I wrote a post focusing on Silver’s technical price action and sentiment almost a month ago, Decision Time For Silver. Interestingly enough, there has been no decision yet. Markets are quite ironic at times, but the pressure continues to build. Therefore, I thought it was prudent to update traders on recent developments as I have a feeling the action is about to start.
Here is an interesting fact. When it comes to the price itself, there has been no change over the 12 month and 6 month time frames. Consider the fact that Silver traded at around $19 in June 2013 and it also traded around $19 in December 2013. As I write this, Silver is trading at—yep you guessed it—$19 per ounce.
Chart 1: Silver is still at a decision point between support and downtrend
Source: Short Side of Long
However, despite no change in price, Silver’s sentiment readings have either remained extremely negative, according to certain indicators, or actually deteriorated even further according to others. If we observe Chart 1, we can see that hedge funds and other speculators currently hold only 766 net long contracts, a far cry from 40,000 plus seen in September 2012, as Gold began its crash.
If speculators continue to cut positions for another week or so, we will be officially net short for the first time in a decade. Obviously this data is focused on futures only, however if we group together futures and options positioning as CTFC does, we can see that bulls have completely disappeared as net longs have actually turned net short for the first time in 11 years.
Chart 2: Disaggregated COT data shows hedge funds net short Silver
Source: Short Side of Long
CFTC also gives us the option to view disaggregated data, by breaking the total futures on the long and the short side into various categories. For contrarian investors, the best indicator is tracking hedge funds, also known as managed money. To be quite honest, I think a better name would be “dumb money”.
If we refer to Chart 2, we can see the managed money is now net short Silver by the largest amount since at least 2006. This itself is a rare occurrence and usually considered a major buy signal. But it gets even better.
If we continue playing around with the data, we also come to the conclusion that total short selling on Silver is at an all time record high (refer to Chart 3 below). Gross short positions are now about 33% higher than at any other major bottoms in Silver including 1997, 2001 and 2005.
Chart 3: Silver short selling by speculators is at an all time record high
Source: Short Side of Long
So what can we expect?
I wish I had a crystal ball to let you know how the future plays out.
However, I can tell you what I will be doing with my money. Personally, I continue to hold previous long positions in Silver and will be buying more on any major weakness. I’m actually considering buying right now, but before I buy more, I am waiting for a resolution of the technical triangle seen in Chart 1.
The way I see it, just because every man and his dog is bearish on Silver does not mean we cannot fall further from the current levels. However, if we do fall further, I think that the selling pressure and bearish energy is all but exhausted.
Therefore, any further downside should be limited. Also, I honestly feel that this level of bearishness (gross short bets) isn’t going to be sustainable for a long time, so eventually one should expect a major short squeeze coming.
In summary, I've got my finger on the buy trigger…but I haven’t pressed the button yet.