This article was first written for members on Tuesday July 16: The talk of the metals market on Tuesday was silver. It seems many were shocked and surprised by this rally in silver on Tuesday. And, I am sitting here scratching my head as to why all the shock.
Well, as I think about it, I am starting to understand the shock if you had been reading what everyone has been writing about silver. Whereas the rest of the complex has already moved strongly higher, silver has been significantly lagging. And, I have been hearing one excuse after another as to why it is lagging, such as silver “has been acting as an industrial metal.”.
But, last I looked, the economy was humming along. So, why would an industrial metal be lagging? Moreover, it certainly did not act like an industrial metal on Tuesday.
Well, now I have to ask you if anything happened on Tuesday which supports the strong move in silver? I cannot find anything that can explain silver’s run up on Tuesday – well, at least not anything in the common sense of why people believe markets move.
In fact, silver even rallied alongside a rally of the US dollar. That is not supposed to happen, right? Also, consider that while silver rallied strongly on Tuesday, gold and many mining stocks were down on the day.
But, here is the cherry on top: I thought the metals were not supposed to rally based upon the latest "bearish" COT reports? Yet another metals conundrum.
In fact, much of this current rally in the entire complex has been a true head-scratcher for most traders and investors.
Well, this was not a head-scratcher for any of our subscribers. You see, we outlined a strong upside set up in silver in the last weekend analysis I provided to the members of ElliottWaveTrader.net.
The main problem with most investors and traders is that they rely upon correlations to set their market expectations. But, for anyone who has any real experience or understanding of metals, you would know that you must analyze each chart on their own. And, in so doing, you would understand that not all metals charts run together. Moreover, you would even understand that the metals can and do run strongly alongside the dollar, as well as fall strongly alongside the dollar.
And, for those of you that thought there was something wrong with gold rallying while silver was lagging, do you not remember the year 2011? That was when silver topped in April of 2011, whereas it took gold another 5 months before it completed its topping structure.
Lastly, as I noted to my subscribers months ago regarding the technicals and COT:
As gold approached its highs of the past 3 years during this week, I am now hearing about how the RSI is hitting overbought levels, how the COT is suggestively bearish due to the commercial’s short positions, etc. But, very few understand these points within the appropriate context.
You see, if the market is indeed still within a bearish posture, then overbought indicators are indicative of the market preparing to turn down again. And, if the market had rallied in a 3-wave fashion, then I would clearly be viewing this overbought indication as significant.
However, when the market turns towards its bullish inclinations, as it has potentially done with a 5-wave rally off the May lows, simply reaching a level in an indicator which has been viewed as an “overbought” reading is not bearish. Rather, these indicators will embed during a strong bullish move (most specifically a 3rd wave). This often fools everyone who is reading the indicator in the same way during a bullish trend as they do within a bearish trend. The same applies to the COT. We have seen many instances where the market has entered very long periods of extreme bullish action against the positioning of the commercial traders. So, again, I would not view this as dispositive of the nature of the market.
So, please leave all your correlations, news events, and fundamental explanations at the door when you view silver. It is driven by sentiment just like all the other metals.
And, as long as we hold over the 15.45/15.50 YI level, we can continue towards the 16.50 region next. However, should we break below 15.45, then it would suggest we can see a bit more downside consolidation over the coming weeks before silver is again ready for another bigger move higher.
Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets. He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.
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