Silver's bear trap - September 25th 2005

Ted Butler highlighted an interesting development in silver in his article Every Picture Tells A Story on September 6th. Quoting Butler: 

"Make no mistake; there was nothing accidental about the recent sell-off to new lows in silver. It was designed to lure the tech funds onto the short side...The funds are potentially trapped. Now we await the resolution."

Looking at the COT picture in graphical format shows this clearly. (Trend line violation and subsequent non-commercial shorting marked with a red oval).

As we have seen, the resolution was a rather strong move to the upside followed by non-commercial short covering.

Taking a closer look at this non-commercial shorting behavior coinciding with up-trend line breaks, we can see that it has happened already to some extent twice this year. When short-term up trend lines were violated in Apr/May and Jun/Jul 2005 non-commercials have gone short comparatively heavily. We haven't seen this kind of non-commercial shorting before April 2005 even though we have had short term power up trend lines broken between the summer of 2004 and the spring of 2005. Non-commercial shorts have previously been at Aug 30th 2005 levels in the spring of 2003 (see lower green line).

The price of silver went up a few dimes in a few weeks after the funds went short in Apr/May and in Jun/Jul 2005. With the price rebounding the funds covered their shorts (adding to these small short covering rallies). Not very good business for the funds, IMO (unless you have some hidden agenda).

If you compare the most recent COT development with that of the summer of 2003 there are some interesting similarities. I think the chances for a significant rally in the coming months is much bigger than that of a serious break to the downside (even if the long term up trend line is tested again or even temporarily broken). If you believe in market manipulation (as I think you must, to some extent, if you have been following the silver market for any length of time),  with the trading crowd all using fundamentally the same set of TA indicators, it should be obvious that a manipulator wants to affect market psychology by trying to trigger key TA indicators when they can.

The past few months' poor silver performance is explained partly, IMO, with this new non-commercial shorting we have seen, triggered by trend line violations. It has not been profitable for the funds, and I hope it might be over after the funds have covered their shorts after the latest big bear trap.

It seems odd how willing the tech funds are to come up with new & innovative ways of throwing money at the commercials. Previously it has been (strongly leveraged) longs with quite tight stops, now shorts with tight stops. But they day will come when the silver price is not set at the Comex anymore, and that day is drawing closer.

That being said, and with silver's very bullish fundamentals (and the seasonals possibly starting to also kick in), I am optimistic about  silvers performance for the rest of the year.


September 25th 2005

Carl Löfberg

Tampere, Finland


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