Silver's False Bullish Breaks Head Fake Technicians

Friday March 16, 2012 15:42

As February ended, silver made a spectacular rise and fall. The metal’s spot price first traded up to a high of $37.20 on the 28th and then crashed down hard to hit a low of $33.96 on the following special leap day of February 29th.

Since then, the spot price of silver has traded down further, falling as far as $32.46 before then finding support and subsequently bouncing to $33.50. And then again, spot prices were pushed down below the 50 day moving average. The overall decline from the $37.20 level took the metal just below its reactionary low of $32.63 seen after it had peaked at $34.38 on February 2nd and 3rd. 

Interestingly, that temporary spike in silver was accompanied by at least three important bullish technical breakouts that subsequently turned out to be false signals.  No doubt many technical traders were duped into establishing long positions by the initially very bullish signals seen on or just before the 28th that were then quickly reversed by the sharp drop seen on the 29th.

Since the technical picture for silver would have seemed unreservedly bullish had the market not fallen so dramatically on the 29th, one wonders how anyone could not see that it reflected some form of intervention taking place behind the scenes?

False Break of Declining Trendline

The first notable false upside break was that of an important declining trend line — which is also the medium term downward sloping channel’s top line — that can be drawn between the major price peaks of $49.78 and $44.17 seen on April 24th, 2011 and August 21st, 2011 respectively.

The spot silver market had been trading just under this key trend line on the 23rd, 24th and 27th, prompting considerable excitement among technical silver traders who had plenty of time to note this important trendline test. 

The spot price finally broke the trendline on the 28th, when it was then drawn at the $35.66 level, prompting technical traders to pile into silver and triggering plenty of buy stop orders.

Nevertheless, the initial bullish euphoria quickly reversed the following day, as silver fell back below the declining line, which was then drawn as the lower $35.59 level, and the market has since traded underneath it.

False Break of 200-day Moving Average

Another false bullish signal came a few days earlier on the 23rd when silver initially closed above its 200-day Moving Average for the first time since September on a daily basis.

A break of this closely watched medium term indicator by the price can prompt considerable follow on transactions since it is often considered a trend reversal signal by longer term strategic traders and fund managers.

Silver ended that week at $35.36, also above its 200-day Moving Average at $34.82, yielding an additional confirmation. Nevertheless, the bullish break was soon nullified on the 29th, as the market closed at $34.66, which fell just below the average’s $34.80 level on that day.

False Break of Double Bottom Neckline

A potential double bottom chart pattern has been widely identified on silver’s daily spot price chart with two almost equal lows at $26.05 and $26.15 on September 26th and December 29th of 2011.  The intervening high at $35.66 was seen on October 28th of that year, which defines the pattern’s key neckline level.

Although the $35.66 neckline level was initially broken intraday on the 24th of February as the market rose to $35.70, the price then failed to sustain a close over that level. Nevertheless, the notable rise on the 28th did manage to show a close over the neckline at $36.89.

When the market then fell back below the neckline on the 29th and also closed underneath it at $34.66, this represented yet another false bullish technical break for silver.

By Dr. Jeff Lewis,, Editor

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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