Originally published August 7th, 2011.
The question that silver investors and speculators should be asking themselves this weekend is what happens if the broad market crash that began late last week continues and even intensifies as is very possible after the Standard & Poor rating downgrade of US debt that was made public, coincidentally you understand, after the markets closed on Friday.
While many of you will probably be able to answer that question in a general way, perhaps with the use of expletives, without any assistance, it is still useful to examine the charts to gauge what is likely to happen with refererence to past events and to put things into context.
The short answer of course is that if the broad market crash continues and accelerates then we can expect silver to break down rapidly through nearby support levels and tank. This is exactly what it did in 2008 and we can expect it to do likewise as the baby gets thrown out with the bath water yet again. On its 6-year chart we can delineate a core major bullmarket uptrend for silver and also see that it is still very close to the top return line of this core uptrend. The freak move that broke silver out of the top of this uptrend back in April can be seen now to have been an unsustainable "throwover breakout" when Smart Money was shovelling out silver to Dumb Money as fast as it could. Earlier we had thought that silver would accelerate away to the upside out of the channel, but now this is looking like another "pipe dream" that is set to be smashed on the hard rocks of reality. In the light of the latest developments we can see that there are 2 factors on this chart that are signalling that a large intermediate top area is completing in silver, which is the persistent high volume since late last year indicating high public involvement, and as we know the public usually gets stuck holding the bag, and the very steep rate of ascent of the 200-day moving average over many months, which in normal times at least calls for either a long period of consolidation or a reaction, and if the stockmarket crashes it is likely to be the latter, and a heavy reaction. Here we should note that silver could drop back as far as about $20 without violating the long-term uptrend shown on this chart.
On its 6-month chart we can see silver's rally of the past month and how it has only run into trouble in the past 2 trading days after having made new highs for the rally that started early in July just on Wednesday. So far no really serious damage has been inflicted and silver bugs may be taking comfort from its still bullishly aligned moving averages and the way silver steadied above its 50-day moving average on Friday, but the big down day on Thursday, which left behind a "bearish engulfing pattern" on the chart means trouble, and if the broad market crash gathers pace next week silver can be expected to slice through nearby support levels like a hot knife through butter and plunge. Here we should note that it is still overbought on its MACD indicator despite the drop late last week, so there is certainly plenty of room for it to fall hard and fast.
The latest COT chart for silver, while nowhere near as bearish for the short to medium-term as the gold COT chart, shows that the bullish COT structure for silver that existed at the end of June has now changed to neutral with a slight bearish bias. This however should not mistakenly be taken to imply that silver will fall less than gold in percentage terms if everything goes into the tank soon, quite the opposite in fact.