Silver Market Update
Keep your eye on the channels
21 December, 2004
We have had several bearish developments in silver this month.
It failed just beneath its April highs, then it plunged precipitously
and in the process broke down from a long-term parabolic uptrend.
That said, silver does have a habit of staging violent shakeouts
and then going on to gather itself together before advancing
again. What is very clear is that silver's plunge halted exactly
on the lower intermediate uptrend line in the vicinity of the
rising 200-day moving average, shown on the 1-year chart. This
very important trendline support must hold - if it doesn't, another
rapid decline to the $6.10 area or even down as low as $5.50
will be the consequence.
There is no disputing that
silver is a considerably weaker play than gold at this time,
the recent reaction was far more severe than that of gold, and
in marked contrast to gold, it reacted FROM its Spring highs
whereas gold reacted TO its Spring highs. There is thus considerable
risk that the current tight trading range is a "downflag"
- if it is the price will break down from the channel and plunge
Assuming no breakdown occurs
it would likely take several weeks of trading above the lower
channel line for sentiment to recover sufficiently to put silver
in position to stage another significant rally. Traders wishing
to go long will run less risk if they wait for the price to rise
up through the 50-day moving average, which will drop back over
the next several weeks. Traders who are considering going long
with the price above the lower channel line, with the intention
of placing a stop to effect a swift exit on a breakdown from
the uptrend need to be aware that because this channel line is
so clear and obvious, a large gap down is likely to occur should
the price break down, rendering most stops useless. A tactic
to avoid being caught like this would be to buy with
the price comfortably inside the channel, but with an exit point/stop
a little ABOVE the channel line, accepting the risk of being
shaken out for a minor loss as the price of avoiding being caught
up in another plunge.
Maund is an English technical analyst, holding a diploma from
the Society of Technical Analysts, Cambridge and living
in southern Bavaria, Germany.
Visit his subscription website at clivemaund.com.[You can subscribe
No responsibility can be accepted for losses that may result
as a consequence of trading on the basis of this analysis.
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