Watching this game being played by the shorts in the mining shares as they attempt to extricate themselves from their rather tenuous short positions in the shares is shaping up to be mighty entertaining.
On Monday of this week, the mining sector finally blasted through the stubborn line of resistance that has formed on its price chart near the 580 level. It ran right through the 600 level and almost as high as 610 before settling near the high of the session. All in all, very bullish chart action. Yesterday it moved lower along with the gold and silver markets but bounced off the 580 level confirming that former resistance level as the new support level even though it ended lower on the day. It kept itself above the low of MOnday's session as well. That too was friendly.
Today, the shares were mangled with the result that the index collapsed back through that same old 580 level and was unable to regain its footing above it before the close of the trading session. It did managed a decent bounce off the session low however.
Since the middle of June, the mining sector, while lagging the performance of gold (and silver to a certain extent) , has been in a definite uptrend marked by a series of higher highs and higher lows. While the long suffering share holders have been distressed by their lack of upside activity, as long as the index stays above the uptrend line shown on the chart, it will still be in a bullish posture although it will have to clear 610 to get another strong leg to the upside.
If this index recaptures the 580 level within the next couple of days, the shorts are in trouble.
Silver was whacked along with gold in today's session as technical selling kicked in after the takedown began once it appeared that the run to $44 would fail to build on its gains. After $42 gave way, selling accelerated as down side stops were run which were helped along by the frontrunning High Frequency Trading club ( also known as market parasites and general pond scum).
The market did bounce higher from the $39 level however and while it still looks heavy, the level from which it bounced is the confluence of three technical support levels on the chart. The first is horizontal support noted in heavy red which also is the former Fibonacci 38.2% retracement level which was a pivot level around which silver was trading for the better part of the last 5 weeks. You will also note a short term uptrendline which has been forming drawn off the last June lows and the early August swing low that comes in very near this level as well.
Ideally, we would like to see silver hold in this general region to prevent a deeper fall towards $37.00 - $36.50. I would feel a bit more confident about its immediate prospects if it could regain its footing back above the former 50% retracement level up near $41.25 - $41.50 on the price chart.
Volume was very heavy today indicating a great deal of panic type selling was taking place. Unlike the drop that occured in silver back when it neared the $50 level in April, the Commitment of Traders report shows a relatively low level of speculative interest on the long side compared to past for the managed money or hedge fund category. They are currently about 11,000 contracts shy of their net long position size that they were holding back in April at the peak.
Also noteworthy is the fact that the Swap Dealers are barely net short while the Commercial net short exposure is also relatively small. The latter two categories rarely if ever sell into downward silver markets so if any selling is going to occur in silver, it is going to have to come from either additional long liquidation or fresh speculative side short selling.
In regards to the former - while the hedge funds are net longs, after today it is fairly easy to theorize that that long side exposure has been whittled away considerably. That begs the question - is this category of traders going to start aggressively moving to the short side? One would be rather challenged to build a fundamental case for that. In the meantime we will watch to see where chart support emerges and where the long liquidation will ease off.
Here it comes....
CME GROUP - Gold Margin Rise Effective After Close Of Business Thursday
Margins will be raised 27%
Old Margin $7,425
New Margin $9450
Old Maintenance $5,500
New Maintenance $7,000
