Upcoming Correction May Present an Opportunity on a Silver Platter

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 |  Includes: DGP, DGZ, DIA, DZZ, GDX, GDXJ, GLD, IAU, JJM, JJN, PTD, PTM, SLV, SPY, UBG, UBM, UDN, USV, UUP
by: Przemyslaw Radomski, CFA

Silver’s performance has been outstanding recently, but it is not uncommon for the white metal to have extreme volatility both ways in its price moves. Let’s turn to the long-term silver chart to see what is in store for the white metal (charts courtesy by StockCharts.com.)

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Click to enlarge

This week’s long-term silver chart shows that in the past, rallies of this magnitude are frequently followed by sharp declines. This was seen in early 2009, again in June, December 2009, and once again in May 2010. Consequently, there is simply no denying that this possibility of a quick decline is out there and investors should proceed with caution at this time until such a correction has been seen.

Silver’s price is but ½ of 1% higher than in mid-May, nearly four months ago. This sideways price movement seems likely to be simply delaying the obvious needed price correction to atone for the rally seen last spring in which silver’s price rose nearly 33%.

As mentioned in several previous updates,

Silver analysis is quite tricky and frequently, the typical market signs do not apply. General speaking, a separate interpretation is needed when concerning the white metal. Volatility is commonly seen as well when analyzing silver’s charts.

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A relatively new chart, which we are using this week looks at silver’s price action from a non-USD perspective. Several points of interest are notable here. First, the resistance level created by a line connecting the May and July local tops is very close to today’s closing level for the silver:UDN ratio. Secondly, the RSI is nearly right at the 70-level, having risen from about 30 in just over a month. Please note that in the past this meant at least a weekly correction.

Finally, the MACD in the lower level of the chart is near the horizontal black line around .01 just after having crossed the 0 level. All of these factors have coincided or indicated local tops on many past occasions. This is further, consistent indication that a strong possibility of a local top exists for the very near-term.

We need to take a closer look at gold for timing details because at volatile times in silver actually anything can happen, so we need to use guidance provided by other markets than the price of white metal itself.

We received several questions about the silver market this week and its ability to spike very high without taking a breather in the short run (caused by silver shortage, default of the entities that are massively short silver, etc.) The reader wanted to know if we are sure that we will be able to tell when this could occur. The answer is that nobody can be sure about their ability to predict future. That is why we encourage our Subscribers to use part of their holdings to buy real gold and silver bullion products, and then to use the rest to diversify between long-term investments and speculation. This way they are still exposed to silver's sudden appreciation while leaving only small part for speculation on the short-term price swings. This is a way of hedging against missing a big move. We believe this is a right (and most importantly - profitable) thing to do.

There is an excellent chance that the period following an eventual correction will present investors with a tremendous opportunity with respect to risk-reward ratios and profit potential. Sunshine Profits will stand ready with our Market Alert capabilities should important developments occur before next week’s update.

Disclosure: No positions