In May, I presented what appeared to be an extremely bullish divergence between the price of silver and its Accumulation-Distribution Line (ADL). I asked whether the price of silver would rise to meet its ADL or would the ADL fall to match the price? Two and a half months later, there has been absolutely no resolution to this situation. The divergence remains, and if anything, has actually increased slightly.
For a technical definition of what the ADL is and how it’s calculated, see the original post. But in layman’s terms, the bullish divergence is often thought of as underlying positive market sentiment not yet reflected in the price. Imagine the price of silver as a beach ball resting in the deep end of an empty swimming pool. With no water in the pool there is no additional pressure required to hold the ball at the bottom. Now think of the ADL as the water level as the pool is filled. As the water rises, it becomes increasingly difficult to keep the ball submerged. If the pressure becomes great enough to overcome the forces acting upon the ball, the ball will rise quickly to the surface.
Indicators like the ADL can be misleading because they are highly dependent on the choice of starting points. Subtle divergences can often be influenced, or even created, by cherry picking the range. However, there is nothing subtle about this particular divergence. Going back to the limit of this charting source still shows that something has fundamentally changed with the recent trading in the silver market. Isn’t it interesting to note that the long term ADL itself appears like a more natural price curve? Perhaps $49 is where the price really would be if the market were not contending with out-sized naked short positions and black box OTC derivatives action.
Stay tuned. Things could get very interesting this fall.