Rallying mining stocks? Forget about them. Silver is the new cool kid in the neighborhood. Having rallied by almost 50 cents in just one day, silver stole the spotlight and seems to be ready to move much higher… Or much lower. Does anyone still fall for silver’s fake rallies? Based on the size of the rally and the corresponding volume, it certainly seems to be the case. But you don’t have to fall for it – that is if you prefer to analyze the market’s emotionality instead of acting on it. It’s not an easy thing to do, because each silver rally seems to be “it”. But what’s easy and what’s profitable is rarely the same thing.

Today’s analysis will be quite specific, because we already wrote about “the silver signal” several times in the past several days. We did emphasize our take on the silver market more than once, because the market itself provided us with the signal more than once.

First, there was the spike in the ratio of volumes between SLV and GLD (charts courtesy of http://stockcharts.com).

The red arrows mark cases when we saw huge volume spikes in the ratio. More precisely, they show spikes in the ratio of volumes, as the ratio, by itself, doesn’t have any volume.

On numerous occasions, we wrote that silver tends to be the metal of choice right before the local tops and before sizable price declines. The likely reason is that the silver market is dominated by individual investors that tend to be more emotional than institutions. For those, we have not been following our analyses previously – the “silver signal” is seen when silver outperforms gold on a short-, or very-short-term basis. Ideally, it should be confirmed by rather weak action in mining stocks (Friday’s action in the miners was indeed weak)

The spike in the ratio of volumes was recently the highest in months, which makes it very likely that we are at a major top or very close to one. We saw this signal a few times earlier this year and, in all cases, big price declines in gold and silver followed – if not immediately, then shortly.