Silver Market Update
Originally published August 25th, 2008.
Silver is believed to have bottomed. On the 1-year chart we can see how the failure of the clear line of support (now strong resistance) at and above the $16 level led to a savage plunge. It crashed the next line of strong support that we had expected to hold but stabilized not far below it, the decline doubtless being arrested by the unprecedented oversold extreme that it had by this time attained.
There are several factors suggesting that the bottom is in. One is that silver has dropped to long-term trendline support that we can see on the long-term chart. Another is that it is still extremely oversold with an unprecended low reading on its MACD indicator. Still another is that it has dropped way below its long-term moving averages, and although now still quite a long way below its 300-day moving average, which we would read as bearish in the case of gold, it is not much more so than at the August 2005 panic low, which was followed by a steep advance. The chief difference between now and 2005 is that the recent plunge has left a lot of players "hung up" at much higher levels - above the key support/resistance line at and above $16 who can be expected to generate heavy resistance once the price attempts to vault this level, and therefore a first attempt to run this resistance, especially if it happens rapidly, will be regarded as an opportunity for shorter-term traders to short silver. The plunge caused technical damage, greater in the case of silver than gold, and one consequence is this strong resistance level.
The large lower shadows on recent candlesticks, clearly visible on the 1-year chart, reveal underlying demand snapping at silver on down days and further suggest that the bottom is in. There is thought to be a fair chance that silver will react back early this week towards but not as far as the recent lows as it continues to base beneath the resistance in the $14 area, and any such reactions will be regarded as buying opportunities.
The latest silver COT shows continued improvement, although it is not as positive as the COT chart for gold.