Silver Market Update
Originally published August 29th, 2010.
After looking extremely vulnerable for weeks, silver staged an upside breakout last week that has taken the price away from the danger zone and also signaled a probable breakout to new highs that, should it occur after such a prolonged standoff, can be expected to lead to a powerful uptrend that takes the price to a target area in the high $20's.
On its 6-month chart we can see how on Wednesday silver broke out upside from the Triangle it had been stuck in for months. This is regarded as a genuine breakout because of the way it broke sharply out of the Triangle after weeks of quiet trading, and also because of other factors, such as the positive patterns approaching completion in a range of Precious Metals stocks. If it is genuine then it should not drop back into the Triangle, although it may well react back short-term towards its top line, which would be viewed as a buying opportunity, before it goes on to take out the resistance towards and at its highs around $21. A clear sell signal would only be generated by the price dropping below the bottom line of the Triangle.
The picture has brightened considerably this month - in July silver had looked decidedly vulnerable, with the price sagging and the 50-day moving average falling above it, and momentum very negative. It could easily have broken down which would have led to a plunge, and the fact that it has instead broken out upside is a strong sign that the lurking forces of deflation are to be temporarily vanquished by the liberal application of hefty doses of newly created money - so easy and convenient when you know how.
The 3-year chart shows that silver still has some way to go before it breaks out into the clear above $21, but the zone of strong resistance shown up to that level could now be swiftly overcome. This is because silver has been "knocking on this door" for a long time and should therefore have already absorbed most of the overhanging supply. After the prolonged standoff of the past year, a breakout to new highs should lead to a powerful uptrend up to the high $20's, and the MACD indicator shown at the bottom of the chart which is almost at neutrality certainly provides scope for such a move. In recent weeks we have recommended silver as a "no brainer" Straddle trade on the site, for it is was obvious that after such a prolonged period of going nowhere fast a big move was brewing. At this point it remains a great Straddle trade, especially if it should dip back to the top line of the Triangle in coming days, which would result in the currently inflated Call option prices being slashed.
A reaction back towards the top line of the Triangle in coming days or over the next week or so would certainly be viewed as a silver opportunity to load up on most things silver - silver itself, silver stocks and Call options etc, while stops may be placed below the bottom line of the Triangle to protect from an abort, which could lead to a devastating decline (not now expected). Finally, a factor that we should not overlook is that September is seasonally the strongest time of year for gold and silver.