Taking a Look at Silver

By Tim Taschler, CMT, Sprott Global Resource Investments

There was a nice trade in silver off the December lows into the end-of-February peak. Even if longs held through the correction in early March, the rebound move back to the February high took only two weeks. As of close on Friday, April 7, 2017, the picture changed, and it might be worth taking a close look at what some of the potential implications are for silver.
As the chart below shows, courtesy of Stockcharts.com, SLV, the silver ETF, put in a large, bearish reversal candle Friday. After attempting to break out on the Syrian bombing and the less-than-expected NFP data[1], SLV reversed lower and closed below its 200 day simple moving average:

Source: StockCharts.com as of April 7, 2017

Zooming in on the daily SLV chart to look at the past 30 days exposes the outsized reversal day on Friday, April 7, 2017, that encapsulated the prior 9 trading days. A failed bullish upside breakout, only to reverse and close lower, sends signals I can’t ignore.

Source: StockCharts.com as of April 7, 2017

The chart below shows that SLV sentiment is hitting “Excessive Optimism” levels. Optix is a proprietary measure of investor sentiment and is usually a contrary indicator. When investors, as a group, are leaning too far in one direction, either bullish or bearish, one must take care of not getting caught by a counter move in the opposite direction:

Source: SentimenTrader at April 7, 2017

Looking at things from another angle, a report I follow closely having been a futures trader on the floor of the CBOT, is the Commitment of Traders report. The chart below shows that Commercials are at a new 52-week-high in the number of net short futures contracts they hold, while Large Speculators (aka managed money and hedge funds) are at an 52-week-high in the number of long contracts they hold:

Source: cotpricecharts.com as of April 4, 2017

Commercials, often referred to as the ‘smart money,’ are hedgers that deal with the underlying commodity as part of doing business. Commercials are large operators with very deep pockets, and they are exempt from position limits and are allowed to post smaller margins (i.e. they are able to use more leverage). It’s important to note that this snapshot of commercial positions is as of the close last Tuesday, April 4, 2017, and are reported by the CFTC on Friday afternoon of the same week.
When watching COT levels each week, what is important to me is the trend in the positions that Commercials and Large Specs hold. But what is also important to me is when extreme positions occur. Looking at the chart below we see commercial positions back to 1993, and what jumps out at me is the fact that the current commercial short position of 112,346 short contracts is a record short position.

Source: SentimenTrader as of April 4, 2017

The bottom line is that investors are excessively optimistic while Commercials are at a record level of bearishness. The price chart is suspect and looks to me like it is set up for a decline, or correction at a minimum. What is unknowable is whether a pullback will be short and shallow or something long and deep. I plan to watch from the sidelines and will wait to see some change in the COT posture, or a signal off the price chart, before looking to make a trade in either direction.

[1] Nonfarm payroll (NFP) is an employment report released monthly by the U.S. Department of Labor Bureau of Labor Statistics. The April 7, 2017 report states that total NFP employment grew by 98,000 with notable growth in both mining and professional & business services.