Silver Market Update September 17th, 2012

The strong uptrend in silver of the past several weeks is believed to mark the start of a major uptrend that should take the price comfortably to new highs before it’s done. On the 12-year log chart for silver below we can see that this uptrend is still in its infancy, as it has a target at the top channel return line shown, which means it should get to over $60 on this advance, a modest objective given the stunt pulled by the SPSC (Silver Price Supporters Club) over at the Fed last week.

Silver is approaching an inner trendline that appears to still have some validity, the pale blue trendline shown on the chart, and given that this coincides with a resistance level shown on the 2-year chart below and that silver is now critically overbought short-term, and also that its COT readings are at extreme levels, and also that the good news is now on the street, a period of consolidation or a minor reaction here looks likely, which would set up the next upleg. Before leaving the 12-year chart note the momentum breakout shown by the MACD indicator at the bottom of the chart.

Silver’s 2-year chart makes plain that it has now broken out decisively from the long corrective downtrend in force from April – May of last year. Moving averages are now swinging into bullish alignment again for the first time in a long time and we should soon see the “Golden Cross” where the 50-day moving average rises up through the 200-day, and the latter turns up, which will be a sign that the new uptrend is becoming established. Silver is now critically overbought on its RSI indicator shown at the top of the chart, which suggests that it is likely to take a rest soon before continuing higher – most likely it will consolidate for a while, and perhaps react back somewhat – but it is not expected to react back much, given that the Fed last week hooked up the fire hoses to the gas pump with every intention of spraying gasoline on the spreading fires of inflation. This makes perfect sense from their point of view, as the massive QE now set in motion will enable them to continue to enrich their crony pals in the banks and on Wall St by simply passing this spirited into existence money straight to them, and by propping up the bond market, and pass the bill for this munificence on to the middle and lower classes via roaring inflation and a zero return on savings.

The 6-month chart for silver shows recent action in much more detail. On this chart we can see the powerful, steep uptrend of recent weeks, that has in part been fuelled by panic short covering, of course, and last week got an extra boost from the grandstanding by the Fed, which was on a scale that surprised even those expecting QE, for not only did they announce QE, but they even went as far as promising that it would be open-ended, and also their intention to clamp interest rates near to zero for another year, until 2015. This is all music to the Precious Metals markets of course, and all but guarantees ongoing strong uptrends. Nevertheless, we can see that silver is heavily overbought here short-term with several technical factors pointing to it needing to take a rest before continuing higher, and this fits with the fundamental situation as all the good news is now out and on the street.

One technical factor pointing to silver needing to take a breather here is the latest COTs. On the COT chart below we can see that Commercial short positions are about to fly off the scale, with Large and Small Spec long positions being at very high levels too, and here we should note that this data is only up to date as of last Tuesday, so Thursday’s spike in the silver price can reasonably be expected to have driven these positions to even more extreme levels. This makes a period of consolidation or a reaction here likely before the uptrend continues towards our objective at new highs.