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Article / 18 November 2015 at 15:00 GMT

Why it's not the time to be shorting silver

Technical Analyst / FuturesTechs
United Kingdom
  • Short sellers of silver have made good returns in recent weeks
  • But going short at current levels would be hazardous
  • Silver prices have fallen for 14 days in a row, today is shaping up to be No. 15
  • "Rule of Nine" says never more than nine consecutive candles of the same colour
  • Not ready to go long in silver yet at this stage
  • One idea would be to sell silver and buy gold

Silver bullion
 Silver has been hammered in the commodities selloff. Photo: iStock


By Clive Lambert

If you’ve been on the short side in silver in recent weeks, well done, as you should have made solid returns with little drawdown. But if you’re looking at silver now and thinking of going short at current levels, I would say “leave it”. Why?

Silver has now posted 14 down days in a row, and all of them have been red candles as well (sometimes the two don’t necessarily coincide, but in this case they do). Today is shaping up (so far) as being number 15 in a row. 

From candlestick analysis I generally rely on (because it’s generally reliable!) something called the “Rule of Nine”, which says you never see more than nine consecutive candles of the same colour. So if we get to day 7, 8 or 9, I am screaming for a bit of green, and it usually comes along. But not this time. Silver is really breaking the rules with this selloff.

Silver daily chart shows 14-day losing streak
Silver Daily
Source: CQG


The relative strength index is oversold on the daily chart as well, although this is NOT a buy signal, as the “classic” RSI buy signal occurs when the reading comes out of oversold or, in other words, when gets back above 25.

Another thing that suggests this cannot keep going is the candles. Between October 29 and November 10 silver posted some pretty large red candles. Since then, the real bodies have been getting smaller, indicating that the market is starting to find some balance or, at the very least, the selling is relenting. But silver is still dropping. And I’m not sure I can remember a run like this in my entire career.

Yet another thing that tells me not to go short at current levels is the monthly chart (below). As you can see, the silver price is reaching the support area. Not only has it bounced from these levels previously (in December 2014 and again this August), but it is also close to a 78.6% Fibonacci level (a favourite of the Elliott Wave heads) and an uptrend line (at $13.61/oz all month!). 

My only problem with this uptrend line is that it’s on a “linear” scale chart, and I tend to prefer log scale charts on longer-term timeframes.

Silver reaching support on the monthly chart 
Silver Monthly
Source: CQG


So there is plenty of evidence to suggest that silver might find support soon, and we know that selling INTO support is never a good idea. If the price did break this key area of support between $13.60 and $13.90/oz, the bears would likely be reinvigorated, and then we could look for $13.07 and $12.43/oz very quickly.

That’s not to say I would buy/get long at current levels, as I’ve always been advised (I’ve never tried it!) that catching falling knives is a hazardous pursuit.  

One more variable is that this is priced in US dollars. And we’ve got the Fed minutes tonight to think about.

A trade that could take advantage of all of the above is to buy silver and sell gold. I’ll let Saxo Bank's head of commodities strategy Ole Hansen add some colour to that idea if he wishes.


Potosi, Bolivia
Historic silver mining town Potosí, Bolivia, one of the richest hills on earth. Photo: iStock



— Edited by John Acher


Clive Lambert is chief technical analyst at FuturesTechs
1y
Ole Hansen Ole Hansen
Hi Clive, Thank you for your observation and i agree 15 down days in a row combined with RSI into oversold territory is not the best starting point for a short. I will ask my quant guys to run an analysis on the frequency of such an occurrence
1y
Ole Hansen Ole Hansen
This according to my colleague is the first time going back to 1991 that silver has closed down 15 days in a row. The previous record was 10 days during September 2008. (Source: BBG daily data)
1y
Magpies Magpies
Great additional commentary, the only thing i wil add is that we are in uncharted waters(pun intended) as the Fed has been on hold for an unprecedented period and if the minutes suggest we get a rate increase before Christmas then you can see the gold bugs losing their rag and we could see the 850 level tested around Santas chimney antics.
1y
fxtime fxtime
Silver and gold give all the usual signals for bullish/bearish moves and indeed we have seen the bearish move predominate over the last 14days on silver....however premium price between near dated contracts Dec and ofcourse March are nigh on par. Potentially a CIT is building...when contracts rollover watch the subsequent far dated contract and if it is below the rollover contract price we have a signal to enter a long. Probability and distributive data state silver is beyiond two std deviations of displacement and is currently an outlier....so a tentative CALL option for one week may be worthwhile fwiw unless you think we have a further 5 consecutive daily falls. A high risk trade but the rewards could be worthwhile. Risk is your outlay obviously.
1y
fxtime fxtime
SIH6 at 14.10 fwiw :-)
1y
Magpies Magpies
THANKS
1y
Clive Lambert - FuturesTechs Clive Lambert - FuturesTechs
Thanks fxtime. good stuff.

Magpies, I have long had a target of 890 for Gold... I think I spoke about this in a Video on here at the tail end of last year!
1y
fxtime fxtime
LOL...the silver punt long is proving worthwhile afterall :-)
I doubt it will last like this for long so suggest halving the trade and banking some immediate profits if scalping and position stop at b/e otherwise rely on your options rapidly enhancing returns :-)
1y
Clive Lambert - FuturesTechs Clive Lambert - FuturesTechs
About time we saw some green!!!
1y
Q Q
Thanks chaps, glad I read this and went long this morning.
1y
Travis Travis
Great silver call! You think we hit that 890 gold number this year? I am hoping for a nice dump in gold from here before Thanksgiving, and continue till the first or second week of Dec...followed by the Seasonal Rally ignited by the Fed hike. ....not sure how much of a gold drop should be expected over the next week. I always look for your updates Mr Lambert
1y
fxtime fxtime
Agree with the 890 XAUUSD target level...fwiw I have a band of 750>900 XAUUSD for the lows and to start scaling a medium term long in that region for a mean reversion of the total drop !!
1y
fxtime fxtime
My silver near dated options are being covered now to secure the profits and gainsay some time premium too which would have been lost due to the weekend and the joys of Theta.
The direct silver long is also being covered today (n0w) again banking profits as this was always a scalp. I reckon Silver and gold will bounce further fwiw but my mainstay market for trading purposes isn't these markets for ROCE purposes.
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