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Silver has shown amazing strength in
recent weeks, surprising even its staunchest advocates by making light work
of recovering the ground lost in the January reaction, and even went as far
as to break out to new highs late last week, hugely outperforming gold in the
process, which not unnaturally has silver bugs cock-a-hoop. We were looking
for a big rally in the last update posted at the end of January and we have
not been disappointed.
The breakout to new highs last week was undoubtedly
a very bullish development and it makes an advance towards $50 a reasonable
objective for later this year. However there are signs, principally in the behaviour of gold and Precious Metals stocks, including
the volume patterns in individual silver stocks, that
silver is first going to react back before it continues much higher.
On its 8-month chart we can see the bullish
engulfing candlestick pattern that was a factor enabling us to predict the
rally, and as we had also expected the large number of traders who had bids
in near the $25 support level were left standing at the station as the train
pulled out without them.
 
Despite the longer-term bullish implications of the
breakout to new highs, silver is thought to be very close to topping out now
on a short to medium-term basis, which has more to do with what we can see
developing on the gold charts and the charts of PM stock indices and
individual silver stocks, than it has to do with the silver chart, although
we can see that silver on Friday hit a trendline
target which could mark the top of a broadening pattern that silver could now
react back across.
If silver is now destined to react back with gold
and PM stocks, how far might it drop? A reasonable objective for a reaction
would be the January low from which this advance started, although bearing in
mind the obvious strength displayed in recent weeks, it may not drop back
further than the support level in the $28 area.
The latest silver COT chart shows that the Large
Specs have ramped up their long positions again over the past couple of
weeks, and remember that this chart is only up to date as far as last
Tuesday's close, so we can expect their positions to be considerably higher
than shown here after silver's sharp rise on Thursday and again on Friday,
which means that downside risk has reappeared. The COT chart was a factor
that assisted us in determining that silver was set to rally in the last
update, as at that time the Commercial short and Large Spec long positions
were at a very low level.
Clive Maund
Trading the precious metals and Energy
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