur late in a bull run, and clusters of negative divergences are highly suggestive of a market top.

Figure 1. SLV/ weekly

If you don't believe me, check out this article from November 16, 2009: "Just Sell Something, Please!!" and this article from December 1, 2009: "Have You Sold Anything Yet?". This pattern of a clustering of negative divergences showed up in the equity markets back in November, 2009. It also showed up in long term Treasury yields only 8 short weeks ago prior to an 15% drop in yields. It also showed up in copper back in January, 2010. The pattern is repeatable enough across multi markets that it is noteworthy.

So let's return to figure 1 our weekly chart of SLV. The indicator below the price graph counts the number of divergences over a given time period, and since the first cluster showed up in October, 2009, SLV really hasn't done a whole lot. Now we have another cluster, and I cannot see SLV moving significantly, and in all likelihood based upon this pattern, there is a strong possibility of a market top.

Over the last 35 years looking at a continuous contract of silver, we note 2 other instances of this pattern occurring. The first was in 1993, when this pattern marked a high (give or take a few percent) in silver that lasted for over 10 years. Prior to that the pattern showed up in late 1978 and silver went 10% higher over the next 8 months before exploding higher in 1980.


Mike C said...

What are the implications of this analysis and conclusion for gold?

I would think it would be close to impossible for gold to continually move higher but silver to not go along for the ride.

So I would assume that if you think silver is topping out, then you also believe the same for gold.

Interesting that this signal failed in 1978 just prior to the final bubble phase in precious metals.

Dave Narby said...

I'm betting option (2).

Might get a bit of a pullback, but I wouldn't be betting against PMs here.

Unless of course, you think they will raise interest rates...

Guy M. Lerner said...

Gold seems to be in its own universe
--use to be correlated inversely with Dollar and now it is everything to everyone --safe haven, currency of last resort, etc

Silver has the economic/ industrial implications

Silver has been making a top or going sideways for 10 months ---very wide range; maybe as Dave says its option 2 ---we are just making a base

Dave Narby said...

Gold is money. The level of misinformation surrounding gold dwarfs that of the Kennedy assassination, etc. It has been money for over 5 millennia. I recommend reading the past three years of posts from FOFOA to really understand gold.

Silver is similar to gold, but with physical utility beyond money. So the chance that there's a lot less silver out there than is believed is pretty high.

IMO they are the only bull market left until the DOW:GOLD ratio approaches 1:1 (and it could go below that this time).

frasse said...

Absolutely agree with you at the moment in the terms of $. I could expect SLV go down to 15 - 14.6 level. But then as it is a currency as well as gold, I think that level will be enough for the moment. It is to early I think to say this some more confirmation i needed !