Tuesday, November 16, 2010

Silver retracement target and clarification

Just a short post on Silver to clarify a term I have been using and look at some retracement targets for the price.

"Parabolic spike" is a term I have used to describe the strong moves higher we've seen approximately every 2 years during the Silver bull market, so when I suggested the parabolic spike might be over (in a post last week), I was referring only to that particular strong move and not the entire bull market. I suspect we will see a Silver price multiples of the current price before this bull market is over.

Following the parabolic spike in 2006 and 2008 we saw large corrections after each move:

$16.68 - April 18th, 2006 (peak)
$9.40 - June 14th, 2006 (trough)
44% drop

$21.35 - March 17th, 2008 (peak)
$15.96 - May 1st, 2008 (trough)
25% drop

A 25-44% drop from the $29.33 peak a few days ago would take us back to: $16.43 - $22. I would suggest this is a possible target for the correction to bottom. There would be very strong technical support around the $19.50-$21.50 level if it corrected that far.

That said given the current fundamental demand for Silver I would not be surprised to see it find support at higher levels than seen in previous corrections or the spike may not be over at all and we are just in a period of consolidation before another sharp move higher.

It's worth checking out James Turk's commentary on Silver's price action, he believes that the chart is still looking bullish and that Silver will reach $30 within the next 7 days:

November 14, 2010 – Silver’s short-term uptrend remains intact, notwithstanding silver’s big price drop on Friday.  The fundamental factors driving silver higher have not changed.  The outlook for silver remains very bullish.
There has been no damage to silver’s technical condition.  For example, silver is above its 21-day moving average.  Also, silver remains well above $25, its last major resistance level.  More importantly, the price drop at the end of the week occurred with bullish sentiment taking a nosedive.  These conditions bode well for silver’s short-term outlook, as does the following chart.
The above chart will be familiar because it is the one I used on King World News on October 28 to forecast a $30 silver price in less than 18 trading days.  Silver closed that day at $23.871.  On November 9, only 8 trading days later, it reached $29.342 – nearly hitting my target.  The good news is that my reading of the above chart indicates that silver might yet reach $30 within my 18-day target, i.e, November 23.
Note the new pattern silver has formed.  It is a pennant, and these have the same features as the flag pattern upon which I based my $30 forecast.  Both are continuation patterns within uptrends.  They allow for a short-term consolidation, mainly to work-off some bullish sentiment, which accurately describes what happened in silver as this pennant formed over the past few days.  A pennant pattern typically ends with an upside breakout.
My expectation therefore, is that silver will break out of this pennant to the upside, and probably early this week.  The demand for physical silver remains very strong, and it is the demand for physical silver, and not paper-silver, that ultimately determines the silver price. 
Most trading in physical silver takes place in London and Zurich.  The weakness on Friday occurred after both of these centers had closed.  That means that prices were driven down in the paper market.  We have seen these late Friday raids to ‘paint the tape’ many times over the past decade, so this latest one should not be a surprise.  But what is indeed a surprise to me is that the silver shorts would try this gambit now when the physical market is so tight.  Lower prices will only heighten the demand for physical metal.  Thus, I expect the silver price to rebound sharply this week.
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Disclosure: Position held in Silver. Not investment advice. Do your own research.

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