Why Silver Could Drop Below $30/ozt
A close look at where silver is currently positioned at this stage of its developing long-term bubble, and what can be expected short-term in its price using Bump-and-Run and Dead-cat Bounce pattern analyses, suggests that silver is on its way to returning to its long-term mean.
Where is Silver Positioned in This Bubble?
As shown below, it might be interesting to compare the silver chart with this graph of â€śMain Stages in a Bubbleâ€? by Dr. Jean-Paul Rodrigue. Â It shows that, after a brief â€śreturn to normalâ€?, silver is now moving into the â€śfearâ€? area of the Blow off Phase as it â€śreturns to the mean.â€?
What is the Bump-and-Run Pattern Saying about the Short-term Price for Silver?
A Â Bump-and-Run pattern typically occurs when excessive speculation drives prices up steeply.Â According to Thomas Bulkowski,Â this patternÂ consists of three main phases:Â Â
- A lead-in phase in whichÂ a lead-in trend line connecting the lows has a slope angle of about 30 degrees.Â Prices move in an orderly manner and the range of price oscillation defines the lead-in height between the lead-in trend line and the warning line which is parallel to the lead-in trend line.Â
- AÂ bump phase where, after prices cross above the warning line,Â excessive speculation kicks in and theÂ bump phase starts with fast rising pricesÂ following a sharp trend lineÂ slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height.Â Once theÂ second parallel line gets crossed over, it serves as a sellÂ line.
- A run phase in which prices breakÂ support from the lead-in trend line and plunge lower in a downhill run.
As shown in the chart as of 6/28/2011 below, silver has been developing an intermediate-term Bump-and-Run pattern since last September.Â It only recently broke support from the lead-in trend line and entered into the Run phase to plunge lower in a downhill run last week.
The next downside price target is projected at around $29/ozt. by the target line which is parallel to the lead-in trend line and is distant from the lead-in trend line with the same lead-in height.
What is the Dead-Cat Bounce Pattern Saying about the Short-term Price for Silver?
In addition to being in the run phase of the Bump and Run pattern silver is in a Dead-Cat Bounce pattern. A Dead-Cat Bounce pattern has three major phases:
- An initial plunge phase during which a sharp decline of 25% to 45% is experienced over several days.
- A bounce phase during which there is a short-term recovery of between 15% and 35% in 1-5 weeks.
- A post-bounce decline phase during which there is a slow decline over a 2-10 week period to a low somewhere between 15% and 45% below the bounce top.
Whatâ€™s Next for Silver?
- the initial plunge phase in early May with a decline of 31% (i.e. from $48.42 to $33.53) and
- the bounce phase at the end of May going up 15% (i.e. from $33.53 to $38.48).
The post-bounce decline phase has been ongoing since the early part of June and has the potential to drop 15% to 30%. A 25% drop would, incidentally, bring the price of silver down to $29/ozt. which would be in keeping with the abovementioned Run phase of the Bump and Run pattern.
The above chart patterns suggest that silver could drop below $30 per troy ounce soon on its return to its long term mean. It is the time to re-check fundamentals, reality, and risk for silver when Fedâ€™s QE2 ends.
If you found the above article of interest, you may wish to read my Market Weekly Update on gold, silver, the U.S. dollar and the S&P 500 by going here.
Dr. Nu Yu
Dr. Nu Yu (fx5186.wordpress.com), managing partner and co-founder of Numarkan Investments and an affiliate of the Market Technician Association, is a frequent contributor to www.munKNEE.comÂ â€śItâ€™s all about MONEYâ€? and www.FinancialArticleSummariesToday.comÂ â€śA site/sight for sore eyes and inquisitive mindsâ€?. He can be contacted at firstname.lastname@example.org