2012-FEB-28
Silver. What a ride it has been for the last 12-14 months! We started 2011 at about $30 and that’s pretty much where we ended. In between, we made a high near $50 and a low of $26. Mr David Morgan, whose opinion I hold in high regard, has said the one thing he expects for the year ahead is volatility. I beg to differ.The volatility has been done with. 2012 will be one nice uptrend. Presented below is my view of silver from a technical perspective.
Lets take a more detailed look at the above chart:
- First comes the wild optimism on the way up to $50 – increasing participation by small and larger speculators (with many of the former no doubt buying at or near the top).
- The chart doesn’t say who was selling in late April/early May or why, but the way the move took place, it clearly wasn’t your average Joe.
- On some profit booking by the shorts, we saw the price crawl back up towards $44.
- I honestly didn’t expect the price to reclaim its high because most bulls were licking their wounds, and considering they just played all in, I doubted them having any serious buying power at their disposal to stage a comeback.
- With the bulls seriously wounded, I believed that it was the new big powerfull bear that would be calling the shots. And even as per basic Elliott Wave theory, it will at least be a 3 wave retracement, and so a wave 3 was coming with new lows for silver.
- And so comes the 3rd wave to new lows. $26. At this point, I went all in with what I had. Yes, it could turn out to be a 5 wave instead of a 3 wave. Yes, it prices still could go lower. But that’s a risk I was comfortable taking.
When a series of higher highs and higher lows, has just turned into a series of lower highs and lower lows, a Head and Shoulders pattern is formed. Simple isn’t it?
I was enjoying the bounce off the September lows, and was fortunate to have cash for investment again. It was mid-November. Silver’s price action didn’t seem too convincing. By mid-December, I was of the opinion that the chart was forming a Head and Shoulder, as a continuation pattern. (EW last wave 5 down move fitted it perfectly with this H&S developing) So I decided against making the purchase. H&S broke its neckline, price dropped. Look how beautifully, the height of the Head, is pretty much how deep prices went when it broke the neckline, as depicted in the chart above.
That is just the fall I was waiting for. Being a student of technical analysis, I knew if my H&S analysis was correct, the price would fall to around $26. I was ready to buy more silver at that stage, but at the last moment, fear took over. I backed out. My emotions got the better of me and I walked out empty handed.
I have observed with H&S patterns, that often the price reverses sharply once it reaches its target depth. On the third day after the low, it was at $29. How I cursed myself for missing this 10% up move. Then the price started to move sideways. Although not very distinct, the chart was now looking like it was forming an Inverted Head & Shoulder pattern.
There was a gap on the chart (indicated by the black dot in the chart immedietely above) I promised myself if it did get filled, I would make my purchase. But it didn’t.
The price movement on January 12 looked like a convincing inverted H&S break of the neckline. Though the gap at $28 made me nervous, the H&S neckline was broken. I stuck to my discipline. I wouldn’t be a fool twice. And so, on Friday, (the 13th), I purchased my share of physical.
Prices started to move up. News came in that the reason for silver's rise was because of purchases by Eric Sprott. And now back to today. The real reason for this article. Take a look at the chart below:
In my opinion, silver has formed another Inverted Head & Shoulder, and its price action on 23rd February 2012, represents a break of the neckline.
The implications of this are (if the pattern is to work) that the price should rise in proportion to the depth of the head. What this means is the price will be at approximately $42, most probably by mid-April.
Take a look at the first chart again. Wave 1 was massive in size and volume. Wave 3, was massive in size, but not in volume. This tells us there weren't that many participants who wanted to liquidate like before. Wave 5, was neither massive in size nor did it have volumes.
This tells us the bears are out of ammunition. It's silvers time to shine again.
From Alf Field's Elliott Wave analysis of silver – which was posted on Jim Sinclair’s blog – to James Turk’s bullish flag pattern, both are suggesting solid technical reasons for higher prices in the weeks ahead.
Fundamentally, silver is undervalued. Technically it has a bullish setup. When both these factors of analysis are in agreement, it generally produces a very heady concoction. Are you ready for the ride?
