Silver Market Update
Originally published February 15th, 2009.
Silver has advanced in a satisfactory manner to the first target given in the last update at the resistance in the $14 area and is now at a critical juncture, for there are several factors pointing to its breaking down into a reaction shortly. However, it could instead break above the resistance in the $14 area which would be expected to lead to a steep and rapid run at the strong resistance level in the $16 where exhaustion would set in.
The reason for this "it's probably going to break down, but it could instead rise steeply" interpretation, is readily apparent on the 1-year silver chart. For on this chart we can see 3 major factors that point to imminent reversal - it has arrived at an important resistance level around but mainly below the $14 level, and also at its falling 200-day moving average, which is a restraining influence, and its slow stochastic, shown at the bottom of the chart, is hovering at an extremely overbought level. On the other side of the coin it is still above the support of a parabolic bowl, which is rising more and more steeply and could "slingshot" silver at the strong resistance level in the $16 area, where it would arrive in an extremely overbought state and would be expected to rapidly burn out and react. We are going are going to have an answer to this one very soon now, for silver is being forced into a corner between the rising parabola and the upper return line of the uptrend channel - it must break one way or the other very soon. The major stock indices, as we have already observed, are looking set to break heavily lower, and if forced to take sides, we would have to go for silver breaking lower soon.
The long-term outlook for both gold and silver remains excellent, with global currency debasement being highly fashionable, and near zero interest rates thrown in for good measure - no wonder investors are buying physical gold and silver hand-over-fist. This being so, if silver breaks down from the parabola shown soon as expected, it is likely to react back across the uptrend channel towards its lower support line, where it is expected to stabilize and turn up again. It will therefore be a buy again on an approach to this support line. If instead it breaks above $14 and races towards $16, traders can reduce positions there in expectation of a reaction, and get back in again once the reaction has run its course.