Silver Market Update
Originally published February 24th, 2013.
Even though the technical indications for silver are not as strongly bullish as those for gold, they are now sufficiently positive that silver is likely to take off higher before much longer, encouraged by the strength that we should soon see reappear in gold. Of course, it will probably take some weeks for sentiment to recover sufficiently to drive a significant rally after the latest sharp drop, so we may see some backing and filling before a sustainable uptrend can get going, but that is normal.
We predicted another downleg in silver in the last update, which was posted on the 10th, due to the still bearish COTs at that time and the way that silver was topping out beneath a zone of resistance. The downleg started the next day and has proven to be quite severe, as we can see on our 7-month chart below. The decline did not pause at the support at the early January bull hammer, but continued lower to another support level and the trendline target shown. The bounce on Thursday and Friday occurred because silver has become critically oversold on its RSI, but it looks weak, and so we could see some more minor downside short-term before the current downleg has completely run its course. Nevertheless, we are believed to be close to an important bottom here.
On its 3-year chart we can see that silver has dropped back close to the lower boundary of its recent trading range. While we may see a little further downside short-term towards the strong support at the bottom of the trading range, it is now viewed as entering buying territory, however, this support is clearly defined and of great importance as it has turned the price back up to start significant rallies on 3 occasions over the past 17 months, so it must hold - if the price breaks below it, it would likely trigger a plunge as lines of stops would be triggered.
Another bullish point to note is that after breaking out of its downtrend back last August - September, silver has not dropped back into it, but has instead drifted back down in a reaction, riding the support above the upper trendline. The current position of the price not far above this trendline and also just above the critical support towards $26.50 suggests that it is now at a very good point for a major new uptrend to start.
The long-term 7-year chart is encouraging as it shows that all of the action from the April - May 2011 highs looks like nothing more than a reaction within an ongoing major uptrend that should re-assert itself before much longer, although as we can see the lower channel has not yet caught up with the price - but it may not have to, given the now super positive outlook for gold.
So it is good to see that we now have at last a significant improvement in silver's COT structure on its latest chart, which, since it is only up to date as of last Tuesday, does not take into account the sharp drop in silver's price that occurred on Wednesday, and so these figures can be presumed to be better still now. However, it must be said that there is considerable room for improvement, and we may see it in the weeks ahead if silver backs and fills for a while above the support before the expected new uptrend begins. That said, it is considered prudent not to wait for that to happen before taking positions, because downside now looks very limited and gold's COT (and other indicators) is already very bullish indeed, meaning that it could take off higher with little delay now.
The public were still too bullish on silver just a few weeks ago, which is a big reason why it plunged, but as we can see on the latest public opinion chart, they have now curbed their enthusiasm, which is a good thing. Public opinion is now back at the more acceptable levels from which a strong uptrend can get started.
Chart courtesy of www.sentimentrader.com
In conclusion, although silver may back and fill short-term, and possibly drop back a little more towards its key support level at and above $26.50, it is now viewed as being back in buying territory ahead of the powerful uptrend that is expected to develop before much longer that should take it comfortably to new highs.