Then Retreat Again?

Silver had a strong day on Friday, finishing higher by $0.42 cents or nearly 3.0% to close at $14.71 as of the final trade on the New York COMEX. Friday more than made up for the previous four days of losses, such that for the week in total, silver was higher by $0.35 cents or 2.5%.

What do we make of silver at this juncture? Is this the start of the more significant advance that we expect is due over the years ahead? Or is this a temporary rally that will lead to further declines?

Let us examine the data. Below we show the price of silver from the late-2015 bottom at $13.65 through the present. Immediately below the price is a volume indicator, which shows the number of contracts traded on a given day. We will reference the chart below for the subsequent discussion:

Silver Price Charts

Silver Has Broken Intermediate Support

The most important point to note for silver is that the clear horizontal support zone (black lines), which existed between $15.70 – $16.10, was clearly violated in July of this year. The violation is shown by the red callout.

What do we mean by support zone? Support refers to a price region where large buyers emerged on repeated occasions in the past. In the case of silver, we can see that on no less than 12 distinct occasions between December 2016 and July 2018, every time the price dropped into the $15.70 – $16.10 zone, sufficient buying activity emerged so as to cause the price to rebound by $1 – $2 over the subsequent weeks. Those 12 tests on the support zone are shown above by black numbers.

Significantly, what happened in July 2018 as the price of silver approached the support zone for the 13th time? Those buyers – whoever they were – failed to show up.

How do we know this? Because the price of silver broke lower through the previously-established buying zone, down to recent lows near $14.00. We cannot know the reasons why those buyers failed to show up, but clearly, they were exhausted and/or not as determined as we originally would have hoped. Whatever the reason, they were absent in July.

And so, this week, the price of silver rebounded, even in spite of a small $5 loss in gold. What now?

We strongly expect that following a temporary rebound, silver will make a new low below the $14 figure recently observed in September.

Support Turns To Resistance

When examining price trends in the markets, there is a useful adage which says: “Broken support turns to resistance.”

What does this mean?

Imagine a short-term oriented trader, who purchased silver at any point from December 2016 through July 2018, at the previously established support zone of $15.70 – $16.10. His timing on the purchase seemed wise over the subsequent 12 – 18 months, as silver continued to rebound from these lows. Yet what will happen now that the price has fallen below his entry point?

He is likely to sell at break-even.

We must understand that there is not just one trader who is underwater on his previous purchases from this zone, but thousands who bought in the $15.70 – $16.10 range from December 2016 through July 2018.

All of those traders are underwater. What are they likely to do the next time silver approaches their initial buying zone?

Most will look to sell at break-even.

When enough sellers show up within a specific price zone, the price must fall, unless a new group of buyers emerges to scoop up the silver from them.

This is why we strongly expect that the previous support zone will now turn into resistance for silver on any bounce over the coming weeks, and the price will retreat.

Target for Silver

In estimating a target for a subsequent significant low, we must examine the previous downward sloping consolidation (shown above in blue). Note how the highest surge above the support zone came in at $18.60 in April 2017, a $2.90 amplitude above the $15.70 zone.

Thus, there is an amplitude of $2.90 of traders who are now underwater on their purchases. We expect them to sell to cut losses over the coming months, and so a target can be estimated by that same amplitude subtracted from the $15.70 breakdown point. This reveals an intermediate target of $12.80 for the price of silver over the coming months.

Will this $12.80 target be hit exactly? We cannot say. The markets, as in all parts of life, are in constant flux. However, this target represents our most reasonable expectation based on observable data as to how far the price of silver should fall.

Takeaway on Silver

Many short-term oriented buyers who purchased silver within the $15.70 – $16.10 support zone are now underwater. They will be looking to sell near breakeven the next time the price approaches this zone.

A significant buying opportunity may be setting up for long-term oriented investors near our $12.80 target once this resistance zone is confirmed.


CHRISTOPHER AARON
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. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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