The "Oversold" Myth, Using Silver As An Example

Today we expose the myth of "oversold".  We'll use silver as the example.  A gold chart would look essentially identical. 

Many times in this blog when analysts, advisors or other "experts" claim something is oversold we'll challenge the assertion and often counter with the opinion that it's not even close to oversold.  We're usually correct. 

Why?  Most of the time commentators are purely guessing, or at best simply looking at an RSI (Relative Strength Indicator).  Think about it.  If they could reliably make money trading or investing, would they be wearing a cheap suit and wasting time giving tv interviews? 

Below is a chart of silver, with the red arrows indicating when many so-called experts and the RSI were claiming it was oversold.  The thicker the arrow, the more oversold it was purported to be.

Looking at each instance of "oversold" since November is particularly instructive.  The first bounce was bigger than the second.  The third wasn't a bounce at all, and by the fourth silver fully collapsed.

That's why we frequently caution against a "buying the dips" mindset, especially if you're in the red already, much less if you're buying something that's printing 52-week lows.

The difference currently, and why we think there's a reasonable chance of a bounce imminently, is that as you can see at bottom the small traders are wiped-out, large traders are virtually flat, and commercial hedgers are almost flat too.  This is not unlike the situation before the big rally a year ago.

Anything could happen now, and another plunge wouldn't be out of the norm given the present set-up.  Going long for a bounce, or remaining heavily short, are both risky positions at this point.  In the longer term, shorts should continue to score. 

Successful speculators understand risk and manage it accordingly. 


Worth considering:  Worst Is Yet To Come, There is Still Too Much Bullishness

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