Silver and COT changes, May 6th 2005

Silver closed today at $6.91 after taking a little dip from the $7+ level. We saw a slightly bigger dip at the end of last week when silver broke the short term up trend line to the 6.80 area, but found support at the first longer term up trend line. We could take a further 20+ cent 'plunge' down from todays levels, but should find support again in the $6.60 area and stong support at the $6.40 area.

The past 2 years we have had several power up trend lines established, lasting from one to several months, followed by comparatively strong corrective moves to the downside. The major corrections (April 2004 and December 2004) have coincided with large comercial short positions and, equally importantly, large non-commercial long positions. The bottoms have, however, shifted higher and higher with solid support at the long term up trend lines.

(Chart courtesy of StockCharts.com)

Silver COT analysis

This weeks COT numers show us once again that you have to be careful with government data. Some traders have almost certainly been placed into different categories, compared with previous reports. (If not, some fundamental changes are taking place in the market.)

We can see a huge increase in non-commercial shorts, and an equally big drop in commercial shorts. This leads indicators such as the commercial short/long ratio and net commercial short to drop to 'unprecedented' lows.

Lets assume for a second that 14000 shorts are in the wrong category, and we shift them from non-commercials to commercials.

We can still see some interesting changes, if we assume that other traders would be in the categories they have been lately (which is not neccesarily a sound assumption). Commercials are more long (in absolute terms) than ever before in the recent past. Non-commercial longs are, at the same time, at comparatively very low levels.

Regardless of possible inaccuracies in the COT data, I believe there are real changes happening in the market. I believe that these changes turn out to be bullish for silver -if not in the short term, then at least in the intermediate term.

There has also been some concern about the comparatively big commercial short position in gold, but todays COT data confirmed a decreace of 26014 contracts and todays ca. $5 plunge in gold took the commercial short positions probably down further.

So, both from a TA and COT point of view, silver looks very solid and definately a buy. The major differnece in the past market bottoms in silver is that this time the gold COT position is somewhat different and in silver we have seen an increase in absolute commercial long positions.

Analysing just silver makes one very bullish on silver at these prices and the current COT structure. The COT action in gold is somewhat concerning, and stops for more speculative poisitions in silver are in place a bit below the long term up trend lines.

For investors who are not (too heavily) leveraged, just sit tight. I believe there is a good chance this correction will end in the same way the year end correction ended. We broke the 1st up trend line at around $7, lingered in the sub 6.80 area for more than a month, and those 'silver bulls' getting desperate and liquidating their positions were left empty handed when silver shot up 25 cents on Feb 14th, just like the commercials prefer.

Recently on silver:

23.04.2005: Silver and COT changes
15.04.2005: Silver ready for upside swing based on COT
07.04.2005: Silver market update with a look at the COT structure

Sources:

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