Silver Challenges SupportSilver Challenges Support
By Gene Arensberg
27 Aug 2005 at 11:11 AM EDT
HOUSTON (ResourceInvestor.com) -- Silver has been trading sideways for six months, but it almost certainly won’t for much longer. The prime question during that half-year period was; Which way will it break? Increasingly less confident (complacent?) longs were hoping that the up-to-now very strong support at $6.80 would hold one more time while the bears hoped just the opposite. As of Friday, the odds shifted strongly in favor of the bears. Temporarily?
Back on July 19, I opined that until silver broke out of its trading range convincingly one way or the other, “maybe it’s best just to be a patient silver spectator.”
Up until Friday, one could have just taken the time off since then and not really missed very much. But Friday’s options expiration day trading put silver back in focus from a technical perspective.
A Coiled Spring
Since the powerful October ’03 to March ’04 definition breakout move to $8.50, silver respected a well defined linear uptrend until it was challenged in June. Rather than breaking down, since late February the metal has been trading in a rectangular trading range roughly between $6.80 and $7.60.
An attempt to reclaim the hallowed ground above that uptrend line to spring a bear trap failed during the first week of August. It was not a convincing breakout despite the attempt to regain the chart real estate above the 50 and 200-day moving averages. After only a week the white metal disappointed longs, shooting back under the trend line and both moving averages. The moving averages have since acted as resistance.
On Thursday, August 25, the spot price closed millimeters above the implied support of the bottom of the rectangular trading range ($6.80) with a last trade of $6.835. Long patient silver bargain hunters are now literally on the edge of their seats as the second most popular precious metal lost it’s grip above the lower end of the broad trading range. On Friday, the 26th, silver on the cash market showed a last bid of $6.736 after dipping as low as $6.706. That is likely just above the area where a large number of sell stops reside.
Here is a closer look.
The slippage below the long uptrend line in June was worrisome to longs, but now the challenge of support is the more important issue. Bulls fear that a confirmed breakdown of the $6.80 support might lead to a sell-stop triggering shakeout of stale long positions.
The last week of August is notorious for its light liquidity. I think breakouts and breakdowns should be viewed skeptically until they are confirmed this time of year. At the same time, breakouts of long rectangular trading ranges can be dramatic because of the large number of stops which have had time to find their way close to the implied support/resistance. A long-period trading range is sometimes like a coiled spring or a catapult. Usually it is best not to underestimate the amplitude and the velocity that a confirmed breakdown of a wide trading range might possess. Emphasis on the word “confirmed.”
Friday’s move comes just as the 50-day is crossing lower than the 200-day moving average (a “bear cross”) on the daily chart. At the same time, however, silver is approaching an oversold condition and there is not a very heavy speculative long book on the COMEX this time for breakdown fuel. This suggests that if a breakdown is confirmed, and the price gets into sell stops, while the move may be dramatic, it will very likely be short lived.
And, if a sell-stop triggering selloff gets underway, it just might be the last opportunity for bargain hunters to own “cheap silver” for a generation.