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Originally published February 14th, 2010.
We sidestepped the recent C-wave decline in the sector, in particular the plunge in silver, scaling back positions the day before it began, and as we now know the PM sector has followed the script set out in the Marketwatch update of the 19th January to the letter. However, the evidence that has accumulated over the past week or so suggests that we have since become too cautious - we should have stuck to that script as it now appears that the correction is over and that the PM sector is powering up for a major advance. Fortunately little has been lost provided that we get back on track without delay.
The 6-month chart for silver still looks rough and it helps to look also at the much more bullish looking chart for gold in the Gold Market update. On its 6-month chart we can see that silver has plunged since mid-January, crashing support at the bottom of a shallow uptrend in force from September, and also an important support level in the $16 area which will now provide resistance. Plus points on this admittedly rather grim looking chart are that silver is now deeply oversold, as shown by its MACD indicator at the bottom of the chart, and below a still rising 200-day moving average, which itself increases the chances of a turnaround to the upside. Note that while silver is on the point of breaking out upside from the steep downtrend shown, and will do if gold breaks out upside immediately from its Falling Wedge, the damage caused to sentiment by the severe drop and failure of a trend channel and a support level means that silver will probably need to back and fill for a while before a major uptrend can get going. Thus a breakout from the downtrend will probably result in a sharp rally and then a reaction back to a higher low before it can continue on up.
On the 18-month chart we can see a reason why silver should reverse to the upside here. While the failure of the parallel uptrend channel shown was a worrisome development, there is another valid more shallow uptrend support line in play where the price has clearly found support, that is shown in light blue, and other factors, most notably what we are seeing on the gold and PM stock index charts, and also on the COT data, suggest that silver has indeed hit bottom and should turn up again soon. Interestingly, we have a similar trendline failure and finding of support at a lower valid trendline on the HUI index chart.
A further very important factor providing strong evidence that silver is bottoming is the COT data. The latest COT chart shows that the Commercials have been scaling back their short positions at a rapid rate for weeks, with another big drop this past week, so that they are now at their lowest levels since last July. As usual they made huge gains on the recent plunge, and the fact that they are dumping their shorts like hot potatoes is a strong sign that a big silver rally is in the works.
We will be highlighting the best silver stocks to take advantage of the expected major uptrend in silver on the site over the next day or two.
Clive Maund
clivemaund@gmail.com
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