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Silver: What Happens When Most Traders Are "All-in"?

These clues will help you pinpoint future tops in gold and silver

by Bob Stokes
Updated: December 27, 2016

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[Editor's Note: The text version of the story is below.]

Gold is often in the spotlight when it comes to precious metals. But silver offers its own opportunities.

As you may know, on July 4, 2016, silver hit a high of $21.17. During the prior week, trading volume skyrocketed as the precious metal's price soared nearly vertically, giving bulls extra confidence.

Two days later (July 6), a contributor for MoneyMetals.com wrote:

Now that the precious metals' five year cyclical bear market is acting like it's been replaced by a vibrant bull run in the opposite direction (up!), many analysts who chided the ongoing rise in the mining stocks and metals that started in December 2015 are begrudgingly changing their "outlook" [to bullish] so they don't get left behind.

As we've observed time and again, the fear of being "left behind" often becomes the most pronounced just when a financial market is about to turn.

Moreover, as silver was making its high, the 5-day Daily Sentiment Index (trade-futures.com) had jumped to 94.4% bulls, the highest 5-day average in 5½ years, since the April 2011 silver peak at $49.91. Meaning, almost 95% of polled silver traders had firmly committed to the upside right near the top.

Plus, there was yet another big clue that silver's price trend would be reversing. Our July 6 Short Term Update showed this chart and said:

Managed Money accounts (speculators) hold a record number of futures and options silver contracts in anticipation that the current rally has far to run. They buy into a rising trend and sell into a declining one. When their positions reach an extreme, it's worth paying close attention, as trend reversals are most likely to occur. With a record net-long position, there are few traders left with the position size to keep the current trend intact for a long period of time.

Indeed, silver's price took a nosedive and today, it's hovering just under $16 an ounce, a 25% drop.

This Dec. 23 Short Term Update chart shows silver's sell-off since the July 4 high of $21.17 (entire wave labeling available to subscribers):

And wouldn't you know it, -- now sentiment towards silver has reversed from where it was in July -- and is extremely pessimistic. As of Dec. 21, the 5-day Daily Sentiment Index (trade-futures.com) registered a reading of only 9.8% bulls.

Market sentiment can stay at a bullish or bearish extreme for a while. At the same time, it would be imprudent to disregard an indicator with a long history of marking market reversals.

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