If you have been reading this column for some time, you may have noticed that technical analysis can often show us the “what” ahead of time, but the exact “why” trigger typically remains to be seen.
Last week we noted that the swift decline from $18.50 back down to $16.75 over the previous seven trading days constituted a retest of the breakout seen during the first week of February. The breakout occurred as prices exceeded the upper boundary of the price channel that defined the July 2016 to February 2017 decline. Subsequently, the fall seen through Wednesday of last week constituted a retest of that broken channel. Please refer to the turquoise lines on the chart below, along with the annotations for the breakout and retest:
Again, the charts can often tell us “what” is likely to happen, but the “why” usually remains to be seen.
In this case, it happened once again to be the Federal Reserve meeting on Wednesday which provided the bounce from the retest we anticipated on the charts. The 0.25% rate hike announced by the Fed on Wednesday was indeed met with weakness in the US dollar, and inversely strength in the precious metals complex — most clearly seen on the silver chart above.
In sum, for the week silver rose 2.9% or $0.49 cents to close at $17.41 as of the final trade on the New York COMEX futures market.
Silver’s Primary Downtrend – Broken
Our charts change periodically as new information becomes available. In the above silver chart, we have new information as to where large buyers are showing up – now visible just above $16.75 in the spot market.
As mentioned, the primary declining channel from July 2016 through February 2017 has been changed to the turquoise color (see color key, chart above). In this system of analysis, turquoise represents broken trendlines. Broken trendlines should be kept in our minds for at least several months following a successful breakout – precisely for the reason that they are often retested by traders some point into the future.
By changing the color of the trendlines from royal blue to turquoise (once broken), it allows a quick visual perspective that still recalls the former trend but does not distract from the newly emerging primary pattern.
In the case of silver, we have a new primary trendline, which must be drawn from the December 2015 low at $13.65 per ounce up to the December 2016 low at $15.75 per ounce. This is shown by the new dashed royal blue line on the chart. With two significant higher lows occurring exactly one year apart, we can now begin to define the support and resistance levels which will be important for silver for at least the remainder of 2017, and likely well beyond.
On Trendline Retests
Note that silver’s breakout from its primary down channel occurred in early February at $17.25 (red callout), and the retest of the same down channel occurred five weeks later, at $16.75 (green callout).
It should be apparent now the value in monitoring these technical trends.
Those who were not following this primary trend in such a manner since July likely would have experienced more fear during the recent quick correction which ended last week.
As we instead saw the correction as a retest of the broken trend channel, much of the potential fear was avoided.
For those interested in applying this form of technical analysis, note that retests of downward trends may indeed occur at lower price points than their original breakouts. This type of lower retest can scare those investors who are only focused on the absolute price without regard to trend analysis.
We cannot get every single twist and turn correct every time, but as any traveler who has ever been lost in a new land without a map or compass will tell you: “Having some information is infinitely better than having none at all.” This has been our experience over many years of observing the precious metals – the charts are valuable maps that we have to guide us.
Silver Going Forward
For now, we reiterate that silver has successfully retested its second-half 2016 primary declining trend. Initial support should be seen between $16.75 – $17.25 on any weakness, labeled on the chart above. In a worst-case scenario, we could observe a second-retest of the aforementioned broken trend channel, in the price region of $16.50, which would correspond with the rising primary (blue) trendline from the December 2015 bottom.
Our highest probability scenario at this juncture is that silver will begin to advance to challenge the February highs near $18.50, labeled Initial Resistance on the chart, at which point we will need to monitor related signals to gauge the possibility of a further advance toward the 2016 highs near $21.
Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency, where he specialized in the creation and interpretation of pattern-of- life mapping in Afghanistan and Iraq.
Technical analysis shares many similarities with mapping: both are based on the observations of repeating and imbedded patterns in human nature.
His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is provided as a third party analysis and does not necessarily matches views of Bullion Exchanges and should not be considered as financial advice in any way.