The silver chart should strike fear into the hearts of silver investors. There is no Ascending Triangle on the chart (from last May's highs), as some claim, instead the pattern is looking more and more like a large Double Top, with the second peak taking the form of a Head-and-Shoulders top. Before anyone graciously goes to the trouble of enlightening the writer about the wonderful fundamentals for silver, let me say this - don't bother, I know about them - and so does the market, that's the trouble, they may already be fully discounted by the market.
We can see this ominous looking pattern in detail and in its entirety on the 2-year chart. When silver peaked in May last year, it had become extremely overbought, having opened up an enormous gap with its 50 and 200-day moving averages. This led to it plunging unceremoniously back to the vicinity of its 200-day moving average. After that a more gradual uptrend became established, with silver riding above its long-term moving averages, the 200-day and 300-day shown on our chart, the advance starting to run out of steam as the price approached last year's highs. In recent months upside momentum has ebbed away steadily to the point that there is now none, as shown clearly by the descending series of peaks on the MACD indicator at the bottom of the chart, as a bearish Head-and-Shoulders top has formed that comprises the 2nd peak of the large Double Top formation.
What should be a disturbing development for silver bulls is the recent failure of the long-term uptrend line in force since August 2005. The parallel uptrend in gold has not yet failed. Now, all that stands in the way of a potentially dramatic plunge back to strong support in the $10 area is the important support in the vicinity of the 200 and 300-day moving averages close by beneath, and a line of significant support marking the lower boundary of the Head-and-Shoulders top in the $12.20 - $12.50 zone.
The COT chart for silver is neutral to slightly bearish - a lot less bearish then the gold COT chart, and this difference may reflect silver's recent underperformance relative to gold, and allow scope for a rally of sorts from the current somewhat oversold condition arising from the recent drop. Not that this would be regarded as cause for celebration. Assuming nothing dramatic happens in the meantime, which is perhaps taking a liberty, we should keep a close watch on the COT chart in coming weeks to see if Large Spec long positions and Commercial short positions increase significantly, which would signal an increasing risk of a drop, or whether they moderate significantly, thus creating upside potential.
With the Precious Metals sector starting to weaken rapidly, the next thing we will be looking at on the site is defensive strategies with reference to the HUI index and individual stocks and options.
