Silver Market Update
Originally published February 7th, 2010.
Silver did exactly what was predicted in last weekend's update - it bounced off the support of its long-term uptrend line before reversing and crashing through it spectacularly on Thursday, but then on Friday it bounced back strongly in the late trade, leaving behind a bull hammer on the chart, leading bulls to declare that "the correction is over". The questions therefore are "Was it a correction and is it over?"
For reasons that are discussed in the Gold Market update, the recent downturn in both gold and silver is thought to mark the onset of a more severe decline associated with the re-emergence of deflationary fears - Deflationary Downwave Mk 2, otherwise known as Son of Crash 2008. It should not mark the end of the bullmarket in Precious Metals, because politicians can be expected to react to another deflationary downwave the only way they know how, which is more money creation, more bailouts and more monetization, leading to intensifying inflationary pressures again, upping the stakes and the risk to another higher level.
On the 2-year plus arithmetic chart for silver we can see that unlike gold, silver has broken down from its uptrend by a decisive margin, which is regarded as a serious bearish development that opens the door to a plunge similar to that which occurred in 2008. While the combination of it becoming critically oversold on some short-term oscillators, like the RSI shown on this chart, and the appearance of a bull hammer on the chart on Friday, suggests temporary downside exhaustion and a relief rally, any such rally is likely to to brief and unlikely to carry the price back above the $16 level again before the decline resumes in earnest. Silver is therefore regarded as a short sale on a near-term rally towards $16, with a stop above $16.