Silver Break Improves Technical And Investment Clarity
Sid Klein | Sep 29, 2014 03:04AM ET
The break in silver has improved clarity with respect to statistically strategic, high reward/risk investment probabilities and opportunities, in the context of yield, risk/reward, leverageand risk/tolerance.
Along with the twin article concerning corresponding fundamentals, this technical study concludes with the resultant strategy.
TECHNICAL
Sentiment indicators calling for a historic low even before the recent break, support the multiple charts below in forming a major pre-New Year 4th-quarter low (as in 2008), and, necessarily, a violent 2015 reversal.
Regarding the monthly 46-year silver chart below, a few crucial observations may be made.
(1) - The 2011 and 1980 highs do not parallel at $50, because it is a monthly chart (at month-end in 1980, silver had closed about $15 off of its high).
Everyone's favourite all-time-high price measurement adjusts the 1980 peak price to account for inflation. The latter neither contemplates today's true inflation rate, nor the very possible hyperinflation of tomorrow. Still, today's false inflation figure allows for a price ~$150/ounce.
(2) - The next chart "explains" how $150 is likely, according to technical analysis and the rules of Elliott, ironically all such analysis having been made possible by this breakdown.
IN BREAKING BELOW 2008'S HIGH, BY RULE, THE 2011 PEAK WAS NECESSARILY A WAVE-1, SINCE A THIRD WAVE MAY NOT EVER CROSS A WAVE-1. {Ergo, the next important advance begins a major move, rather than ending one (wave-5 around $60-$75), a doubt that existed due to the chart's form.}
The implication is that Wave-1 of a major 3 has yet to even begin. Mathematically, huge space between price points suggests huge waves (price moves), once they start.
Without showing computations, the numbers illustrate that $150/ounce is a VERY REASONABLE target for Wave-3 by the time it's over, remembering too that that level will only mark a still bigger Wave-1, before an even larger Wave-3 takes silver to $500 by 2025. (Today's Wave-1 is concluding after 13 years.)
(3) - The chart plainly shows a more bearish A-B-C correction than that of gold, which so far has suffered a common zig-zag,though gold may yet make a new 4th-quarter low; silver has formed a triple-zig-zag.
According to the rules of Elliott, for silver (triple a-b-c)there won't be another wave after this 4th-quarter low; the 46-year chart also allows this down-wave to decline to the popularized $15 area before yearend.
(4) - By connecting the lows of 2004 and 2008, we are approaching that uptrend line as well.
(5) - This monthly stochastic is oversold and diverging bullishly, which suggests a 4th-quarter low too.
46-Year silver chart
Get The News You Want
The 46-year chart is included to provide the major Wave context for the size of coming moves, while the 15-year silver chart more clearly shows the recent break of the 1980 high.
Monthlies, weeklies and daily (not shown) stochastic are also lining up for a 4th-quarter low. Bottoms followed by divergences precede very bullish moves.
We see the longest term stochastic of the three bottoming. This supports a MAJOR move in 2015, while the 15-year chart helps to more clearly visualize the effect of time on pattern; the technical conclusion again supports a 4th-quarter low ~15, which price is the consensus.
15-Year silver chart
PRICE/VOLATILITY/TIME PROBABILITIES
PRICE: The SLV's 3-year weekly chart reflects oversold readings which should improve, even if silver makes a final low in the 4th-quarter. Weekly stochastic support a multi-week rally once the turn begins.
Importantly, there exists a bullish divergence. (Dailies are obviously oversold, so we just focus here on the more meaningful weekly and monthly indicators.)
The 3-year weekly GLD chart (follows SLV chart) illustrates a price chart that presently reflects a triple bottom and reverse shoulder-head-shoulder low. As in 2008, gold may (have) bottom(ed) months ahead of silver's low.
As well, unlike silver, gold still reflects a 5-wave advance in 2014, followed by a 3-legged decline. This wouldimply that gold did indeed bottom. The upshot for silver is that, in this scenario,$16 would hold and trade between $16 - $18.50 through yearend, while the GLD would range between $115 - $127.
3-Year weekly SLV chart
3-Year weekly GLD chart
On the break below $18, put premiums (see VXSLV) skyrocketed to discount price targets that had become traders' fears ($14 - $15 range). Such fears are logically reflected in premiums, since sellers front-run their own (or client) sales.
This also explains why the ultimate buy point will be a minor new low that is un-confirmed by the VXSLV, perhaps in October.
Premiums bottoming before price means that the worst selling pressure preceded the low, leaving nothing to push the underlying security lower. THIS IS LIKELY IN SILVER THIS QUARTER.
SILVER VOLATILITY: The INTRA-MONTH explosion in the VXSLV from under 20 to just below 35 is, I suspect, a sign of things to come for the SLV itself (see 1-year VXSLV chart below).
Whatever the case, it certainly suggests that one ought not wait for a low in prices or volatility separately, to determine the best time for going long, particularly if employing the strategies below.
From here on out, this correction in silver will have occurred largely in terms of time, as opposed to price. A drop to ~24 at the above-forecasted higher low, in conjunctionwith a price low that, in my opinion, holds $16, will mark the ideal time to trigger investment.
Please note the shocking 1 and 4-year charts of the VXSLV which follow here.
The STUNNING speed with which silver's numbers can change is evidenced here. However, few are familiar with the VXSLV's significance or its cyclical relationships to price.
Briefly, through the bear market, premiums trended asymmetrically to silver's price. This changed after this summer low, due to the laws of diminishing return and unbound upside. This new cycle's relationship has merely manifested a September aberration.
A new cycle for the VXSLV in itself implies a major new trend ahead.
As indicators and pictures of change, these charts illustrate how fast prices will move. Also, they clearly show how stunning will be the effect on option premiums which, as the 4-year chart above illustrates, is still very far away from meaningful resistance.
TIME: When premiums explode during a hit suffered by prices, the "orthodox" low in prices is when the correction ends in terms of time.
Sure enough, generally sideways action over the coming weeks will take down the VXSLV a bit and, so, with a net-negative change in the price of silver that is accompanied by a HIGHER low in the VXSLV over the same time period, the ideal timing for options and warrants will have presented itself this quarter.
In this scenario, the SLV will not break $16, even if it makes a new low later this quarter, which is unconfirmed by a new VXSLV high.
Finally, as previously reported, the 6-month time cycle became over-popularized and, so, the PMs bottomed a month early this summer.
Consistent with that, I see prices' worst action as soon behind us, discountinga higher yearend low, which, again, will have brought the combination of time and price into perfect line with what the purchaser of bullish strategies would like to see.
TECHNICAL PROS: Ordinarily, sentiment and accumulation/distribution go hand-in-hand, but not in silver.
Thanks to Asia, the Middle East and the Russians (etc.), PM accumulation has even accelerated with declining prices, while sentiment among the paper-price-influencing hedge funds has imploded.
So, when the trend-following hedge funds reverse course, it could violently catalyze and compound returns (driven by foreigners). It is but a question of time before multi-dollar price moves occur in silver.
TECHNICAL CONS: The trend has not reversed
STRATEGY, TIMING
A major factor in investing in long term options or warrants is the deep concern regarding the very existence of the underlying metal at the custodian. It could be financially disastrous in comparative terms, if settlements became cash-based.
Therefore, warrants that are exercisable into vaulted gold are the only form of acceptable long term leverage. The very long term is stressed for 2 reasons:
Firstly, one may wish to own a strike date that captures the more advanced stages of ascent, when the more pronounced movements historically occur in silver.
Secondly, with premiums at historic lows (though that violently shifted this month to a historically-still-low range), one may seek a long-dated situation that would also enjoy multiple yield-enhancing call writing opportunities.
Simultaneously, one ought contemplate yield-enhancing strategies that do not involve buying stocks at nosebleed levels!
Notes including a capped yield tied to the price of silver is a way of intelligently pursuing returns, while doing so as an opportunist with historical perspective.
The appropriate combination of these strategies depends upon the investor's risk tolerance, as well as the present holdings in his/her portfolio. The more stocks and bonds that one owns, the more such strategies as what are advised here become increasingly appropriate.
Regarding a strategic interpretation of the technical and fundamental analyses taken together, the preferred ratio of capped note to warrant is 3:1. Purchases are advised at new price lows unconfirmed by the VXSLV, ~24. Whether the note or warrant is bought first is unimportant.
NB: Please view with twin analysis of fundamentals.
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