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The intermediate top in silver was
called several weeks back in the last update. We had expected it to plunge,
but instead into went into a more orderly steady decline, its measured rate
of decline thus far being due to the fact that the dollar has not entered
into a new uptrend – yet.
We can see how silver broke down from
its uptrend, formed a Double Top beneath resistance, and then went into
decline, in detail on its 6-month chart below. We shorted silver
investments near to the top with a close overhead stop, a tactic
which has worked out well, and the big question now is to determine whether
the downtrend is set to continue, or maybe even accelerate, or whether this
is just a correction that has about run its course so that a reversal to the
upside is imminent, and the COTs, which we will look at lower down the page,
have an important part to play in making these determinations.
 
Looking further at the 6-month chart we can see that the downtrend of the
past few weeks has taken silver down through its rising 50-day moving
average, to approach its 200-day moving average, which is also rising, and it
is getting oversold at this point. While this won’t necessarily stop it
dropping further, it is enough to put us off entering any new short positions
here – so if you missed doing so at or near the top, you’d best
forget it as it’s getting too risky. The fact that we now have a neat
clearly defined downtrend puts existing shorts in a good position, as you can
stay short for further downside, but take profits and stand aside if the
price makes a clear breakout from this downtrend, which would be evidenced by
a close 20 cents above the trendline boundary.
Apart from some moving average support, the first serious support comes in at
the level shown in the $28.30 - $29.10 zone, which is quite a long way down
from where we are now, and if the downtrend isn’t broken that is where
it is headed.
There is one scenario that we should
be aware as it may produce a whipsaw. The dollar may back off from the
resistance it is now at briefly, before turning higher again and breaking out
as expected. This could result in a breakout by silver (and perhaps gold)
from its downtrend that is a false move which is followed by a severe
decline. We will deal with this on the fly on the site if it should occur.
What does the longer-term 3-year chart
reveal of the larger picture for silver? It tells us that silver is
essentially rangebound between the nearest major
support and resistance zones shown with an overall neutral trend,
and this being so it could quite easily drop back to the major support level
in the $26.50 - $28.00 area, and should a deflationary shock hit, it could
obviously crash this support and plunge as in 2008.
The COT charts assisted us greatly in determining that silver was set for a
drop in the last update, when it was pointed out that the seldom wrong
Commercials were heavily short. It is therefore logical to look for a
significant reduction in Commercial short positions on the latest COT charts,
if we are to see a breakout and significant recovery in the price of silver
soon. The bad news for silver longs is that, as we can see on the latest
silver COT chart shown below, there has been little reduction in the
Commercials’ massive short positions. This implies that the downtrend
is set to continue and possibly even accelerate, and this fits with the
latest COTs for the dollar, which are strongly
bullish and imply that the dollar is set to break out upside from its recent
base pattern shortly, which will of course be bad news for both gold and
silver.
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