Silver plunged violently in
April, making huge gaps down. Normally, this behaviour is characteristic
of a blow-off top, and ushers in a bear market. Of course, this
interpretation does not square with the seemingly bullish fundamentals,
and silver bulls have two basic explanations for this plunge.
The first is that the market had become too frothy and that therefore
the plunge was a healthy clearout of speculative excess. The
other is that the silver market has been cornered by an elite
group of powerful players, who have the muscle to manipulate
smaller players and periodically flush them out. Due to the extraordinarily
steep and violent decline in April, this latter explanation seems
plausible to me, as what we witnessed was certainly no ordinary
correction, the action was more like that of a volatile penny
I do not normally write much about market manipulation, because
I take it for granted. The strong usually exploit and manipulate
those weaker than themselves. In markets generally, weaker players,
who tend to rely on the mainstream financial press for information,
are actually fed disinformation in order to set them up as the
"cannon fodder" for the big guns, who are well connected
and are privy to information not available to the general public.
It is for this reason that I became a technical analyst, so that
I could read the language of the market itself, rather than the
offerings of "The Ministry of Disinformation". Even
using TA one is not completely immune from this "hall of
mirrors" effect, for the big guns have the power, especially
in low volume stocks, for example, to engineer false breakouts
and shakeouts. They can do it and they do do it.
As I have already said, April's action in silver was, according
to standard technical analysis, bearish. However, if the big
guns have cornered this market, as seems probable, then they
may be out to systematically milk smaller players in both the
metal and the stocks by means of what might best be described
as the "toilet cistern" mechanism. I use this simple
and graphic analogy because, as everyone knows, a toilet cistern
fills steadily over a period of time, and when it is full it
is ready for someone to push the handle, whereupon the level
in the cistern falls suddenly and dramatically. This is what
happened in the silver market in April - the handle was firmly
pushed - and we all know what happened to the small specs as
a result. If this is, in fact, what is going on, then the big
players will have been buying heavily a few weeks ago when the
So what was the plunge in April - the start of a longer decline
- or just an organised raid by powerful traders shaking out the
weak? There are very divergent views amongst experienced traders
and market watchers, with some reputable and well-known observers
being resolutely bullish, and others, notably the more reputable
Elliott wavers, being equally bearish. None of the people I am
referring to are idiots, and all can make a good case for their
stance, but they can't all be right - as usual the market will
have the final say.
We will now turn to the charts
to see what the market itself has to say about its probable future
direction. We'll start by looking at the 6-month chart for silver.
On this chart the April plunge with its huge gaps can be seen
in detail. Such big gaps normally have bearish implications.
After the decline had run its course there was a hesitant recovery
over the past few weeks from a deeply oversold position, that
has brought the price back into a zone of strong resistance beneath
a large gap, and served to unwind the oversold condition. An
important point to note is that after such a severe decline,
a market normally needs a substantial period of convalescence
before it has any chance of staging a rally of any significance.
A good guide as to how long this period will last is frequently
provided by the 50-day moving average. In this situation prices
usually remain range-bound until the 50-day moving average has
come back close to the price and the 200-day moving average.
Only then do the chances of a significant advance increase. Until
then the trend should be regarded as neutral, with prices likely
to be constrained on the upside by the considerable resistance
towards the large gap; with further resistance continuing all
the way up to the top of the gap. We are therefore likely to
see prices drift back again over the next few weeks and fluctuate
in a trading range bounded by the support at $5.50 and the resistance
towards $6.30. Of course, if the support around $5.50 fails,
it will be bearish signal. So for now, the trend is broadly neutral.
On the 3-year chart it is clear
that the price is not yet in a position to go romping ahead after
the recent plunge. On this chart we can also see the support
going back to 1999 that arrested the April - May plunge. Also
showing up on the MACD indicator are the wild swings from extremely
overbought to extremely oversold, in the space of a few weeks.
The current neutral bias in the silver chart is reflected in
the charts of the big silver stocks, where prices are fluctuating
between major support and resistance levels. Potential Head-and-Shoulder
tops are evident in the charts of Hecla, Pan American and Sterling
Mining, and prices will need to advance through the green lines
shown on the charts of these stocks to negate the risk of these
patterns completing. Such patterns quite frequently abort before
completion, a dramatic example being the huge Head-and-Shoulders
top that formed in the S&P500, which then failed to deliver
- surely a tribute, if ever there was one, to the persuasive
powers of Mr Greenspan.
Analysis of the big silver stock charts - Apex Silver, Coeur
d'Alene, Hecla Mining, Pan American and Silver Standard follows
[You can subscribe here].
2 Jun, 2004
Maund is an English technical analyst, holding a diploma from
the Society of Technical Analysts, Cambridge and living
in southern Bavaria, Germany where he trades US markets.
website at clivemaund.com
No responsibility can be accepted for losses that may result
as a consequence of trading on the basis of this analysis.
© CliveMaund 2004. All Rights Reserved.
Inc Miami USA