Highlights:
- Futures market show extreme change in market positioning
- Technical support in silver prices coincides with this sharp change
- Fed outcome seen likely to dictate whether a rally commences immediately or results in a potential capitulation low
The bias in silver prices has largely been formed on in depth analysis of the gold market with in mind that while the magnitude of price movement between the two metals varies, the general direction (correlation) does not. For in depth analysis on gold pertaining to this article, please see “Gold Setting the Stage for “Lift-off” Post-FOMC”
Silver prices continue to probe multi-year lows ahead of what is expected to be the first rate increase by the Fed since the last tightening cycle from 2004 – 2006. Market positioning/technical combination plus key fundamental event could soon lead to a major move in precious metals.
Futures markets show extreme change in market positioning
In recent weeks in gold futures, via the Commitment of Traders (COT) reports, we saw large speculators (hedge funds) liquidate their long positions at a furious pace, nearly bringing their net position to flat for the first time since 2001. Commercial traders (hedgers) covered their short hedges at an equally impressive rate, bringing their net position near the zero-line as well.
The COT reports for silver futures also showed a similarly impressive rate of change in positioning (unsurprisingly), but did not see the two opposing sides bring their net positions as close to the zero-line as witnessed in the gold market. From an analytical standpoint the move in gold positioning was ‘meatier’, but the race to square up positions in both markets indicates an inflection point and on several occasions in the past has acted as a timely indicator looking out over the next several weeks or longer.
Silver COTs Weekly: 2013 - Present
Technical support at hand
From a pure technical standpoint, silver like gold is also trading at a bottom-side trend-line, but in the case of silver it also constitutes the bottom-side of a potentially explosive descending wedge dating back to 2013. The lower line of support coupled with the extreme movement in positioning among traders creates an environment seen at critical inflection points.
Today’s ultra-important economic event is seen as a likely catalyst for soon setting things into motion. Given the still pervasive down-trend in silver prices, we would view an initial rally as only corrective in nature within the context of the descending wedge, but should down the road silver move above the top-side trend-line then the start of a major move higher becomes the focus.
Silver Prices Daily: 2011 - Present
The following scenarios look most probable post-FOMC:
The Fed raises rates, but provides signaling to the market their intended trajectory at this time for the tightening cycle to be flatter than expected. In this case, the dollar is likely to sell off while precious metals get a shot in the arm.
In the second scenario, the Fed raises rates but provides signaling to the market it intends to ratchet rates at a faster clip than the market has already priced in. If this holds true, the dollar is likely to catch a bid, while sending precious metals further down the rabbit hole, at least temporarily. Keep in mind, market positioning has already worked its ways towards an extreme, effectively pricing in "lift-off" (especially in gold). Any strong move lower from here could be viewed as capitulatory in nature, potentially resulting in a tradable low.
The first scenario looks more probable from where I sit, but in any event, market positioning and technical developments look set to be on a collision course with a catalyst which has the potential to set off a rally in silver in the weeks ahead. No position at this time looks like the best position, but that bias could soon change.
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--- Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinsonFX or email him directly at instructor@dailyfx.com
