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The following is an example of the
quality of technical analysis available to subscribers of the Metal Augmentor service. Just before the following
technical analysis was published, we speculated on the imminent breakout by
silver from its intermediate triangle pattern.
Silver Market Technical Analysis
by Eidetic Research
 
The foundation of our technical
approach to analyzing markets rests on three principles: pattern recognition,
momentum conditions and wave analysis. Although our initial monthly chart
above features wave annotation, we are presenting it more for perspective than
wave interpretation. In this analysis we want to concentrate on momentum
conditions but we will revisit the above chart in our concluding remarks. For
now, our longer term perspective on silver is that the market completed a
major down price cycle in November 2001 at a Comex nearby futures low of
$4.0150. Since then new up cycle trend development has encountered heavy
selling pressure around $20. Prices have backed down, sometimes aggressively
from highs around $20 in March and July 2008, December 2009 and May 2010. Our
August 21,
2010 silver market analysis discussed the potential for a
near-term move up to the $21.20 area given the upside completion of a May-August
2010 triangle pattern (pictured here). The pattern did complete to the
upside so we are expecting further gains from a current price at $19.90 as we
write.
Our favorite gauge of price momentum
conditions is the stochastic(s) oscillator but we also rely, albeit to a much
lesser degree, on Wilder’s ADX indicator. For those unfamiliar with the
indicator, it may be defined thus:
ADX attempts to measure the trending
quality of a market . . . The indicator measures the strength of the trend,
regardless of direction; the higher the value, the stronger the trend.
The indicator itself appears as a line
that may move between values of 0 and 100 (see indicator on silver chart
below). In the past we did a study of the reliability of the indicator
(10-period and applied to Comex gold prices) and our conclusion is that as
far as its application to weekly charts goes, it is a better gauge of trending
power in up markets than it is in down markets. We also adhere to the view of
other technical analysts that the indicator needs to be rising and above a
threshold of 20 to confirm a sustained trend condition.
Pictured next below is a weekly silver
continuation chart with a 10-period ADX in the sub graph. This chart is
worthy of several interpretive comments. As you can see the ongoing uptrend
cycle shows pattern repetition. Recurrence of patterns in a cycle is common
and that condition is often seen across time frames which can range from
intraday to monthly. High level continuation patterns, bounded by red
overhead resistance lines, occurred in 2004-2005 and again in 2006-2007.
Arguably the resistance line that we have drawn from the 2008 high also defines
the upper boundary of an even larger pattern of similar appearance.
Note that in the 2005-2006 pattern the
ADX indicator bottomed in May 2005 at a value of 11.4 (cyan box on indicator
that has been extended up to the price chart). It did not cross above the 20
trending level (horizontal magenta line on indicator) until October (prices
circled in yellow) and the price consolidation was not completed until
November 2005. During the 2006-2007 pattern, the ADX indicator bottomed at a
value of 8.9 in August 2007. The indicator cross above 20 occurred in
November 2007, coincident with the completion of the price consolidation.
Currently the ADX indicator turned up the week ending August 20, 2010 from a
value of 7.9.
Our price data dates from January 1970
and the 7.9 ADX reading is the lowest in the entire series. From the previous
behavior of the index, we draw two inferences. First, there’s a long
way to go before the indicator crosses above the trending threshold at 20.
That could mean prices will consolidate around the overhead red resistance
line at about $19.70, not ruling out a significant pullback within the
pattern similar to that in mid-2007. Or prices could forge ahead toward their
$21.20 area target and thus be in new uptrend high ground before the ADX
crosses 20. Second, the absolute low level from which the ADX has turned up
suggests that potential uptrend development could be pronounced in its
trending power – i.e. surprising in upside acceleration with
corrections being less deep than traders expect.
Before we conclude, we would like to
show one more chart since we think that it tends to corroborate the
concluding sentence in the above paragraph. Below is a gold/silver ratio
monthly chart. This is obviously a long-term chart where swings in the ratio
are long to develop and mostly sustained. Following the February 1991 high at
98.9 the ratio declined to a March 1998 low at 46.5. Since then the ratio has
been confined to a range that is bounded by two highs at 80.4 and 80.1 in
2003 and 2008, respectively, (overhead red line) and two intermediate-term
lows at 46.5 in 1998 and 2006 (underlying green line). Ratio values are now
declining and at about the middle of the range (63.7). Because of software
limitations, we cannot show the monthly stochastic in this illustration but
we would note that the indicator will make a monthly down cross in neutral
territory given September closing values at current levels (i.e. Comex active
nearby futures at $19.90 plus/minus). Given a downturn in the stochastic
indicator, the intermediate-term bias would be for the gold/silver ratio to
move lower. In that case, we would expect an intermediate-to-long-term
downside move to the 46.5 area.
To finish our chart references,
let’s return to our first chart above — that with Elliott wave
annotations. In our opinion, if our illustrated wave scenario is correct
— we have previously presented our rationalizations for it to Metal
Augmentor subscribers — then the most significant point about the chart
is the nature of the corrective swings that followed the May 2006 high at
$15.11 (annotated point I).
The increasing amplitude of the a-b-c labeled sequence
established what is called an “irregular” flat that featured
extension in the c-swing. In our opinion “irregulars” of that type
in the number II wave position are rare and, in this instance, we think that
price behavior signaled an environment in which the market will be
continually subject to unexpected and pronounced price volatility.
In summary, weekly momentum conditions
in the silver market suggest that its recent advance from below $18 to a high
at $19.93 basis September Comex futures on September 3 could be the start of
a sustained trending phase. That scenario would likely favor trend strength
well above a near term target around the $21.20 level. Deteriorating momentum
conditions in the gold/silver ratio, if further corroborated at the end of
September, would also suggest that silver prices could improve, especially
relative to gold. Since the ADX indicator has only recently turned up,
however, there is time enough for silver prices to still be vulnerable to
downside pressure in the near-term as the prevailing pattern from the 2008
high is completed in a fashion similar to patterns in 2005-2006 and
2006-2007.
Eidetic Research
September 3, 2010
This report is for informational
purposes only and is not intended as an offer or solicitation with respect to
the purchase or sale of any commodity, futures contract, or option contract.
Although the statements of facts in this report have been obtained from and
are based upon sources that are believed to be reliable, we do not guarantee
their accuracy and any such information may be incomplete or condensed. We do
not assume responsibility for typographical or clerical errors in this
report. All opinions included in this report are as of the date of this
report and are subject to change without notice. Employees of Eidetic
Research may hold positions in futures or cash markets that are either in
accordance with, or contrary to, stated conclusions within this report.
Tom Szabo
Silveraxis.com
Tom Szabo introduces
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