After a very turbulent year, silver now looks set to take off again. The best entry point of the last 5 years was in 2008… and currently we are in a similar situation, which means that silver…is ready for take-off. In this article I will tell you why I think [that is the case illustrating my views with the use of 7 charts. Words: 1200
So says Willem Weytjens (www.profitimes.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Weytjens goes on to say, in part:
Chart #1: Commitment Of Traders Report and the Price Movement of Silver
Commercials have yet again reduced their net short position in silver, which is now close to the low of 2003 at the beginning of the bull market. Commercials are generally seen as the “smart money”, so if they reduce their net short position, they expect price to rise (or at least not drop substantially).
The reason why Commercials are the “smart money” is that – unlike the millions of small investors who burn their hands by buying high and selling low – they tend to “buy” low (reduce short positions as price declines) and “sell” high (increase short positions as price rises).
Charts #2/3: Commercial Net Shorts vs. Sentiment and the Price Movement of Silver
There seems to be a very high correlation between sentiment…and the net short positions of commercials [as seen in the chart below]:
The best way to invest is to “buy low” and “sell high”.
- As sentiment and/or commercial net short positions climb into the orange area [of the chart above], it is time to become cautious…
- The standard deviation bands [in the chart above] show how extreme the current reading is compared to its recent history so if sentiment rises above the red standard deviation band it is an unsustainable situation, and that sentiment has to reverse (decline) over time.
- Conversely, when sentiment drops below the green standard deviation band…[that too is] an unsustainable situation, and sentiment has to reverse (rise) over time.
- The red circles on the chart below show that good exit points occured when sentiment was above the red standard deviation bands.
- The green circles on the chart below shows that good entry points occured when sentiment was below the green standard deviation bands.
The best entry point of the last 5 years was in 2008. This was a time when both Sentiment and Commercials Net Short positions reached extreme lows. Currently, we are in a similar situation, which could mean that silver is at or at least very close to a bottom, and that it could take off pretty soon…
Chart #4: The Situation in 2008
Looking back at 2008, as long as the price was below the 50EMA, [as seen in the chart below] you should not have bought. The best time to [have bought] in my opinion was early December 2008, when the price broke above this 50EMA and both the RSI and MACD broke out above the red resistance lines. At that point you had a BUY point. You would not have bought at the extreme lows, but taking this 50EMA as a stop-loss it would have minimized your losses…[and] you could have let your profits run. In fact, this 50EMA was at that point at the same level as the horizontal resistance line underneath the lows of 2006 and September 2008. A breakout above that level was extremely important going forward.
As price declined in 2008, the Accumulation/Distribution index declined as well [see above, but here in 2011] the Accumulation/Distribution index has made brand new highs despite the fact that silver is off about 35% from its all-time high…Another bullish factor now is that, as price declined, volume declined as well, which was not the case in 2008.
Chart #5: The Situation in December, 2011
It looks like the massive drop a couple of weeks ago – which took silver down to $26 – was the “perfect” entry point, price wise. However, in my opinion, there are “better” entry points at levels slightly higher than today. Let me explain why. If you would have bought when silver hit $26, you would have done an amazing job, however, if you did, you were catching a falling knife. There was a huge risk that silver would drop even lower, maybe as low as $20, which is about the breakout point of the autumn of 2010…Looking at risk to potential reward, at $26, the risk of silver dropping another $6.50 was too high for the potential $6.50 [ profit to be realized. The risk-reward ratio would have been] 1-1 since you could have lost just as much [if you were] wrong as [if you were] right. I [prefer] those kind of situations where you get a risk-reward ratio of 2 -3 (i.e. where you can gain 2 or 3 times as much as you can loose), [or, better yet, where] I don’t have to think twice when…[I get] a risk-reward ratio of 5.[As can be seen in the chart below] we are currently in a similar position [as we were in 2008], as there is resistance at $34 which acted as support in the first half of 2011. The 50EMA is now at the same level as this red resistance line, and both the MACD and RSI look set to brake out above their red resistance lines…Combine that with the severely depressed sentiment in silver and the low net short positions of commercials, and we have the ideal cocktail for a nice rally in silver prices…
Chart #6: Sentiment in Gold
Silver tends to follow gold [and a] look at the sentiment in gold [in the chart below shows]… that the standard deviation bands provide good entry and exit points. Sentiment in gold is now pretty bearish, and is close to the green standard deviation band.
Chart #7: Gold:Silver Ratio
When we look at the Gold:Silver ratio, we can see that the ratio is now facing strong resistance at the 38.20% Fibonacci Level. IF the ratio takes out this resistance, it looks headed towards 60, which is the 50% Fibonacci Retracement level. However, IF that were to happen, both the RSI and MACD would most likely make a lower high, causing negative divergence, meaning this “rally” should be “sold” (which means one should BUY silver in favor of Gold in my opinion). The MACD looks set to roll over, which means the ratio looks ready to drop.
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