Silver (SLV) Heading To the Bargin Basement?

Friends,

We have a Dow Theory bull market.

The mother of all technical signals is now flashing bright green, indicating we’re on course for higher equity prices in New York – and likely the rest of the world, too.

Our Dow Theory ‘buy’ signal was triggered last week, when the Industrial Index closed at an all time high, confirming a similar move into record territory by the Dow Transports back in mid-January.

Here’s the way it played on the charts.

The red boxes indicate when each index bested its previous ever best effort.

A confirmation of this nature is not an everyday occurrence, precisely because it involves all time highs. That is, there’s room for varying interpretations of the theory, as we’ve seen on many occasions over the last several years. But today, there can be no doubt.

When both the DJIA and DJTA move into record high territory, as they’ve just done, no Dow Theorist can demur. Dow Theory has signalled that the future is a bull and all should hold on tight to avoid being shaken from her.

Is it possible? Is it conceivable?

It’s still hard for many to believe that this is something –

a) that could happen, given all the shenanigans we’ve seen in the financial world and from government over the past five years, and

b) that can persist, given all the shenanigans we’ve seen in the financial world and from government over the past five years.

We’ve spoken about this at length, and we remain convinced that it is possible and will continue because of what’s come to be called the ‘great rotation’.

The ‘great rotation’, for those with important things to keep track of, is quite simply the projected long term investment trend out of fixed income securities and into stocks. After a thirty-odd year move higher for bonds, the theory goes, the bull is spent, and investors are on the cusp of pulling their funds from fixed income securities in favour of equities.

A look at the charts confirms the hypothesis better than any talking head on CNBC ever could.

Here’s the iShares Trust Barclays 20+ Year Treasury Bond ETF (NYSE:TLT) charted against the Dow for the last six months.

The relationship between the two is uncanny.

It’s as plain as day that the mirror image formed by TLT and the Dow proves the thesis – investors have been withdrawing funds directly from Treasuries and depositing them into stocks.

RSI and MACD also show a persistent deteriorating long bond position. RSI has just submerged below its waterline and MACD, already below it’s waterline, is now crossing lower (in blue).

Noteworthy, too, is the last trading session, which produced a new low for the move (in black). With that, TLT has descended below an eleven month support line and looks to be headed toward $110 in the near term.

Beheaded? Gruesome!

We won’t delve into the longer term repercussions of these developments here; we’ve said enough on that score to date. We can say, however, that it will not pay to inhabit the long side of the fixed income trade going forward – even if you’re holding real bonds, and even if you hold them until maturity.

The only rational reason to hold bonds for the next while will be to protect capital – and even then, we don’t recommend you exceed two to three years duration on any instrument. And we scream from the rooftops so that all might hear that you are absolutely forbidden to purchase or own any bond-based mutual fund or ETF until we notify you otherwise. We cannot be emphatic enough regarding that last bit of guidance. These vehicles are quite simply the suicide bombers of today’s investment world.

There are two separate developments we see now in the world of stocks. The first is the rise in the indexes stateside. The second is a stall in Europe that we’re not yet prepared to characterize as fatal

The U.S. action you’ve seen above.

Paris and Frankfurt (seen below) are showing signs of retreat.

Have a look here:

We note a simultaneous and exaggerated bearish engulfing pattern that struck both the German and French markets two weeks ago, just as the short term moving average began to roll over, that we believe bodes ill for the continental bourses as a group.

We also admit that the pattern did not take place at the top of the latest run-up, which might have given it more heft as a trading signal. The bearish engulfing pattern is generally considered a reversal indicator, but the action that surrounds it is also an import consideration.

Here we see that in the days following the pattern, the indexes climbed almost to the top of the marubozu (long black engulfing day down), indicating we may have seen a false signal – or at best, a delay before the decline begins.

That notwithstanding, the length of the marubozu also generally aligns with the expected upcoming drop, so the extreme exaggerated nature of these two marubozus should not be taken lightly. The potential for a strong and rapid decline still exists.

If and when that happens, we expect the weakest sector of the market to drop the most.

And that segment, in our opinion, is silver.

Oh no! Not again!

We’ve made lots of money on the precious metals decline over the last year and a half, and we feel the potential to make more is at hand. As we’ll attempt to show you below, the technicals for silver are currently very weak, and the metal appears poised for a drop regardless of what occurs in the broader investment arena.

That said, if we do experience a decline in the major market averages, it will very likely not behoove anyone to be sitting in investable silver stocks such as SLV and AGQ for a long time to come. It is our firm belief that some of the biggest declines in the ongoing silver bear will be registered in the event of such a broad market selloff.

Here’s SLV’s chart:

The pattern here is familiar; it’s a descending triangle, it’s bearish, and the instant price action moves below support at $27.45 watch traders fly to sell this puppy short.

We say don’t wait.

Wall Street Elite recommends immediate purchase of the SLV October 26 PUTS, now trading for $1.09 apiece.

With kind regards,

Hugh L. O’Haynew, Senior Analyst, Oakshire Financial