|As a fan of silver as a hedge against the ongoing mission by central banks around the globe to devalue paper money, a recent Zerohedge.com article entitled "80% Chance of 40% Silver Short Squeeze" caught my attention. According to the article, silver short positions have surpassed 40.5% - an extreme that in the past has been followed by big silver rallies with just one exception. The five previous periods and the rallies that followed were; July 1997 (70% gain), November 2000 (13.5% drop), October 2002 (13.2% gain), April 2003 (19% gain), and August 2005 (114% gain).|
|Figure 1 – Daily chart of the silver ETF SLV showing the trading channel over the last 18 months.|
|Graphic provided by: TC2000.com.|
|Armed with that information, I decided to do a little homework. First I looked at the chart of the iShares Silver Trust ETF (SLV) and was interested to see the rather clear channel the stock has exhibited over the last 18 months. Each time it hit support around $25.60, it has rallied. As you can see from the chart in Figure 1, SLV had just rallied from that point again in early April.|
|My next question was how has seasonality impacted silver? As we see from the chart in Figure 2 showing the composite performance in the best years (bullish trend), average years and the worst years (bearish trend), the year so far has been dismal. Should we trade now or wait for the seasonal low in late June?|
|Figure 2 – Seasonal performance of silver (SI2-057) showing the trend since 1972 with the current year’s performance in blue.|
|Graphic provided by: www.GenesisFT.com.|
|Currently (blue line), silver is well below even its average bearish trend down 15% year-to-date. Assuming support at $25.60 holds, and given the extreme short position in silver, there is a good chance of a reversion-to-the-mean bounce from here. By the time the seasonal low occurs in June given the current position, much of the short squeeze bounce may have already occurred.|
|Clearly, the silver short positions are bets that inflation will not accelerate even in the face of trillions of dollars in fiscal stimulus around the globe. But the only way it would pay off is if the US and other major economies experience GDP collapses from here or at the very least, the US and its major trading partners enter major recessions soon. This is not a scenario that looks very likely at this point. |
This trade set-up is relatively straight forward. Buy silver or SLV on strength with a stop loss just below the current major support level at $25.60. According to historic data, there is an 80% chance that the trade will make money over the next 12 to 53 weeks. It could also prove to be a great place to put your money to avoid the usual "sell in May and go away" weakness in stocks.
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