The Problem That I See With Silver

One of the most important themes that we focus on every day is the idea that the more times that a level is tested, the higher the likelihood that it breaks. This goes in both directions. A good example of an upside break after multiple tests of resistance is $HD the last few days. I loved that chart coming into the week. But to the downside, I think Silver is testing this key support way too many times for comfort. It looks to me like the resolution here is going to be to the downside.

First, here is a weekly line chart showing these lows just below 19 tested successfully 3 times. Where I come from triple bottoms and triple tops are very very rare, if they even exist at all. In all likelihood, as I mentioned on Fox Business in late May, we’ll see a 4th or 5th test that eventually cracks the support. Well as we can see in this chart, we’re seeing just that: a 4th test of support in a commodity that is still in a 3+ year downtrend:

8-19-14 si daily line

We have yet to see any evidence that this downtrend is reversing. In fact, with each bounce off this key support level, the sellers have become less and less patient. Notice how each rally off support has been weaker and weaker. The theory is that the next bounce won’t be much of a bounce at all and support will break leading to a bigger sell off.

The next chart shows the daily bars with a downward sloping 200 day moving average. I find it hard to believe, from where we sit here today, that this is a bottom and not a continuation pattern. Everything in my experience tells me to lean short:

8-19-14 si daily bars

But I want to see a break first. I think there will be plenty of downside to take advantage of upon a break of support. The first target I see is the $3.60 measured move target from the amplitude of the recent bounces off support. This takes us to around $15. But the ultimate target I see is just under $14 which represents the 161.8% Fibonacci extension from the first bounce off this key support last summer. Symmetrically this makes the most sense to me since this support just under 19 is also the 161.8% Fibonacci extension from the first bounce off the 2011 lows. The market likes to rhyme like this. So I’d look to cover at 15 and the rest at 14 constantly reevaluating the whole way down.

Based on the distance from our ultimate target, I think it’s worth it to be patient. But recognizing this development ahead of time can be a huge advantage when it comes to preparing for the moment. So I thought I’d share what I’m seeing with you guys.

Patiently waiting for a break

JC

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Tags: $SI_F $SLV $AGQ $SIVR $USLV $ZSL $DBS $DSLV $USV $SLVO


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