SILVER: Buckle Up For A Big Move

There are several extremes in the silver market based on the data that we monitor. It is clear that a big move is underway.

Seasonal data shows that July and August are the strongest months of the year after January and February. We expect a rally during the summer months.

The daily chart indicates that silver is breaking out through a declining trend line that started last summer. That trendline, however, is being tested currently. So we really are at a pivotal point.

Source: Finviz

The weekly chart shows that silver is sitting exactly at the declining trend line that extends back to the peak in April 2011.

Source: Finviz

These trend lines are quite important. The key questions are whether the breakout will be confirmed on the weekly chart, and whether it will hold.

Last summer the strong U.S. dollar capped a rally in precious metals. Because the dollar is consolidating its recent gains, we do not believe that precious metals prices will be suppressed this summer.

Silver has declined 67% from its multi-decade top, which occurred in 2011. Since then the grey metal has been consolidating for 2 years. Market sentiment vis-à-vis silver is neutral to bearish. These conditions strongly suggest a rally and perhaps a new bull market.

Technically, silver started a secular rally in 2004 at $6 and peaked in April 2011 at $49.50. The 23.6% Fibonacci retracement level comes in at $15.18, the multi year lows which was tested in October and November 2014.

Source: Stockcharts

Last month the short positions in SLV, the largest silver ETF, decreased by a huge -38%. Currently there are 12.8 million shares of SLV short out of 332.9 million shares, one of the lowest in many years.

Interestingly, the SLV ETF holds 856 million ounces of physical silver, which is almost identical to the February 2013 amount before the silver price collapsed. That is significant because GLD, the largest gold ETF, showed that its physical gold holdings decreased 34% in the same period of time. This contrast shows a healthy interest in silver.

The COMEX Commitment of Traders report for positions at the close of trading on Tuesday June 9th showed that 18,028 short contracts were covered by commercial traders. That is one of the largest changes in the history of COMEX silver. It comes 3 weeks after 19,706 short contracts were added by commercial traders (at the close of trading on Tuesday May 19th), also one of the largest changes ever. According to the latest data, open interest stands at 189,524 contracts, the highest in history, and equal to the previous top set in Q1 of 2008.

The rate of change in short positions by commercial traders, one of the key indicators we are monitoring, has moved aggressively from bearish to bullish in a matter of 3 weeks. There clearly is a lot of tension in the silver market, and the breakout or breakdown is going to be explosive.

Source: GoldchartsRus

If it would be some “good” news, the commercial short positions in COMEX gold are neutral.

So the key question really is whether silver is leading the precious metals complex lower.

Conclusion:

Silver is testing a critical trendline of both the daily and weekly chart. Given the seasonally strong months of July and August, we expect a rally in silver. However, given the large open interest in COMEX silver, a "false breakout" would invalidate that view. The pivot price is $16.50. Any sustained move above or below that price will determine the next short to intermediate cycle. Keep your eyes in silver now!