I have written at length about the woes of silver due to hedge funds playing it along with copper, from the short side of the market. Last week's break of significant technical support down at the $28 level brought in even more hedge fund shorts.
However, silver is showing some signs of bullish or positive divergence which merit watching. For those who are newer at this, bullish divergences occur whenever a technical indicator fails to produce a new low while the underlying commodity is in the process of making new lows. In other words, the commodity and the indicator are diverging.
In the case of bullish divergence, the technical indicator has been moving lower but note that the lows it is making are successively higher than the previous lows in the indicator even as the metal has been moving lower and making successively lower lows in the process.
Keep in mind that bullish divergences are often times mere continuation patterns so never buy a market based solely on a divergence. What will make things interesting however is if silver prices can climb back above broken support now turned resistance at that $28 level and HOLD ABOVE it.
Downside momentum is slowing even as traders have been selling rallies in silver so any sign of an overhead resistance level giving way is going to induce some of the shorter term oriented shorts to book some good profits.
Let's keep an eye on this.
One thing to also watch, last week's low near $26.50 is now a critical support level. If it fails to hold, a test of round number support near $26 will happen almost immediately. That MUST hold to prevent a drop to $24.
I must admit that it is difficult seeing these precious metals continuing to move lower with the massive Bank of Japan stimulus package and the rotten jobs number of last week serving to reinforce the idea of QE3 and QE4 continuing to last throughout the remainder of this year, but there are real concerns about the efficacy of these stimulus measures. After all, when we consider the fact that by the time QE3 and QE4 reach the month of December of this year, a total of $3.5 TRILLION will have been conjured into existence as the sum all four Quantitative Easing programs. In spite of where we currently are in this money creation binge, job hiring seems to have stalled out.
Let's face it, consumers without jobs cannot engage in spending sufficiently large enough to provide any serious or solid economic growth. Oh, yes, they can use government benefits to purchase goods and services but not at a size sufficient to jolt this economy higher. More importantly, the VELOCITY of MONEY needed to spur inflation is simply not there.
One has to wonder what exactly will be the trigger or catalyst that is needed to shake off the deflationary psyche among the hedge funds towards commodities in general and get them to begin anticipating inflation. It is more than evident that the stock market rally is nothing else but a spectacular display of PAPER ASSET INFLATION brought about by the Fed's unlimited paper dollar creation schemes. As stated repeatedly now at this site, that money is almost exclusively ending up in US equities in the desperate chase for yield in a ZERO INTEREST RATE environment. It has bypassed commodities for the most part even after QE3 and QE4 were both announced and them implemented.
As we watch the mining shares sinking further into the red nearly day after day after day, one begins to wonder at what point the shorts are going to say, "ENOUGH" and finally ring the cash register. There is an old saying in trading, "Bulls make money; Bears make money; but Pigs get slaughtered".
By the way, copper is getting some buying coming into it on the heels of a strike in Chile. That is serving to prop up the red metal in spite of growing warehouse stocks. We are seeing some of that buying of the red metal spilling over into silver, at least in Asia this evening.
I am continuing to monitor the yield on the Ten Year note to see if traders are showing any signs of anticipating an outbreak of inflation. So far nothing doing.
There is a very gradual uptrend on the yield showing up on the chart that has been underway since summer of last year, but I personally will not be impressed that longer term yields are going solidly higher unless I see this chart consistently remaining above 2.0 percent and that is just a bare minimum to be quite honest that would get my serious attention.
