Top-Down Look at Silver

Several readers have been asking me how I feel about Silver and $SLV. I think the answer depends on what your time frame is. I've been saying all along that I believe Precious Metals have been outperforming Stocks for over a decade and that I don't think that trend has changed or is going to change any time soon. Below is a chart of the S&P500 priced in Silver. It is clear that this is a downtrend for Equities relative to Silver.  We are going to watch this ratio closely for any changes or divergences.

[caption id="attachment_2399" align="aligncenter" width="581" caption="Click on Chart to Make Bigger"][/caption]

On an inflation adjusted basis, we still have a long way to go before Silver gets back to the 1980 highs. TheChartStore does a great job of adjusting the Precious Metal for inflation using the Consumer Price Index.

[caption id="attachment_2401" align="aligncenter" width="581" caption="Click on Chart to Make Bigger"][/caption]

The intermediate term picture looks pretty complete. Looking at $SLV below, the measured move (blue line) from the breakout out of the most recent consolidation slightly exceeded it's target. This is a normal move after a breakout like this.  Now it appears like Silver needs to regroup, consolidate, and make it's next move higher. This could take some time. Look how it took almost took two and a half years for $SLV to take out the 2008 highs. Good things take time.

Now we want to look at the near term. After reaching it's peak in April, $SLV found support at the 50% retracement, which again, is normal. If the May low can't hold, then a retest of $29-$30 is inevitable. This would still be a normal correction within the context of this secular advance.

Now looking at the ultra-short term, here is a 60-min chart of $SLV. Peter Brandt made some good points about the Inverse Head & Shoulders that has been forming over the last month. If this indeed leads to a breakout, we could see a measured move to the mid 40s, but a failure of this pattern should lead to new lows and perhaps that test of $29-$30 that we discussed above. The key level here is the (would-be) neckline around $38.

I would expect that volatility in this area is here to stay.  We saw record volume in late April and early May so it should take some time for this market to recover and regain it's strength. This, however, does not change the big picture where we see Silver continuing to outperform equities over the long run.

Charts Provided by Ron Griess at TheChartStore and Stockcharts.com