Briefly: We are re-entering the short position in silver with $19.43 as the stop-loss level.
We apologize for sending this message so late today, but we needed to see how the session shapes before sending any information. Based on the intraday volatility, silver could have moved almost anywhere after it hit our stop-loss level. The market seems to have soared in a final blow-off manner, and while it seems contrary to our analysis, it is actually in tune with it. We wrote about the current year being analogous to 2011 with regard to the US Labor Day seasonality:
“The 2011 top is usually just mentioned as the 2011 top, or THE top, as it was the most prominent high of the past decades, so there's no way to mistake it for a different high. Consequently, it's easy to forget when did exactly this top take place. The initial high took place on August 23, 2011, and the final (THE) top took place on September 6, 2011 (the first session after the U.S. Labor Day).
Interestingly, the August 13, 2019 session was very volatile overall, which might be similar (to a smaller extent, but still) to the initial August 2011 top.
To summarize, gold is after a sharp rally that took the RSI above 80, indicating extremely overbought conditions, and the only similar case from the recent past is the 2011 top. The 2011 decline started shortly after the U.S. Labor Day, and gold then erased over 61.8% of its most recent upswing - and very fast. It formed a temporary bottom a bit below the previous local high. Gold didn't move to its 50-day moving average at that time.”
The day right after the US Labor Day in 2011 was THE top. Since it was THE top, there had to be an intraday rally on that day. The declines followed shortly thereafter and continues for many months. However, the session right before the Labor Day was the one where the top formed - after an intraday rally. That’s exactly what we saw today.
Gold moved higher and while it didn’t move to new intraday highs, silver did. We already wrote many times how bearish silver’s outperformance is in the short run, so we don’t want to repeat ourselves once again. What we want to emphasize is the relative weakness in the mining stocks. At the moment of writing these words, the HUI Index - proxy for gold stocks - is up by less than 1.5%. This is weak performance relative to what happened in gold and - especially - in silver.
Meanwhile, the USD Index reversed today, but at the same time it closed for yet another day above the rising neck level of the inverse head-and-shoulders pattern. This means that this session is not as bearish as it looks at the first sight. We prefer to wait for three consecutive closes before saying that a breakout was confirmed, but a second daily close - which we are likely to see today - is already meaningful. And bullish for the USDX, which makes it bearish for the precious metals sector.
Consequently, even though silver hit its stop-loss level today, we are reopening the short position in it (with $19.43 as the stop-loss), simply because the outlook didn’t change. The SL is not substantially above the current price, so the additional risk here is not that big. However, the risk of missing out on what might be THE start of THE decline given what day it is and how many sell signals we received - is massive.
As always, we will keep you - our subscribers - informed.
Thank you.
Przemyslaw Radomski, CFA
