Silver Market Update - August 28th, 2011

After one more up day silver reacted back with gold as predicted in the last update and then found support at the lower trendline shown on its 6-month chart above its rising 50-day moving average. We now have to be careful with silver because there is widespread rampant bullishness with some extravagent targets being bandied about, and we know what usually happens when that is the case. Also, as set out in the Gold Market update, gold is still way overbought and thought to be vulnerable to a potentially substantial correction.

The silver chart presents mixed signals. While on the one hand it is not overbought and its moving averages remain in bullish alignment, on the other its rally from its post blowoff top lows in May, following the plunge early in May, has been pretty anemic with its current uptrend channel converging somewhat (bearish Wedge?) and its MACD weak on its latest rally, with the wavecount unclear and the worst case scenario being that all of the action from the mid-May lows is a B-wave countertrend rally in an ongoing A-B-C correction – if it is then another brutal downleg could follow failure of the channel as gold corrects back that can be expected to crash the support level shown.

While the technical picture may be somewhat confusing, the way to handle this situation is clear. If long, or if you wish to buy near the bottom of the channel shown, then you should place a stop beneath the supporting trendline, because if that fails things could get nasty in a hurry. Also, be aware that there is a band of quite heavy resistance arising from the mugs who bought at the end of April and got hung up there with a heavy loss and will be looking to “get out even”. This can be expected to at least temporarily restrain any advance and turned the price back early last week. Silver will need to hurdle this resistance and then its highs before it is in the clear.

Even factoring in that it does not take into account the heavy down day last Wednesday, the latest silver COT chart looks quite bearish, with the Commercial short position having ramped up substantially over the past couple of weeks to the highest level since last April – before the brutal May plunge. 

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