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Our last in depth look at the
silver market (Technical Trends in Perspective December 9, 2003) was
about 3 months ago when the market was trading around $5.60, basis spot month
futures. Prices were at levels not seen since late 1999 - early 2000 but that
was not sufficient to suggest that the market was beginning to realize
prospects for a long-term price uptrend. Since then, 2 significant thresholds
have been crossed (discussed later) and market action now favors the view
that a major advance is getting underway.
The monthly silver
charts above provide both long-term perspective within the context of our
December 2003 wave analysis as well as a picture of classic chart behavior
that we associate with a change in a prevailing long-term downtrend. Price
swings on the large chart are annotated to reflect a triangle pattern
(a-b-c-d-e) that began in 1983. The trend line that is drawn through points
"b" and "d" defined the top of the pattern. As the
pattern was completed in January, better seen in the inset monthly chart,
prices gapped through the trend line. Then in February prices pulled back and
filled the gap, tested the downtrend line, and then reacted higher to
establish a positive "outside" range (higher high and lower low
than the preceding range). Follow-through so far in early March is
additionally constructive. The trend line gap, gap filling pullback, trend
line test and strong close are a combination often seen as markets undergo a
major trend change.
If our long-term
triangular interpretation is correct, then the initial upside potential
following its completion is the highest level attained as the pattern
unfolded. That is point "b" at $7.40, basis spot month futures.
Trading in the week ended March 12, 2004 reached a new high at $7.26, so the
$7.40 area appears attainable in the near-term. (That level has additional
technical significance which we will discuss shortly.) A final point to note
on the monthly chart is that its 14 period stochastic indicator, while at an
extremely elevated reading, currently shows no indication of flattening or
peaking that would suggest uptrend exhaustion.
The above weekly
silver chart and momentum indicator present some intermediate-term
perspective. Probably the most notable bullish development since December was
the move above the $5.80 resistance area that capped 3 rally efforts in 1998
- 1999 (horizontal dashed line). Market action the week ended January 2, 2004
featured a gap above that area but, unlike the subsequent gap through the
long-term downtrend line, the gap through $5.80 has not been filled. Generally,
we believe that gaps tend to be filled. Briefly stated, a gap is an anomaly. Since
normal markets usually don't accommodate anomalies, gaps are usually filled
and that occurs sooner rather than later. However, gaps that occur at major
trend changes often remain open until prices return to them in the next
opposite cycle. Therefore, we think that a return to the $5.80 area is a
doubtful short- or intermediate-term prospect. The weekly stochastic
indicator, although rising, is below its January high point. Contrasted with
new price highs attained in the past week, the indicator displays an
unconfirmed bearish divergence. If confirmed (i.e., the indicator turns
down), that divergence may warn of an interim trend top as prices approach
the key $7.40 resistance level (horizontal red line).
Is there reason to
think that uptrend development could be arrested around $7.40? Yes. The
distance of the first rally (annotated 0 - A) that followed the 2000 low at
$4.0150 is $1.1350. If we multiply $1.1350 by a Fibonacci-related 2.618 and
then add the resultant product to the June 2003 low (point "B" at
$4.4300) where we consider the current advance to have begun, then we derive
a target at $7.40. That would be about the maximum carrying power that we
would expect of a move that comprises a non-trending correction of the 1998 -
2000 down leg. While we consider that scenario to be a low probability event,
we want to lay it out here so that we are not remiss in presenting an
objective market assessment. We would need to see unambiguous negative price
and momentum indicator behavior to give this scenario serious consideration.
The silver daily
continuation chart above shows our current wave interpretation of uptrend
development from June 2003. As we see it, this sequence has completed 4 waves
(circled 1 - 4) and is in the fifth wave of a 5 wave move. The length of wave
1 was 80¢. The length of wave 3 was $1.9650, approximately two and a
half times that of wave 1. Often times when wave 3 is extended relative to
wave 1, as is the case here, the length of wave 5 will approximate that of
wave 1. If we add 80¢ to the terminal point of wave 4, which is point
"c" at $6.30, we derive a potential high point for wave 5 and the
ongoing sequence at $7.10. Therefore, if the ongoing advance is nearing an
interim high, we think that it will be in the $7.10 - 7.40 area, basis spot
month futures.
Our final chart,
below, compares current copper and silver up trend development. This weekly
perspective suggests that silver, rather than nearing a high, may be verging
on uptrend acceleration. (These charts are coincident in time, both low
points at 0 and 0' respectively being November 2001.) Both markets developed
extensive sideways consolidation areas after their initial rally highs
(points 1 and 1' respectively). The obvious difference at this time is that
copper has gone into a radical acceleration phase. We think that the overall
pattern similarity that includes the circled volatile high level
consolidation pattern after the run up through copper's point 3 and silver's
point 3' warrant keeping a close watch on silver for similar upside
acceleration.
In summary, market
action in silver during the last 3 months suggests that the market has turned
up out of its 1980 - 2000 downtrend. The advance from June 2003 is more than
respectable but it has not shown the volatility or rapid gain that we
associate with uptrend exhaustion. The current $7.10 - 7.40 area should be an
important testing ground for an incipient long-term bull market. How prices
act within that zone should give us a better handle on the internal strength
of the market.
Trading activity
shows that the market can quickly trim 30 - 80¢ off a new high without
incurring trend damage. Therefore, we still advocate trading the long side
but with the understanding that corrections could run between 50¢ and
$1.00. Immediate underlying protection points should be at $6.64 and $6.30,
basis spot month futures.
Eidetic Research
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