Usually, we look at the shorter term, daily charts but today, I’d like to take a step back and look at the repositioning within the silver market and why we think it will take more than a Dollar reversal to start a good silver rally.

The precious metals’ markets witnessed some record-breaking behavior this summer. The commercial and speculative traders both set records in total and net positions, which led to the extreme imbalance we referenced here, on August 1st in, “What Does the Big Speculative Silver Position Mean?” Our primary point of reference was our proprietary COT Ratio indicator, which pegged the speculative position at long 12 contracts for every short. This imbalance led to a discretionary COT sell signal being published on August 3rd as we viewed that rally as unsustainable. The subsequent decline of more than 20% suggests its time to see how the silver futures market is rebalancing.

The actions of the traders, commercial, large speculator, and small speculator are published in the CFTC’s weekly Commitment of Traders’ reports. The key to this report’s application in the markets is two-fold. First, the commercial traders are mean reversion, value-based traders who take action based on the ability to improve the bottom line of their underlying commodity business whether as a producer or a refiner. The speculators, both large and small, are looking for trends and breakouts. Consequently, the commercial traders’ collective selling at the highs as they market forward production as well as processor buying at the lows to meet future input needs applies the support and resistance that the speculators attempt to break through. Secondly, the total position data lets us compare their current position to their historical maximums as we track the individual group’s abilities to push the markets around.

Using this as a starting point, we noted that commercial silver producers had built a net short position of more than 107,000 contracts during the summer’s time above $20 per ounce as they took advantage of high prices to sell forward production. The market’s decline has been met by commercial short covering, as it’s easier to offset the futures trade and bank the cash. Note that this exactly the opposite of the large speculator position. Large speculators on the long side of the market have been forced out as the market has ground its way lower. In spite of this, the large speculator COT Ratio remains stubbornly stuck in overbought territory.

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Silver rallies rarely begin with a COT Ratio greater than 1.5. Logically, this makes sense. The commercial traders tend to be zero sum traders as their actions are hedges against the physical market. The speculators, however, come and go, and with them the volume to carry a market directionally.

Unfortunately, it appears that the large and small speculators are already too committed to the long side of the silver market to give it much of a boost. We think this market has yet to find a bottom. Furthermore, we believe that our charts will need to look more like the end of 2015 when the Commitment of Traders report showed a clear balance among the primary trading groups before a meaningful rally can begin. Therefore, we’ll keep an eye on $15.75 and see what happens then.

For more information on our Commitments of Traders method, please visit CotSignals.com.