Silver Market Update
Originally published October 28th, 2012.
The intermediate top in silver was called several weeks back in the last update. We had expected it to plunge, but instead into went into a more orderly steady decline, its measured rate of decline thus far being due to the fact that the dollar has not entered into a new uptrend - yet.
We can see how silver broke down from its uptrend, formed a Double Top beneath resistance, and then went into decline, in detail on its 6-month chart below. We shorted silver investments near to the top with a close overhead stop, a tactic which has worked out well, and the big question now is to determine whether the downtrend is set to continue, or maybe even accelerate, or whether this is just a correction that has about run its course so that a reversal to the upside is imminent, and the COTs, which we will look at lower down the page, have an important part to play in making these determinations.
Looking further at the 6-month chart we can see that the downtrend of the past few weeks has taken silver down through its rising 50-day moving average, to approach its 200-day moving average, which is also rising, and it is getting oversold at this point. While this won't necessarily stop it dropping further, it is enough to put us off entering any new short positions here - so if you missed doing so at or near the top, you'd best forget it as it's getting too risky. The fact that we now have a neat clearly defined downtrend puts existing shorts in a good position, as you can stay short for further downside, but take profits and stand aside if the price makes a clear breakout from this downtrend, which would be evidenced by a close 20 cents above the trendline boundary. Apart from some moving average support, the first serious support comes in at the level shown in the $28.30 - $29.10 zone, which is quite a long way down from where we are now, and if the downtrend isn't broken that is where it is headed.
There is one scenario that we should be aware as it may produce a whipsaw. The dollar may back off from the resistance it is now at briefly, before turning higher again and breaking out as expected. This could result in a breakout by silver (and perhaps gold) from its downtrend that is a false move which is followed by a severe decline. We will deal with this on the fly on the site if it should occur.
What does the longer-term 3-year chart reveal of the larger picture for silver? It tells us that silver is essentially rangebound between the nearest major support and resistance zones shown with an overall neutral trend, and this being so it could quite easily drop back to the major support level in the $26.50 - $28.00 area, and should a deflationary shock hit, it could obviously crash this support and plunge as in 2008.
The COT charts assisted us greatly in determining that silver was set for a drop in the last update, when it was pointed out that the seldom wrong Commercials were heavily short. It is therefore logical to look for a significant reduction in Commercial short positions on the latest COT charts, if we are to see a breakout and significant recovery in the price of silver soon. The bad news for silver longs is that, as we can see on the latest silver COT chart shown below, there has been little reduction in the Commercials' massive short positions. This implies that the downtrend is set to continue and possibly even accelerate, and this fits with the latest COTs for the dollar, which are strongly bullish and imply that the dollar is set to break out upside from its recent base pattern shortly, which will of course be bad news for both gold and silver.