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No Significant Breakaway to the Downside Expected in Silver

For example, the July Silver options expire on June 25th. If we’re at kind of the midpoint, then we could be down at 1050 by that point in time. Percentage-wise, that’s a significant move from 1384, let’s say down to 1050. However, the options are so pricey and so expensive that you just don’t have the multiples as far as risk-reward. It’s not that exciting.

In the meanwhile, our better tact is to look to inner short positions in the futures where perhaps the market pattern or price formation will shape up, which will allow us to take a very modest risk with the possibility of a nice reward.

It’s kind of the same situation with the S&P 500 as in the silver because the historic volatility in these options is so high. Even if you’re right in the direction – whether to the upside or the downside – you’re paying through the nose for these options and there just aren’t great multiples available. You might make one-and-a-half times your money. It’s just not exciting.

The ideal is something like the soybean oil where you have the prospect for a 10:1 to 12:1 risk-reward opportunity; being no more right in the bean oil than you would be, say, in the silver market, necessarily. This comes into play, obviously, with regard to looking at the risk-rewards moving into a trade, and those dictating the value of that particular trade action.

So, I’m watching the silver. I like what has taken place. We’ve been sitting on the sidelines, anticipating that if the market did move into these fan lines (see video/chart), then maybe we could do something. Well, that happened. So, the first order of business was moving into the fan lines, and that’s happened.

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The overall decline, anticipated decline, that was very modest, as you can see. We established our top on February 23rd which came in very close to replicating what occurred in 1980 during that bear market rally.

The market has sold off sharply within two days. It has seen significant retracement to the upside so I do expect to see the silver market decline. The probabilities favor that; however, the options are extremely expensive and the level of ascent to decline that we would expect, I should say the decline, the velocity of the decline should be very modest.

It’s a situation where we may have an accurate forecast but there really isn’t the opportunity to make serious money on it.

I am going to be updating you with regard to this market. Probably the most prudent approach is to actually sell options. Sell call options for example, now that we are into this fan line. That is probably the most prudent thing to do since the options are very expensive, very pricey. That may be the most prudent way to play this market.

Then we looked at the soybeans, very representative of the agricultural sector since basically all the agricultural markets are playing to the same beat, whether the cotton market, the corn market, wheat market, soybean market, or bean oil. They’re moving, in a sense, as a group because basically what’s happened is that this economic dislocation is having the same impact on commodities as a group.

It’s very unusual that commodities are not trading within their own cycles and have some independence, but right now the commodities are really joined at the hip due to the magnitude of what’s taking place.

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But silver and gold are interesting. As you’re probably aware, gold has been amazingly resilient in the face of the deflation which is taking place across the financial landscape whether it’s in real estate, whether it’s in commodity prices and tangible commodities, natural resource stocks, or in the stock market. There’s just a huge amount of wealth that’s been lost, and yet gold has been holding its own.

It is acting as it has historically, somewhat like a crisis hedge. Silver, I’ve said, typically acts like an industrial metal. It does have a crisis component to it, there’s no doubt, certainly in the psychology of people. But we have felt that this rally in the silver, which started off the October 28th low, would be a bear market rally that would then give way to another leg to the downside in the silver market.

We have been looking at this market to see if it would conform to historic norms as far as bear market rallies are concerned. We have to have probabilities in our favor and not guesswork. What we have in this bar (maroon colored) here, we expected if silver was to hit a bear market rally high, it would do so in this maroon area as of January 26th. Well, our high is January 26th, so we’ve pushed it right to the limit with regard to what would be a normal bear market rally.

I say normal because 71% of the time bear market rallies in the silver are less than 2 months, 28 days, which would put us right at this January 26 ending point. That’s not to say that silver can’t continue higher and put in the bear market rally high and then go down. It can do that, but that would be an aberration. It wouldn’t be hitting the averages. I hope you get this, because we’re looking at the market hitting into probabilities most of the time when doing something. We’re moving beyond where we have a target zone and probabilities being in favor of the silver. Once the probabilities start declining, which is what’s happening in the silver market, we don’t want to put our hard-earned money at risk in something unless we really have the probabilities playing in our favor. We don’t have that, and we’re pushing beyond that time window in the silver, so I want to make you aware of that.

Also, by virtue of that, could there be something happening in silver in our overall bearish forecast? Could that be incorrect? I don’t believe that’s the case, but when we start seeing a market not conforming to historic norms, and as it continues to unfold and move counter to what the ideal would be, and then we start to say, “Okay, we can’t do anything with this market. Maybe we’re wrong in our forecast. Maybe we do have a final low.” I say this because we are often in a place where the market doesn’t conform to what we want. We never do anything as far as a trade action, so there’s nothing wrong with being “wrong” in the market. That’s especially true if you don’t lose any money.

We’ve not had a sell pattern shape up in the silver market for getting short. We’re moving beyond our target zone as far as forecasting is concerned. It has to be a marriage of those two. A trading pattern for going short, we have six trade signals that allow us to either enter longs or enter shorts and exit.

So silver is very interesting for us. This is to say that we were looking for an opportunity to go short, we were looking for the probabilities to work in our favor, and as of today the silver market is a neutral-type situation for us, pending additional trade.

Hopefully that gives you some insight that we are not looking to make a rate of return on a market and always be trading in a market. We are very much what we call “guerilla fighters.” We’re looking for our opportunities to move into a market when the probabilities are right, and we have our own advantage for that based upon history and history being our guide.

The four comparable markets, and we’ve shown this before, were the sugar in 1974, silver in 1980, cotton in 1864, and corn in 1864. Those four markets declined in excess of 71% in price. We are looking at what occurred after those lows were in place during those four markets to look at what potentially could be the DNA in our market and how our market could play out.

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You can see that the silver, cotton, and corn all experienced very comparable rallies (the orange lines) from the standpoint of length of time from their lows to what were bear market rally highs. The red points mean a red light. That means they started the next leg down in an overall bear market. The declines which occurred after these target points all resulted in declines to new bear market lows beneath what would be the December 19th low at 32.40 basis the nearest futures.

We are in a bear market. This is a first leg down. These target points are the first bear market rallies after the first leg down, and all of these were followed by legs down in a continued bear market. We’ve never had a bull market on the order of crude oil in any commodity that’s been completed after a single leg to the downside. I cannot emphasize this enough. When you see this kind of velocity of deflation like in the crude oil, you don’t turn around on a dime. We had a seven-year bull market in the crude oil. Here we’ve had a five-month bear market leg down, and we’re not just going to finish the bear market in five months, and then off we go on another bull market that previously was seven years in the making.

It just has never happened historically, so we would have to literally rewrite 220 years of U.S. financial history. The probabilities are just that that’s highly unlikely. We are statisticians and look at history because that represents human nature and human nature in action. Yes, we’re going through some very difficult times financially, but believe me, the United States has been through some very critical things. We’ve been through the Civil War, we’ve been through World War I, we’ve been through the Great Depression, and we’ve been through World War II, so these are huge economic dislocations which have occurred and do occur throughout world history. We’re in the middle of one of those things right now.

All that to say that our markets are not confounding us, and they’re not a mystery as to what’s taking place because we have a great deal of history in what’s taken place. This is one of those things that we’re saying, “This is what’s happened after commodities declined on the order of what we’ve seen.”