Calling an end to the correction in silver is tricky, but technical
analyst Clive Maund sees an intermediate base forming for silver stocks, a
"classic buy spot."
Although at first glance it's a tricky call, because superficially a bear
flag appears to be completing in silver, on closer inspection it now looks
like silver's correction is done and an intermediate base pattern is
completing. If so, we are at an excellent entry point for many silver stocks,
which have been savagely beaten down over the past several months�a necessary
correction following their outsized run-up earlier in the year.
On its one-year chart we can see that silver's corrective action from
early July has brought it all the way back to its steadily rising 200-day
moving average, a classic buy spot, where a potential intermediate base has
formed. This corrective action has more than completely unwound the earlier
overbought condition.
However, there are grounds for concern on two counts. One is that the
steep drop early in October broke the price below the uptrend line shown, and
the other is that the pattern that has since formed looks very much like a
bear flag at first glance. If it is, another sharp drop will follow soon.
Thus, it is interesting to observe that the volume pattern is not
consistent with this being a bear flag. Instead, it is consistent with this
being an intermediate base pattern. To properly examine the volume pattern in
this sideways formation, we need to refer to a three-month chart, which opens
it out sufficiently to see what is going on in detail.
On the three-month chart, we can see in detail the tight pattern that has
developed following the sharp drop early in October. It looks like a bear
flag until you look at the volume. Instead of a volume pattern consistent
with a bear flag, which would feature greater downside volume days than upside
volume, and a steady trend to lighter volume, we have the exact opposite over
the past couple of weeks�greater upside volume days and a trend of increasing
volume. To steal a term from Infowars or Zero Hedge, this suggests a
"false flag" that will lead to an upside breakout.
On silver's seven-year chart we can see the 2011�2015 bear market in its
entirety, and how breakout from the major downtrend channel led to a
not-particularly impressive rally up to important resistance, where the
advance stalled out and reaction set in. The relative feebleness of the rally
following the breakout from the downtrend is not a cause for concern, as in
the early stages of a bull market gold tends to outperform silver�and it
certainly didn't bother silver stocks any. Silver's next major upleg should
take it above this resistance, albeit perhaps after something of a battle,
and then on toward the next important resistance level in the $26�27 zone.
Although silver's long-term, 20-year chart presents a more messy picture
than gold's 20-year chart, it does also show that the 2011 bear market may be
viewed as a big correction to the major bull market advance from late 2001,
as is the case with gold. Unlike gold's corrective bear market, which stopped
at a major support level related to an extensive period of trading in
2008�2009, silver dropped down through its corresponding support level on its
corrective bear market, and found support at a lower level related to an
extensive period of trading in 2006�2007. All of this does mean that, so far,
silver has been underperforming gold.
Disclosures:
1) Statements and opinions expressed are the opinions of Clive Maund and not
of Streetwise Reports or its officers. Clive Maund is wholly responsible for
the validity of the statements. Streetwise Reports was not involved in the
content preparation. Clive Maund was not paid by Streetwise Reports LLC for
this article. Streetwise Reports was not paid by the author to publish or
syndicate this article.
2) This article does not constitute investment advice. Each reader is
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Charts provided by Clive Maund
