Originally published December 18th, 2011 .
Some weeks ago in a Silver Market update we had noted that a large potential Head-and-Shoulders top area was completing in silver, but we got "thrown off the scent" by the positive Accum-Distrib line (now rapidly reversing) and the seemingly strongly bullish COT structure. In the light of the severe bearish breakdown by stocks indices last week this potential H&S top is now viewed as legitimate. Silver held up remarkably well last week considering what happened to gold, which is a straw that silver bulls are now clutching on to as evidence that silver is still in a bullmarket, but the reason that it held up so well is that it is close to a zone of strong support towards the lower boundary of the H&S top area. Once this support fails it's "curtains" for silver which can be expected to plunge into the high teens.
The Head-and-Shoulders top is shown on the 3-year chart for silver shown below. On this chart we can also observe various other bearish factors that are now coming into play. One is that silver has been trading way below its 200-day moving average since the September plunge, and this indicator is now rolling over and about to turn down, which will put the price and its moving averages in nerarish alignment for the first time since 2008. Another important bearish factor is that that the MACD momentum indicator shown at the bottom of the chart is now in an established downtrend, and with it now showing an only moderately oversold reading there is plenty of scope for further heavy losses going forward.
The 6-month chart for silver shows recent action in more detail, in particular last week's breakdown from what we can now see was a Head-and-Shoulders continuation pattern, which interestingly forms the Right Shoulder of the much larger Head-and-Shoulders top shown on the 3-year chart above. Some eagle-eyed subscribers pointed this out to me ahead of the breakdown, but fooled by the COT, I did not take it seriously enough. With regards to the COT, if it is not at historically bullish readings, how can silver drop? The answer to that is simple - the further it drops the more bullish the COTs are likely to become, and there is no law against the Commercials going net long one day - now that would be a sight to see.
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