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Silver Market Update

Silver has actually held up surprisingly well over the past couple of weeks, given the breakout by the dollar and the severe breakdown by copper, and the breakdown by gold, and should the dollar now turn tail and back off, which is quite likely as it has attained a short-term target (see Gold Market update for details), there is the potential for a sharp relief rally.

On the 2-year chart the picture is pretty much unchanged since the last update. Silver remains within a large symmetrical triangle which is going to force a big move, one way or the other, before much longer. The big difference, and the point to note, is that silver has managed to hold up, despite Friday's decline, while the dollar has surged to reach a short-term target. While the risk of a severe breakdown remains, should the dollar now back off we could see a swift and sharp relief rally that takes the price out of the immediate danger zone. To assess the chances of this happening we will now turn to the 6-month chart to examine recent action in more detail.

The period we need to scrutinize is the gentle downtrend from the early March peak at about $7.60 to the present. The big question here is whether this pattern is a flat-bottomed triangle, which is bearish, or a falling wedge, which is bullish. Unfortunately this is a borderline case, as the lower trendline does appear to be falling very slightly, while there is a clear support line at about $6.80 - $6.85. But whatever the answer to this question, one thing is for sure, the silver price has been forced into a relatively tight trading range between various converging trendlines over the past couple of months, and it and its moving averages are now bunched tightly together. This is a situation that will force a big move before much longer.

Given that the dollar has now achieved a short-term target, and is overbought just beneath heavy resistance, it should only make limited further progress short-term, or consolidate or react. If the latter, silver is expected to break sharply higher, breaking out of the triangle shown on the 6-month chart, and advance swiftly towards the $7.90 area. A big move is likely at this time because of the unusual degree of compression, thus silver is now an attractive candidate for a "straddle" option trade. It is very important to note, however, that such a sharp short-term advance will NOT constitute a breakout from the larger triangle shown on the 2-year chart, and until that happens the larger trend will remain neutral.

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