Trader’s Narrative

The secular gold bull market has been momentarily eclipsed by its plebian cousin, silver. While gold has gone up 18% so far, silver’s performance, year to date is 27%. And from 2009 until now it has gained 90% compared to gold’s 47%. Those performance numbers are starting to get noticed.

The media has recently featured many headlines trumpeting silver’s three decade record. And the Daily Sentiment Index, courtesy of Trade-Futures by Jake Bernstein, which measures the public’s perception of the future performance of silver has hit record bullish extremes. Having reached a climactic 95%, the DSI is once again where it stood this past summer (May and June 2010) twice:

Source: Elliott Wave International

Both of those times, as well as the previous instances were better times to take profits (and go short) than to initiate new or to add to existing long positions. At this point, the DSI is telling us that only 5% of the retail traders believe that silver is going to disappoint. According to contrarian analysis, when almost everyone has bought, it is usually time for either a significant unwinding or a pause to digest the rally.

Turning to technical aspects of silver, both the distance from its long term moving average and the RSI (14) are also pointing to a top here. The relative distance from its 200 moving day average is only 19%. It has been much higher, for example, in March 2008 when it was last trading above $20. But usually when silver’s RSI and its relative moving average distance get stretched like they are now, the white metal has difficulty pushing higher:

There have been times when it has been able to enter a trading range and consolidate its recent achievements instead of breaking down. For example, in late 2007, just before it launched into an amazing run that took it from $14 to $21 in a few months time. But usually, it is simply a good time to sell or sell short. That track record, combined with the extremely bullish public opinion makes me very cautious about silver going forward.