Silver Market Update
Originally published August 21st, 2011.
Although we have seen a quite strong rally by silver over the past week as expected, it is hard to reconcile the prospects for a continued rally in silver with the outlook for a substantial reaction by gold soon. This throws our wave count into question and opens up the risk of silver reversing back down from the upper trend channel return line shown on our 6-month chart that it hit on Friday when it enjoyed a strong up day, and also highlights the possibility that the action of the past several months is a bearish Rising Wedge that will be followed by renewed decline, although for this scenario to become a reality, the price would have to break down beneath the lower supporting trendline of tentative converging channel shown. Otherwise the chart still looks pretty good with silver not being seriously overbought on its short and medium-term oscillators and its moving averages in bullish alignment. Here we should note that there is currently a considerable disconnect between silver and gold, and also that a break above the restraining top line of the channel shown would likely lead to a swift advance to resistance near the highs.
From looking bullish last week, silver's COT chart has turned more neutral/bearish. As we can see the Commercial's short positions have ramped up again, and this data is only for last Tuesday's close - clearly we can presume that the Commercial's short positions have ramped up even further as the week wore on, particularly after Friday's strong gain by silver, and if this is so the prospects for a reversal by silver soon are correspondingly greater.
Unlike gold, silver's chart presents a rather confusing picture at this point - despite the strength late last week it is looking quite likely that it will go into reverse shortly and get taken down by gold as the latter reverses into corrective mode.