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QuantZ: Silver Bottom Update - mixed signals

April 20, 2016

Silver seems to be in a technical bottom. Lots of traders coming out the wood work say they have been long silver.

Media going crazy saying that hedge-funds have bought in.

We try to add clarity to this noise.

 

Our absolute signal (Chart 2 has not been hit), but our tier 2 signal (chart 5) has been hit. Not to confuse you, we hide chart 3 and 4 for another day.

 

We measure market behavior in terms of relative valuation (Chart 5) and it's major cycle time-based form of 1st derivative (Chart 2).

 

How to interpret this?

 

1) Bottom is possible

In terms of multi-year bottom, we cannot say for certain. A hit on Chart 5 implies a bottom if the smart money on silver has not changed their behavioral patterns from the last 15 years.

 

But, the odds increase to 3 sigma if Chart 2 is hit, which implies a behavioral pattern consistent historically since the gold standard. But this has not.

 

2) Short term sentiment is too bullish - short pullback possible

Sentiment by fundamental silver companies are very bearish based on historical patterns. We are at levels which usually imply a shorter term pullback. However, it is encouraging that recently the fundamental behavior has an upside bias within the gyrations as silver went up. That's could be a Sherlock Holmes moment.

 

In this chart below, the blue line is the spot silver prices, and the brown is the sentiment by the fundamentals. Note the recent surge in silver is accompanied by a positive bias in the fundamentals, it is not common and has positive tones.

 

 Here is the same chart, but we detrended the COT values.

 

 

 

 

Conclusion: The Silver trade is worth a shot, because of a partial signal. Relative valuations do imply a longer-term upside, especially  if gold holds it's value.

 

Target: A good % target would be when the relative valuation of chart 5 goes to mean. That's roughly about 15% away.

 

Coincidentally, around $18 is the short term technical target.

 

However, you have to make a decision if you want to wait for a sentiment pullback. If you wait, and you are right, you'll get a cheaper entry point. If you wait and you are wrong, you miss the trade and a potential15%+ upside.

 

It is good to add a technical stop-loss.

 

Risks: If gold and oil collapses, I would reconsider the trade.

 

 

 

 

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