Silver Market Update
Originally published March 13th, 2008.
About a week ago in the last Silver Market update we called a SHORT-TERM top in gold and silver, and we got one. As you may recall the timeframe for the reaction was until about the 17th. Although we have seen a reaction it has thus far been modest, and now, after the extraordinary action and events of the past couple of days, it MAY be over. In any event, with the time window for the reaction soon to close, and downside now considered to be limited, the risk is thought to be that of missing out on the next upleg, which promises to be even bigger than the last one.
The reason that downside is now thought to be limited is that in addition to the RSI easing from its critically overbought readings of a week or so ago, a large parabolic bowl has been identified that is now rising at a rapid rate and is not far beneath the current price. This bowl pattern can be viewed as a kind of geometric "force field" that is shepherding the price ever higher in an accelerating uptrend that has the capacity to get a lot steeper yet. It is true that the MACD indicator shown at the bottom of the chart is still at an uncomfortably high level - so we may see some further consolidation around current levels for a week or so to allow this to unwind, and which would also allow the bowl support line to catch up with the price and project it higher.
With the parabolic bowl promising to drive the price much higher in an accelerating arc, and downside to the bowl boundary now so limited, it makes sense to avoid the risk of missing the boat, and to position oneself for a renewed advance by silver.
On long-term charts it is clear that silver is still substantially overbought and normally we would conclude that an intermediate top is probably forming. However, these ARE NOT normal times - the global financial system is buckling and careening out of control. Recent actions by the Fed are the product of acute desperation and are exercises in procrastination only. Todd Benjamin, one of the very few TV commentators worth listening to, summed it up yesterday on CNN when he said that while the Fed's recent actions could be viewed as a sign of resolve and a determination to "do what is necessary" to defuse the crisis, they are also reaching "deeper into their bag of tricks" and getting ever closer to exhausting their options, and their actions are having less and less of a lasting effect. Thus, even though silver is substantially overbought on an intermediate term basis, it is very possible that it could accelerate soon into a spectacular vertical spike, especially if those heavily short throw in the towel. Bob Moriarty's recent comment that $20 silver would "suck silver out of the ground" may be true, but it's irrelevant, because speculators are governed not by real value but by momentum and by collective market psychology.
The way to play this market is clear from our dome pattern. Go long and stay long while the price remains above the dome in the reasonable expectation of an accelerating uptrend that could well develop into a spectacular runaway spike. Exit/reverse positions if the dome is broken, as this would probably trigger a panic sell off. This strategy affords an excellent risk/reward ratio.