What’s up with Silver?

By “The Lone Trader”

July 2, 2009

 

 

For years silver bulls have been waiting for the fundamentals of silver to finally take hold of price and catapult it into stratosphere.  Alas the fundamentals do not provide a good timing tool for price in the short and intermediate term.  Silver is a great example of this.

 

 

After rising to 21 dollars in 2008, Silver had a tremendous setback during the market meltdown witnessed in almost all markets.  When it finally bottomed in November of last year, silver traded as low as 8.60 per oz.  The winter rally of 2009 retraced all the way back to the 16 dollar area having recently peaked at the beginning of June.  The chart below is a 60 minute chart of July Silver. 

 

Those who are familiar with my work know that price channels play a huge role in my analysis.  Of particular note is the intersection of two channels (Red and White Channels).  The white channel is a momentum channel, while the Red channel is the trend channel.  Notice that price peaked right at the top of the intersecting channels providing a good opportunity to spot a trend change.  The confirmation came when price broke thru the bottom white trend line.  This signaled a loss of momentum which usually ends up in correction.  We can see how the first price breakdown out of the white channel initially supported on the medium term (green line) moving average (June 5^th timeframe). Of particular note is the price failure when it tried to move above the fast (yellow line) moving average and failed (June 11^th).  Notice how price came down and went right thru the medium term (green line) moving average (June 15^th).

 

 

Look at the break in price and gap after failing that green moving average.  This was the exact “sweet” spot of the move.  The combination of dual channels and the use of good moving averages can provide the trader or speculator a basis in which he can measure strength or weakness within a market and where the potential pressure points/resistance might be.  

 

Silver has now reached another important area on the price charts.  This 60 minute view above provides a little deeper insight to the short term.  Notice how price is now perched directly on the larger trend channel (red line) at around the $13.30 area.  This is an important short term support area.  The initial drop on June 30^th was within a whisker of the trend line.  The bounce back up during July first and second encountered resistance right at the fast (yellow) moving average and the subsequent drop of July second has price right on the trend line.

 

You might observe that price indeed does penetrate my channels.  Look at the spikes on April 25^th, on May 2^nd, May 17^th, June 3^rd, June 5^th and 8^th.  All of these spikes penetrated the channel.  But the penetrations are brief and the re-entry back into these channels provides opportunity for speculation and catching the bottom and/or top of short term trends.

 

What next?

 

There are two potential things (besides go sideways) that silver can do right now.  Each has opportunity to speculate.  The first scenario would have silvers price hold the current red trend line at the 13.30ish area and embark on another leg of an uptrend from here.  The way to play this one would be to watch for a penetration of the channel and a reverse rally back into the channel.  Once in the channel place a stop about 15 cents below the penetration price in case silver falls out of bed.   The moving averages will provide initial resistance and the barriers that silver will need to overcome to sustain the new uptrend. 

 

 Thus expect resistance in the coming month at the 13.87 – 14.06 area initially at the fast (yellow) moving average.   Secondary resistance will be the 14.32 to 14.45 area where the medium term (green) moving average exists and finally the 14.67 to 15.03 area.   This last area encompasses the slow moving (Red) average, the price gap on the chart, and the area in which the huge drop in June initially occurred from.   Should silver hurdle these resistance areas, then the top of the red channel line would be the ultimate target above the 20 dollar area. 

 

Depending on your style and risk/reward tolerance, there are a few ways to play this should this uptrend scenario unfold.  For the more conservative player who seeks more confirmation, he/she could wait until silver vaults over the fast moving average (yellow trend line) at the 13.87 – 14.06 area before initiating a position.   Use a stop below the channel line.

 

Should the rally unfold, one might move their stops up under the moving averages as each new resistance/moving average is overcome.  At some particular point the rally will end and you will be stopped out with a nice profit.

 

The second scenario that can develop from this price point would be for silver to not hold the red channel line and breakdown to its next support area.  This is the same 60 minute chart of July silver from the winter rally.  This is also a good snapshot so you can see where my channels were first constructed. 

 

In this timeframe we can see the February top and the subsequent sell off in silver during this spring.  As you can see below, 11.80 – 12.00 was a major price support area from which the rally into June was launched from.  This area is the biggest support area of 2009.

 

This price area should also be a consideration for silver bulls.  Whether you’re a short term trader or an investor, these areas are price points that can be exploited.  If you’re averaging in for the long term small purchases in this area are excellent targets.

 

 

The chart below is a three year chart of silver courtesy of Stockcharts.com.  It is a telling picture of a market that is at a very important juncture in price. 

 

 

For starters, look at the moving averages.  The fast moving average (blue) and the slow moving average (Red) are converging right where price is.   These moving averages are not your typical 50 and 200 day averages, but rather one’s I use based on a precious metals cycle. 

 

There is also a trend line that connects the November and April lows (dotted line).   Observe how price is sitting right on this trend line as well.  Thus we have a confluence of support and price converging at this 13.40 price area in silver. 

 

Recall the other support that I listed at the 11.40 – 12.00 area.   I have drawn two red arrows on the chart.  The arrow pointing to the right is drawn above the first resistance area from the November 2009 rally.  The second red arrow that points to the left is the spot where silver last supported during the correction in April.  This is where the 11.40 to 12.00 support area comes from and how I derived it.  This leads me to conclude that this particular price area is the most important area on the chart.  This is where silver needs to hold to maintain its upward trend.

 

Should the dotted support line break, then the odds strongly suggest that silver is heading for the 11.40 – 12.00 area where a major test of this rally will occur.   I would allow about 15 cents of penetration from the channel.   Here’s what to look for.

 

If the channel is penetrated, first look for it to try momentarily to get back above it.  A subsequent failure and a move below 13.20 should be enough to confirm silver is heading towards 11.40 – 12.00 range.

 

Odds strongly favor that price range.  RSI has broken down, so has my own trend indicator (green oscillator), and MACD looks like it’s in trouble also.   I use these as coincident indicators.  The bottom line is PRICE itself.  

 

Conclusion:  

Silver is either going to hold this 13.40 area, and begin another up leg, or a drop below the 13.20 area will heavily tilt the odds towards silver moving to the 11.40 – 12.00 area.

 

If your accumulating long term, set your next purchase when silver touches the 12 dollar area.

 

Should we get a cascade effect like last year when all markets collapsed, the potential for silver to visit below 10 dollars still exists.  From a technical perspective, should silver break the 11.40 area I would look for a move somewhere to the 8-10 dollar area.

 

Impossible you say?  Never say impossible in the world of commodities.  For now, the silver price chart looks vulnerable if we crack below that 13.20ish area.  The technicals are also looking bearish.  Its technical’s have broken down further than gold due to the fact that silver is also and industrial metal and is reacting to the global recession as well. 

 

For gold bulls, silver can be a great leading indicator for gold as well.   Bulls take heed. 

 

Finally, we get to the seasonal factors.  The most likely timeframe for the metals to bottom is usually in late summer or fall.  October seems to have spawned many bottoms.   Thus far this year, the metals have pretty much followed the seasonal script pretty much to a tee.  Therefore the odds favor that silver should move in a sideways to lower fashion over the summer.  Should we hold the 11.40 area, then most likely a trading range between there and the spring highs would be in order.  However, should we break the main channel on the daily chart in this report then the odds will increase that silver will not bottom until this fall or until we penetrate the 10 dollar area, whichever comes first.

 

During the summer then, we have a couple of key areas.   11.40 -12.00 and 13.20 -13.40 are the two support areas to keep in mind.   As far as resistance goes, it’s the 13.87 – 14.06 area initially,   followed by 14.32 to 14.45 and finally 14.67 to 15.03 area.  Keep these areas in mind over the coming month as one of these areas will probably define both a top and/or

a bottom.

 

May you prosper

Bill Downey