12.27.09
For Silver bulls, the current rally might appear to be the start of a new up leg that might challenge previous major highs near $19 or even $21, those given to longer-term chart analysis might be hard-pressed to reach the same conclusion. In fact, the current up thrust might even be offering the bulls a final opportunity to exit at a profit (or a loss?) before a more substantial period of corr3ction ensues. Surely, there are a number of conflicting technical and fundamental forces at work in the Silver market, but we may be able to learn most of what we need to know by simply examining a long-term (monthly) chart of the continuous Silver futures contract.

Graphic credit: Metastock v. 11

Negative divergence
During the course of Silver’s recent year-long uptrend, prices covered a lot of ground, rising steadily from a low of $8.78 all the way back up to $19.42, which was surely good news for those convinced of a long term, secular bull market in the white metal. However, when we examine the money flow on the monthly chart, it becomes clear that Silver has been losing steam for some time now. Notice how negative the slope of the 34-month Chaikin Money flow (CMF) (34) is compared to the bullish price action since last December; this is known as a bearish divergence, one that will usually resolve itself by following through with a noticeable decline in prices. Additionally, take a glance at the current configuration of the StochRSI indicator (in the horizontal panel beneath the price bars); it’s very close to a bearish signal line crossover (see the upper red line). Taken together, this combination of money flow and momentum/cyclical confirmation paints a fairly convincing picture that Silver is likely due for more declines in the months ahead.

Battle of the Titans
Of course, there are additional factors to consider in the Silver market, and an equally negative fundamental factor is the current posture of the commercial and large speculator (hedge funds) positions in the Silver futures market – the commercials are still heavily net short even as the large specs are net long. Large speculators typically employ trend-following systems and methodologies in order to enter/exit the commodities markets that they trade, and it seems clear that they are still believers that Silver’s intermediate-term uptrend still has legs. The commercials aren’t buying that (pardon pun), at least not in large quantities, and seem more intent on keeping some powder dry so as to enable the scaling in of fresh long positions as Silver begins a widely-anticipated corrective move back down toward major support between $15.82 and $15.42.

Technical support for Silver comes in strong in the price zone between $15.42 and $15.82 and then down between $13.50 and $14.00, but daily-based traders might very well find that a decline into the mid-$15s will create some attractive short-term swing trading ops.

Even better, right now you can sell an out-of the money March 2010 Silver $21 call option for more than $500; should Silver reach the mid-$15s during the next month, the value of the option will lose substantial amounts of value and could probably be bought back for a fraction of the sale price. Given the lopsided standoff in the futures market between the commercials and the large specs, this could be a very attractive, fairly low-risk play for those who’d prefer not to trade futures contracts in this market.

Bottom line:
Initiating fresh long positions in the Silver market right now is probably not the best play, given the likelihood of a major A-B-C corrective pattern developing on this commodity’s daily chart. The down wave ‘A’ has already occurred (the drop from $19.42 to $16.80), the ‘B’ wave up is still in progress and all that’s needed now is something to trigger the selling that should start a noticeable ‘C’ wave down toward major support in the upper to mid $15s. The next few weeks should be very interesting in the precious metals market, so stay tuned for more updates as situations evolve.

Get Our Free Spot Gold & Silver Trading Newsletter

By Donald W. Pendergast Jr.
Contributing Market Analyst
www.ETFTradingPartner.com