Silver Analysis

Since my post on Tuesday warning of an imminent reversal in the spot gold price following the various signals, not least the long leg doji candle, I have been inundated with emails requesting my analysis of silver and, in particular, whether the current pullback is a temporary one or the start of a longer term trend change.

A difficult question to answer but let’s look at some of the technical and fundamental issues for some clues.  In retrospect a look at the weekly SLV (ishares silver) chart gave us a strong clue of the imminent fall and indeed this is one instrument I will be watching personally for any signals to re-enter any trades to the upside.

As we can see from the weekly SLV last Friday’s close on a “hanging man” candle with extreme volume was the first warning signal that all was not well in the bullish trend for silver and was therefore reaching a point of exhaustion.  For gold the signal came, not in the ETF market, but in the spot market with the long leg doji candle on the daily chart, reinforcing the weakness first seen in silver.

The fall in the metals market was further accelerated by central exchange margin parameters being increased on traders due to significant volatility in the market and indeed I received one such notification from my own broker as I was long gold at the time which was another  reason I closed out the position. Moreover,  the sale by Sprott Asset Management of more than $30m shares in its own closed end silver fund (PSLV) also contributed to the dramatic fall in prices.  In addition news that Bolivia is unlikely to nationalise the San Cristobel mine but rather seek larger royalties also contributed to silver’s overall fall.

The question now, of course, is just how far silver is likely to fall and for this we can look at the daily SLV chart and its associated candle pattern which is now building into a steep waterfall with extreme volume and, as such, we are now looking for a price/volume combination which will give us a clue that the downwards pressure has been absorbed.  At present there is no such signal as we begin to approach the 100 day moving average. What we need to see is either high volume and a narrowing of the price spreads or low volume down candles both of which would give us clear signals that the move lower has run its course.  The next stage would be to see a reversal candle, preferably a hammer, which would then signal the first stage of any reversal higher.   As for the spot chart we have already breached all the short term moving averages and are now rapidly approaching the 100 day moving average in the $35 per ounce region where we also have some potential support from the sideways price action of last March.  We could see a pause here and as this area also coincides with a 61.8% retracement of the recent high this could be a significant price point.   If you understand the principals behind volume spread analysis then the SLV is the one of the key places to watch.

From a fundamental perspective the demand for silver still outstrips supply as according to the Silver Institute Data, as of December 31, 2010 the silver market was supplied by 1.056 billion ounces and with industrial demand currently at 878 million ounces, this leaves 178 million ounces available for investment.  As of 29th April (recent fall notwithstanding) the SLV alone held 354m ounces.

Finally, this has all coincided with a bounce higher for the US dollar and until we can establish just how high the dollar is likely to rally, expect all commodities to continue falling back.

As always stay safe & if you are in a trade or planning to open one don’t forget your stop loss!