Silver Pullback Before It Explodes Higher? | Steve Penny

Key Concepts

• Silver Market Analysis: Discussion of current price action, resistance/support levels, and potential future movements for silver.
• Technical Analysis: Use of charts, patterns (wedge, cup and handle, double top), and indicators (RSI, gold-silver ratio) to forecast market movements.
• Investment Strategy: Emphasis on having a personalized plan, managing risk, and adapting to different market outcomes rather than solely relying on predictions.
• Dollar Devaluation: Implied concern about the weakening US dollar as a driver for precious metal prices.
• Gold vs. Silver: Comparison of the current outlook and potential for gold and silver, including the gold-silver ratio.
• Mining Stocks: Consideration of mining stocks as potentially attractive investments despite metal price volatility.
• Risk Management: Strategies for managing potential downside scenarios and capitalizing on buying opportunities.

Silver Market Outlook and Technical Analysis

Steve Penny from The Silver Chartist provides an in-depth analysis of the silver market, acknowledging its recent volatility and new all-time highs. He emphasizes that while he is fundamentally bullish on silver with a long-term target of triple-digit prices, a strategic approach is crucial, especially for newer investors.

Current Price Action and Rangebound Scenario

Penny notes that silver has recently traded around the $54 level, briefly exceeding it to $54.41, before pulling back below $51 and then bouncing. He suggests the most likely short-to-medium term scenario is a rangebound market, with support at $45.50 (the recent swing low) and resistance around the $54.41 all-time high. He cautions against solely relying on predictions, stating, "Nobody knows what's going to happen next week. We deal probabilities, not predictions." Technical analysis, he explains, offers a statistical edge, but even a 60% accuracy rate means being wrong 40% of the time, necessitating a robust strategy.

Key Chart Patterns and Levels

Penny highlights two significant chart patterns:

1. Bearish Rising Wedge (Monthly Log Scale): This pattern, while containing the word "bearish," actually suggests an ultimate target near $75 before a meaningful correction, if the apex is reached. He points out that a sustained close above the resistance line (around $50) and the all-time high of $53.77 would invalidate this pattern and signal a much higher move.

   • Key Levels to Watch:
     • Red "trim profits" line (specific level not explicitly stated but implied as resistance).
     • $50: A key psychological resistance level.
     • $53.77 (all-time high, now $54.41): The previous all-time high.

2. Cup and Handle Pattern (Monthly Log Scale Futures Price): This is described as "the mother of all cup and handle patterns," dating back to 1980. A decisive break and monthly close above the all-time high of $54.47 (spot price) would unlock a measured move target of $96 silver, with potential for even higher prices ultimately.

Invalidation of Bearish Patterns and Bullish Indicators

Penny argues against the idea of a major peak, citing several supporting factors:

• Gold-Silver Ratio: The current ratio is over 80:1, which is historically high and not indicative of a bull market's end. At major peaks, this ratio has been significantly lower (e.g., 15:1 in 1980, 30:1 in 2011, 60:1 in 2020).
• Speculative Components: In a bull market's end, the most speculative components (like junior silver miners) typically lead parabolically. This is not yet observed, suggesting the bull market is not mature.
• RSI (Relative Strength Index): While the RSI is extremely overbought, comparable to the 1980 peak, Penny emphasizes that this indicator alone is not sufficient. When viewed in conjunction with other factors, it doesn't signal a major top.

Inflation and Technical Analysis

Addressing a viewer's question about adjusting for inflation in technical analysis, Penny acknowledges the validity of the concern, as the dollar is an "ever-changing unit of account." However, he explains that:

• Ratio Charts: He uses ratio charts (e.g., gold vs. real estate, silver vs. gold) to remove the dollar from the equation and focus on relative value.
• Trading Algorithms: Institutional trading algorithms operate on actual price levels and do not inherently adjust for inflation. Therefore, these price levels matter to them.
• Combined Approach: A comprehensive analysis requires considering both price action and inflation.

Range of Plausible Outcomes and Strategy

Penny outlines a spectrum of plausible outcomes:

• Most Extreme Bullish: A rapid surge through the all-time high to $96 in the coming months. He considers this "very unlikely" but within the realm of possibility.
• Most Extreme Bearish (Double Top Confirmation): If silver breaks below the recent swing low of $45.50, it would confirm a double top pattern. The measured move target from this pattern would be approximately $37.
  • Calculation: Peak ($54) - Trough ($45.50) = $8.50. $45.50 - $8.50 = $37.

Penny strongly advocates for a strategy that allows profitability across various outcomes, quoting F. Scott Fitzgerald: "It's the sign of a first-rate intelligence to keep two opposing viewpoints in mind at the same time and still retain the ability to think." His personal strategy involves:

• Core Holdings: A significant portion in physical metal, held for generational insurance and not to be touched.
• Long-Term Holdings: Core long-term positions held through volatility.
• Separate Account: A smaller portion where he attempts to "get cute" by trimming at intermediate peaks and scaling back in. This account's potential losses are mitigated by the larger, untouched holdings.

He views dips towards $45 as excellent buying opportunities and would keep cash available to scoop up "bargains" at $37 if the bearish scenario materializes, though he deems it unlikely.

Potential Catalysts for Downside

While not predicting specific events, Penny mentions potential catalysts for a sharp downturn, such as:

• Panic Deflationary Impulse: A heightened risk due to stress in credit markets, widening credit spreads, and issues in the repo market.
• Surprise Dollar Bounce: A sudden strengthening of the dollar, potentially triggered by unforeseen panic events like bank failures.

Gold Market Outlook

Penny is very bullish on gold long-term, with a target of $15,000 per ounce. However, in the current environment, he is "least excited" about gold compared to silver, uranium, and platinum.

• Current State: Gold is in an extremely overbought RSI territory, similar to its 1980 peak.
• Outlook: He expects gold to remain rangebound for a period, similar to silver.
• Investment Preference: If putting new money to work, he favors silver, uranium, and platinum over gold at this juncture. He is content to hold existing gold positions.

Mining Stocks

Despite the metals being near all-time highs, some mining stocks are "beaten down," with some down 40% from recent highs while silver and gold are near their peaks. Penny sees potential attractiveness in some mining stocks, including gold miners, as nibbling opportunities, acknowledging that further downside risk in the metals could impact them.

Gold vs. Silver Swapping

Given the historically high gold-silver ratio (around 80:1), Penny discusses the idea of swapping gold for silver.

• Individual Basis: He emphasizes that this is an individual decision.
• Ratio Chart Analysis: He notes that the gold-silver ratio is currently at support, suggesting gold might outperform silver temporarily.
• Personal Strategy: He plans to gradually swap some of his silver back for gold at specific support levels on the ratio chart:
  • Lower rail of support (not yet reached).
  • Silver squeeze low (62:1 ratio).
  • 2011 low (30:1 ratio).
  • Below 20:1 ratio, he will swap more aggressively.
• Silver's Upside: He believes silver has significantly more upside potential than gold at this juncture.

Importance of a Plan and Exit Strategy

Penny reiterates the critical importance of having a plan, especially an exit strategy. He references David Morgan and David H. Smith's book "Second Chance," which highlights how many investors in the 1970s bull market failed to take profits, leading to significant losses when prices eventually corrected.

• Key Takeaway: "Whenever you push the buy button have a subsequent plan of when you're going to push the sell button."
• Avoiding Emotional Decisions: A plan helps prevent emotional reactions to wild price swings.
• Statistical Reality: 95% of traders lose money, largely because they lack a plan and an exit strategy.

SilverChart.com

Penny promotes his website, silverchart.com, describing it as a community with an "over-the-shoulder service" and real-time alerts. He offers full transparency by sharing screenshots of his portfolio, aiming to help members make better trading and investing decisions and achieve "time freedom to pursue life's higher callings."

Conclusion

Steve Penny's analysis underscores the current bullish sentiment for silver, driven by strong technical patterns and fundamental factors like dollar debasement. However, he strongly advocates for a disciplined, strategic approach that acknowledges probabilities and prepares for a range of outcomes, rather than chasing predictions. His emphasis on having a clear plan, including profit-taking strategies, is presented as the key differentiator for success in volatile markets.