Silver: Is The Bottom In?

The bottom could be in.

Expect silver to outperform gold in this cycle.

Remaining long silver.

It was the 21st of May last when we went long both silver (SLV) and the mining complex (GDX). We have a habit of being early at intermediate bottoms, but this one really takes the biscuit. As we can see from the silver chart below, the rally at the start of June ended up being a false dawn. Price quickly collapsed after a brief rally and broke through both the 50- and 200-day moving averages. SLV is now down from $16.17 on the 14th of June to around $14.91. That's almost an 8% drop, which is a sizable move for investors who bought that false rally.

Many traders and investors would have sold once the white metal pierced through its moving averages, but because our drawdown hasn't been as much, we held strong. The problem with selling into a steep sell-off is that it can be very difficult to pull the trigger on the long side once the trend changes. This is why the vast majority of traders lose money. The masses wait until the trend does a full 180 and then some. Here, though, is the problem with this.

A typical intermediate cycle in the precious metals sector has 2, if not 3, daily cycles. These daily cycles obviously have tops and bottoms. Sometimes these daily cycles also have "half-cycle lows," which are more profit-taking events mid-cycle. Suffice to say, if silver were to print its intermediate cycle this week, we could easily have a half-cycle low a couple of weeks from now. The masses wait for a confirmed trend change, which means waiting too much time. The problem with waiting too long is that one could get caught in a half-cycle low, which causes the trader to sell once more.

In my opinion, one should be buying heavily into this present weakness. Here are some points to back up my argument.

Firstly, traders should look at the weekly charts. The precious metals sector has printed confirmed intermediate cycle lows in mid-year and at year end since 2016, as we can see below. Now bears would say that the long-term silver chart does not look too healthy here, but I would beg to differ. Yes, silver may not have been making higher highs since mid-2016, but remember that gold leads this market, and the yellow metal is still clearly in a bullish uptrend. Silver, due to the gold/silver ratio being abnormally higher and also the range-bound nature of its trading over the past few years, illustrates to us that it has more room to run here once we get our bottom.

Sentiment in silver is now at levels that we usually see at intermediate lows. Silver, being far more volatile than gold for reasons mentioned above, usually outperforms gold in the initial part of an intermediate rally. The problem we have struggled with in the past is taking profits far too early. The right way to play this (whether the pending cycle is a left or right translated cycle) is not to take profits until sentiment returns to optimistic extremes. This would mean 65+ on the long-term sentiment chart for silver. Currently, as we can see below, we are at 35. Over the long term, this strategy has worked far better instead of trying to trade each individual daily cycle. Surprises in bull markets always happen to the upside. There is no point being too cute here.

(Source: sentimenTrader.com)

Once sentiment gets down to these types of readings, it shouldn't be long before we have a bottom. The bottom may have been printed on Monday. Either way, we are remaining long.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.