Is the Party Over for Silver?

Well that was quite a run! Since the end of October 2008 through last week the price of silver rose from $8.40 an ounce to almost $50 an ounce, including almost doubling in price from late January through the end of April. Talk about a blowout. Or should I say “blow off?” For the phrase “blow off” has a special meaning in the financial markets. Once a stock or a commodity completes a blow off top, things can unravel with surprising speed. So given the rapid ascent of silver in the latest fortnight, it is fair to wonder “is the party over for silver?”

Silver from a Seasonal Standpoint

Once thing working against silver from here is that the typical seasonally favorable period has now past and one of the least favorable periods is now approaching. Figure 1 displays my yearly “Seasonal Calendar” for silver.

As always when dealing with seasonal trends it is important to note that nothing works every single time around, so just because a market is entering a “seasonally favorable” period there is no guarantee that it is going to rally. Likewise just because it is entering a “seasonally unfavorable” period, there is no guarantee that it is going to decline. Still, over the long run results can be fairly compelling.

Figure 2 displays the growth achieved by holding a long position in silver futures during:

1. The three seasonally "favorable" periods highlighted in Figure 1
2. The four seasonally “neutral” periods shown in Figure 1
3. The three seasonally “unfavorable” periods highlighted in Figure 1

click to enlarge

Figure 2 – Profit/Loss from long silver futures position during favorable / neutral/ unfavorable seasonal periods (!2/31/81-5/2/11)

As you can see in Figure 2 there were times during “favorable” periods when silver declined. Likewise there were times during “unfavorable” periods when silver advanced. And as one might expect, the action of silver during “neutral” periods has been overall, well, fairly neutral. Nevertheless, the bottom line is that:

1. During “favorable” periods since 12/31/1981 a long position in silver futures gained over $230,000.
2. During “unfavorable” periods since 12/31/1981 a long position in silver futures lost over $100,000.

So where are we now? Well, technically we are in a “neutral” period until the close of trading on the 11th trading day of May (Monday, May 16th). We will then enter a seasonally “unfavorable” period until the close of the 20th trading day of June (June 28).

Summary

So can we be sure that the recent action in silver constitutes a “blow off top” and that “it's all downhill from here” for silver? In a word, no. As always the marketswill do whatever they will do. Nevertheless a simple analysis of the silver market reveals a market that:

1. Soared in parabolic fashion to an extreme price level, and;
2. Presently has no favorable seasonal bias (the seasonal trend is neutral to unfavorable until the close on June 28th).

Given the relentless sell of that has unfolded in the last several trading days, this may not be the time to suddenly jump on the bearish side. A better course of action might be to wait for a short-term overbought situation (for example, a 3-day RSI reading above 70 or 80) sometime after May 16th. At that point an aggressive trader might consider a short position in silver futures while the rest of us mere mortals may be better served by considering bearish option positions using options on ticker SLV – the exchange-traded fund that tracks the price of silver.

As always, time will tell.

Jay Kaeppel