By Adam Hamilton, CPA
Friday December 14, 2012 14:23
Although you wouldn’t know it from listening to all the bearish commentary out there, silver is actually enjoying a strong young upleg. Its technicals are very bullish, contradicting the prevailing pessimism gripping traders. This glaring disconnect between price action and sentiment won’t last forever. It has hammered silver stocks to depressed levels that offer a smorgasbord of opportunity for brave contrarians.
As a hyper-volatile speculators’ playground, silver has always been exceptionally sensitive to prevailing sentiment. While all prices are affected by their traders’ collective greed and fear, silver’s emotional roller coaster has higher peaks and deeper valleys. Silver can skyrocket on greed like no other commodity, but the other end of the sentiment pendulum’s arc is equally extreme. Fear can depress silver for a long time.
And lingering fear is what is plaguing silver sentiment today. For over a year leading into this past summer, silver suffered a massive correction following a near-parabolic surge to dazzling new secular-bull highs. Such a long period of crumbling prices naturally spawned incredible fear. So even after silver bottomed and birthed a major new upleg, traders remain depressed and skeptical of its potential.
But despite today’s rampant silver pessimism, this metal’s technicals are crystal-clear in showing a strong young upleg now underway. Gradually this bullish price action will bleed away the correction’s residual bearishness, and fear will eventually yield to greed. Corrections’ fear shadows always linger into the initial months of their subsequent uplegs, and are a huge boon to contrarian speculators and investors.
The mission of trading is to buy low and sell high, and the only times prices are low within ongoing bull markets is when they are deeply out of favor following corrections. But it is risky to buy before technicals confirm a correction has almost certainly ended. As the bottom is reached, fear and pessimism peak so no one believes a new upleg is being born. That bearishness persists into the subsequent young upleg.
This fear shadow creates a sweet spot for contrarians. As new uplegs stealthily gather steam with little fanfare, price action eventually confirms these major trend changes. But the great majority of traders still remain bearish, their minds staying clouded by the sentiment paradigm of the preceding correction. This leaves a window where excessively-cheap silver-stock prices don’t yet reflect silver’s bullish technicals.
And silver’s latest young upleg has already been confirmed by a variety of major technicals as this chart reveals. Its price action since its summer low has been very bullish. While it amazes me more silver traders don’t pay attention to longer-term charts, sentiment always remains poor as new uplegs first start advancing. But as silver continues to power higher on balance, residual bearishness fades away.
The seeds for today’s price action were sown in early 2011. As silver rocketed higher in its secular bull’s last massive upleg, greed waxed euphoric. I warned about that coming topping in advance in March 2011 as silver grew overbought, and we realized big silver-stock profits. With the largest upleg by far of silver’s entire bull still screaming higher, the inevitable correction following it promised to be ugly.
And it was, in spades. When prices advance too far too fast, one consequence is they suck in all near-term buying like black holes. Surging prices put tremendous pressure on non-contrarian traders to buy immediately or miss the boat. This pulls forward months’ worth of buying that would have happened in the future into the topping. And once all the buyers are in, only sellers remain so a price starts falling.
Silver’s correction began with a brutal near-crash, killing greed and ramping up fear very rapidly. Many of the new buyers who had foolishly succumbed to the euphoria to buy high as silver was topping started to panic. They wanted out immediately at any price, spawning fear that continued to snowball and trap more traders. The ultimate result was a massive 45.5% silver correction over the subsequent 14 months! Continue reading>
