Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

In our previous free analysis we discussed the silver market viewed from the non-USD perspective and we commented on the possibility of seeing a more visible corrective downswing in the USD after it moved closer to the 96 level. In today’s essay, we would like to further elaborate on the white metal – not only because we saw another sign in the non-USD silver price, but also because we would like to reveal a technique that can tell us when the next reversal in silver is likely to take place.

Let’s jump right into charts, starting with the silver to UDN ratio (chart courtesy of http://stockcharts.com).

This ratio means that silver’s USD price that we usually analyze is multiplied by various currency exchange rates (i.a. the EUR/USD) and then these prices are averaged with weights just as in the USD Index.

The thing that’s happening on the above chart is the spike in volume (ratio of volumes). While it may sound esoteric and odd that we’re analyzing the ratio between the volume of silver and one of some ETF, please note that it has significant predictive value.

The huge volume readings preceded major declines (we marked those situations with red rectangles) and since we just saw this signal once again, the implications are bearish. On a side note, when we previously commented on the ratio of volumes between silver and UDN, we called it silver’s hidden signal as that’s something that many investors and professional analysts are not aware of.

Let’s stay with silver for a while. In Friday’s alert, we wrote the following:

Silver and mining stocks declined. The Stochastic indicator based on the price of the white metal flashed a sell signal and while mining stocks didn’t fully invalidate the move above the rising support/resistance lines, their underperformance relative to gold is a strong bearish sign anyway.