Even though the silver price has sold off today, it doesn’t mean the rally
that started two weeks ago is over. While the silver price was down
more than 40 cents today, it may be retesting a support level before heading
higher. However, it doesn’t help that it took two weeks for silver to
go up more than 70 cents, but then fall 30+ cents today.
Regardless, traders and algorithms follow certain technical price
levels. Thus, the silver price was trading in a falling wedge pattern
for the past four months before breaking out of that trend last
week. Typically, a falling wedge pattern is bullish. Yes,
it sounds counter-intuitive, but falling wedges are more bullish to the price
action while rising wedges are bearish.
A perfect example of a rising wedge is shown in one of the Northman
Trader’s (Sven Heinrich) charts on the NASDAQ a few weeks ago:
As you can see, as the NASDAQ Index fell below its rising wedges, the
price action was bearish. Sven atNorthmanTrader.comhas been doing
excellent updates on these rising wedges and technical setups for the broader
markets. Furthermore, Clive Maund, precious metals technical analyst,
recently did aSilver Update stating that he thought the silver price would
drop considerably alongwith the broader markets. According to
Clive’s technical analysis, silver fell below its falling wedge, which is
bearish.
However, sometimes we have to RE-DRAW technical lines on charts to include
newer trading patterns. While Clive Maund saw the present silver setup
as negative or bearish, heading for a “Freefall” in his words, it turned out
to be the exact opposite:
Not only did silver finally break above its falling wedge pattern,
but it did so as the Dow Jones Index fell by 1,000 points. Thus,
the ongoing rhetoric that the precious metals prices will decline along with
the broader markets continues to be an incorrect forecast as gold and silver
trade higher during large market sell-offs.
If we look more closely at the silver falling wedge breakout, we can
clearly see how the price trades off technical support and resistance levels:
Once silver broke above the falling wedge (blue dashed lines) on June 3rd,
we can see that it closed below the resistance level on June 4th (black
dashed line). Now, the very next trading day on June 5th, silver shot
above the resistance level but closed on at it before moving higher the next
two days. Moreover, you can see that the silver price closed right
below the RED 200 Day Moving Average the following day, and then touched the
BLUE 50 Day Moving Average before going all the way up to a high of $15.15.
So, yes… TECHNICAL LEVELS do matter to traders and algorithms that
control the price action in the market. Unfortunately, I can’t
show a price candle for silver today because StockCharts.com doesn’t provide
daily chart updates for precious metals, commodities, or energy until after
the close of the day.
Now, the silver price doesn’t have to go back down to the top of the
rising wedge, shown by the RED DASHED LINE, but in many cases, it will.
Also, the silver price could continue lower to its long-term support level of
$14. There is just no way of knowing, especially in these highly
controlled markets by the central banks.
However, the fundamentals for the precious metals are much better than the
broader markets as I have pointed out several times in the past. While
these charts are from last week, we can see that the Dow Jones and NASDAQ are
still quite overbought when we look at their 200 Month Moving Averages versus
Gold and Silver:
While the Dow Jones and NASDAQ are trading well above their 200
Month Moving Averages, gold is much closer to its 200 MA, while silver is
below it. Furthermore, you will notice the “Production Cost”
trend lines I have put in for gold and silver during the 2008-2010 period and
currently.
Again, the notion that gold and silver will crash along with the markets
isn’t one that I believe will happen. And time and time again, we had
seen both gold and silver shoot higher when the markets experienced large
selloffs.
Lastly, in order for silver, “ON A TECHNICAL BASIS,” to continue higher,
it will need to bounce off the top of the falling wedge line. It will
be interesting to see the silver price action over the next week.
UPDATE: After-market close
Here is the silver price action for today, June, 10th:
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