The buyers are back in the market today and the price of silver is now at 1744 confirming Tuesday's eye-watering rally was not a one-off event.
On Wednesday we were of the opinion that given the speed and length of the move, a mid-week pull-back was to be expected.
A shallow decline would not have been unusual according to Paul Chana, technical analyst at Bank of America Merrill Lynch, suggesting the metal was likely to renew its uptrend within four to five days.
The strength of the gains on Tuesday saw the price form a TD Setup sell signal.
"Of the past 16 signals where RSI was overbought, 11 times or 69% of the time silver prices declined the next day. Of all the 55 sell signals since 2000, price declined 35 times or 64% of the time one day later,” says Chana.
A “TD Setup sell signal” is from the TD Sequential indicator, which is used to identify market exhaustion.
In this case the market had registered short-term exhaustion higher.
According to Chana, this combined with the RSI indicator above 80, which means it is in overbought territory, has historically been 64% accurate at indicating a correction, since 2000.
This appears to have played out to some degree on Wednesday as Silver lost ground moderately.
Chana did warn that the pull-back is normally just temporary, allowing bullish traders to buy at a better price, as the market normally resumes its up-trend after 4 or 5 days:
“Looking forward four and five days after the TD Setup sell signal with RSI overbought, price tends to continue higher.”
That the pullback has been so short in nature would lead us to believe that the chances for a deeper pullback and consolidation have now grown as all Chana's observations still remain relevant and the pause was not enough to settle overbought indicators.
Head and Shoulder's Pattern Indicates Potential Longer-term Up-trend Forming
Looking at a chart of Silver and we can see that Tuesday's move higher was probably not just a random up-move but the breakout from a reversal pattern, which has been forming at the lows since June 2015 arguably.
The existence of a potent bottom pattern increases the possibility that the breakout is part of a reversal and the opening ‘salvo’ of a new bull-market trend in the commodity.
This could have positive implications for other precious metals - which silver tends to lead - but negative implications for the US dollar.
The US dollar is negatively correlated to Silver as noted by analyst Chrstopher Vecchio of Dailyfx, in a recent article .
“Silver prices have started to outpace Gold prices - which if it continues, would be historically good for precious metals and foreboding for the US Dollar. This matters greatly for the USDOLLAR Index, currently battling to uphold support against the September and October 2015 swings lows.”
Silver’s Reversal Pattern
The pattern on Silver looks very much like an inverted head and shoulders (H&S). Inverted H&S’s occur at the end of down-trends and are made up of three troughs in a row.
The first trough is the left shoulder, the next one is the head and is slightly lower than the others, and the final trough is the right shoulder.
Inverted H&S’s are usually quite reliable signals of a reversal in the down-trend and the birth of a new up-trend.
The trigger for more upside comes when the exchange rate breaks above the neckline, which is the line joining the tops of the peaks interspersing the troughs, and on silver is at 16.27.
The upside target from the pattern is calculated by taking the height of the H&S and extrapolating it higher from the neckline.
Usually the pattern reaches all the way to the 100% mark, but for a safer target select the 61.8% Fibonacci extension instead.
The 61.8% minimum expectation on Silver, gives a target of 17.79.
Online broker Swissquote’s market technician Yann Quelann is also bullish the metal, in the short-term at least:
“Silver has set up a one-year high and has erased the 16.00 mark. Resistance at 16.34 (28/10/2015 high) has been broken..”
The commodity is now, “Expected to see further bullish momentum.”
Swissquote remains bearish longer-term, however:
“In the long-term, the break of the major support area between 18.64 (30/05/2014 low) and 18.22 (28/06/2013 low) confirms an underlying downtrend.”
Possible Turning Point in Global Asset Cycles
The sharp move higher in silver, combined with the surprisingly robust recovery in Oil prices after they dipped post-Doha, as well as Iron Ores’s strong rise off its lows, are all signs commodities in general could be reversing their previous down-trend and starting a new cycle higher.
According to Martin Pring’s idealized asset cycle model, the bottoming of commodities comes before the topping of equities, so it is a sign equities may be in the final stages of their bull-market.
The cycle says that Bonds are the first asset class to peak (which we say in 2012 with Treasuries) then equities, and then commodities. Commodities are supposed to bottom some time after Bonds peak.
Commodities start to move higher with stocks but eventually the rising cost of raw materials impacts on the profitability of businesses, contributing the stock market collapse. The final asset class to top is commodities.