Monday, September 24, 2007

The Big Picture: Silver

Silver Bugs are definitely an odd lot. Masochists might be a better description. There is no market on the planet that is as volatile and bi-polar as the World's Silver markets. No roller coaster has yet been built that comes close to recreating the perilous highs and lows the Silver Market has, and can dish out to it's participants. Silver is NOT for the feint of heart, but for those brave enough to climb aboard the ride, it is guaranteed to be a thrill a minute...literally.

Silver is the black sheep of the commodity world. Forever in the shadow of its big brother Gold, it gets little respect these days as a "precious" metal. Too often lumped in with all of the worlds "industrial" metals , it is ignored as a hedge against inflation until all the other metals and Gold become "too expensive". Silver is the "poor man's" Gold. Silver is for nuts...

And one look at the weekly chart of Silver above does little to dissuade one from the "Silver is nuts" mentality. Clearly Silver has trouble making up its mind. Up or down? Plenty of that. Silver is a trader's best friend one month, and his worst enemy the next. Whether up or down, traders on the right side of the trade in Silver can reap huge rewards.

Today, Silver is clearly telling traders that the right side to be on, is the UPside. Silver has broken the downtrend line that has been established since the reaction high in Silver off the June 2006 lows. This reaction high occurred in February 2007.

Silver had fought to set itself up for a breakout to new decades highs, when suddenly China's Stock Market Sneezed, and the entire World's financial markets caught a cold. Most if not all markets quickly shook off their sniffles, and have since gone on to new highs. All that is, but Silver.

Silver has remained ensconced in what seems like a never ending consolidation of those long ago May 2006 highs. Looking between the lines on the weekly chart of Silver above, we can identify a Rectangle Consolidation marked by the two parallel green lines. This Rectangle Consolidation has been controlling Silver since Thanksgiving of 2006. With 14.06 as resistance and 12.18 as support, Silver has meandered sideways for the past 10 months. A false breakout to the upside in February 2007 balanced by a false breakout to the downside in August of 2007 has inspired me to name this consolidation pattern Silver has been stuck in "The Bipolar Box". Sadly, as Gold has broken to 27 year highs above 730, Silver remains locked in The Bipolar Box.

But there is hope! Silver broke from a seven month long downtrend last week at 13.03. The breakout of the same downtrend on the RSI confirmed the validity of last weeks breakout. Now let's once again look back to September 2005, and the breakout that launched Silver from 8.50 to 15. Silver never slipped back below the breakout in 2005. There was a brief consolidation of the break, and then Silver, beginning in early November, moved swiftly higher over the following six months. Can we expect a similar reaction out of last weeks breakout. I think we can. But of course, this is Silver people, anything can happen.

October is generally a week month for general equities in most years. Despite the Fed's bold rate cut last week, I think we can expect the stock market to flounder as we enter October and as we move through the month as well. This weakness in stocks, coupled with the foolish musings of the shorts in the precious metals markets, could throw a bit of a wet blanket over Gold and Silver for the next 4-5 weeks. Both are overbought on their daily charts, and Gold has met a stiff headwind as anticipated at the 735 level. Consolidation is the name of the game now. And patience. Sit tight and you'll be alright. DO NOT attempt to short this market. The shorts are going to be the fuel for the leg up from here through the 800 level. Take some profits in here if you must, and buy your positions back on the dip, or add to them. Use stops to "take" you out of the market if you're uncertain as to what to do and you want to protect some of your profits.

Support in gold is at 714 / 705 / 694 .

Support in Silver is at 13.34 / 13.20 / 13.03

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