Our trading philosophy is based on short to medium term swing trading. It's rare that we hold a position for more than a week or, two. Our thesis has always been to side with the commercial traders when recent price action disagrees. In other words, commercial traders have sold the heck out of the recent silver rally. This means that the commercial miners expect prices to fall even though the market in general has rallied substantially. This is the type of tension we talk about all the time. While we'll review the current situation in more detail, the macro outlook is what we're after, today.
We're going all the way back to 2004. This is when commercial buying pushed silver above $7 per ounce for the first time in years and really got the bull market underway. Looking at the chart below, you'll notice that the blue channel lines in the lower pane represent commercial traders' bullish behavior. Their actions are typical of any other successful group with fresh purchases being made at the market's troughs followed by consistent selling as the market makes new highs. this behavior lasted into the 2011 all-time highs. The market then spent the next two years forming a large top using $25 per ounce as its major support level.
Commercial traders made one last attempt to rally the market in June of 2012 when their net position attained it's third largest total. Note that this position was approximately -12k contracts. The silver miners dominate the silver futures market. Therefore, the typical position is net short to some degree. We measure the net position as a barometer of the silver miners' collective opinion of the market. Meanwhile, commercial silver users finally threw in the towel after their new record long position established in June of 2013 failed to push the market back above the magical $25 per ounce support level. No wonder the market fell so dramatically through this price level in April of 2014.
This sell off finally slowed later that June as the market found initial support at $18 per ounce. The commercial traders had clearly shifted to a bearish bias. This can be seen in the net commercial trader position as it begins tracing a pattern of lower highs and lower lows that still persists. In fact, their selling is intensifying. Commercial traders, led by the miners, reached their most bearish position since July of 2008 this past Halloween. We expect this pattern to continue and that their net short position will increase further on the market's recent rally of more than 15% in the last month.
Now that we've looked at the macro environment, let's examine the current trade setup. The recent high of $16 per ounce in the May silver futures contract appears to have been an episode of capitulation. The silver market's open interest fell more than 20,000 contracts over the last week. Much of this can be attributed to long-term shorts exiting the market. This leaves silver futures ripe for the resumption of its downward trend. We are selling silver futures and placing a protective stop above $16 per ounce. We may be early but we expect the fall to be swift, followed by the grind of new speculative bottom picking attempts and finally, a new low below $13.50.
