Silver Market Update
Silver reacted quite sharply last week from resistance at the March highs, following the buildup of a large "Commercial" short position, and is now at a critical juncture above key support which must hold to avoid the risk of a possibly severe retracement. The 6-month chart shows recent action in detail.
The 2-year chart reveals that silver is still within the confines of a very large symmetrical triangle pattern, whose lower boundary, when extended is also a long-term uptrend line. It is clear from this chart that a resolution of this standoff, a breakout one way or the other, is fast approaching.
When silver broke sharply higher at the end of May it had looked like it would swiftly run to the upper boundary of the large triangle towards $8. Instead, it stalled out at the March high, and the Commercial short position ramped up, indicating a probable retreat, which is what we saw last week. It had been expected that the Commercial short position would shrink on this decline, but, as we can see on the latest COT chart below, it has not - it has done the opposite. This is viewed as an ominous development that greatly increases the risk of a breakdown from the large triangle. Such a development would be expected to tally with gold failing to overcome its triangle apex resistance (see Gold Market update) and going into retreat.
Any subscribers who acted on the "Silver Stocks buy spot" article posted on the site just before the low on Thursday morning may have benefited when silver stocks ramped yesterday, with some of the larger issues gaining about 5%. In the light of these latest COT figures, however, it is considered wise to tighten stops/trim some holdings.
There is one further possibility that should be mentioned. Quite often, when prices get forced into the apex of a triangle, as we are seeing now with silver, an upside breakout aborts, leading to what is called an "end run about the line" - prices advance for a while and then arc round and plunge through the nose of the triangle and go into a severe decline. The way to guard against the worst effects of this, if we see an upside breakout, is to automatically exit holdings if silver subsequently breaks below the apex of the triangle.