Still Holding Silver? Analyzing What's Next

Includes: SLV, ZSL
by: Abigail Doolittle

Silver Held – What’s Next?

There’s an interesting opportunity in silver at this moment, but the question is whether it is to the upside, downside or both. Click to enlarge:

Returning to the “held” description above before discussing that opportunity, I am talking about the fact that silver essentially tested a critical level of support found right above $33 per ounce by making a low of about $33.035 on Friday only to bounce and close well above that level.

This is clearly my own generous interpretation, but I count the trading described above as a hold – for one day at least – and despite the fact that silver clearly punched beneath its intermediate-term trendline as shown above due to the fact that silver closed above this trendline as it did in the other two instances when it punctured that trendline slightly as well.

I’m being “generous” here due to this past week’s violent downward trading that could have taken silver much lower when we consider how well it fits Charles Kindleberger’s model of a speculative bubble. Specifically, Mr. Kindelberger who had been a professor at MIT and the author of Manias, Panics and Crashes diagrams a speculative bubble in the following stages:

  1. Displacement, new opportunities and easy credit – the financial crisis, sovereign debt crisis and QE1 and QE2,
  2. Speculation marked by “irrational exuberance” and euphoria – silver’s 150%+ rise from late August through the end of April,
  3. Distress – silver’s meteoric rise was so speculative that distress is nearly irrelevant, and,
  4. Revulsion – indeed silver’s nearly 70% rise from February through April led straight to panic selling.

And thus, when I consider silver in light of the paradigm of a speculative bubble above and the fact that silver essentially skipped distress and turned over straight away to revulsion and panic, this past week’s 30% decline could have been much worse and it is for this reason that I am being generous with silver’s current hold of that trendline.

Interestingly, it is due to the fact that silver essentially held that intermediate-term trendline of support that means we have an invaluable tool by which to judge the opportunity in silver and whether it’s likely to move up, down or do a bit of both before it stabilizes.

When I simply look at the chart above, the path of least resistance is down and down to about $27 per ounce at a minimum. However, silver resisted that path Friday and this fact cannot be ignored and it brings us back to that trendline.

If silver closes above $34.85 per ounce or so on Monday, the opportunity in silver may be to the upside at least in the immediate-term and in relief to silver’s nearly 30% decline this week.

In fact, I wouldn’t be surprised in the least to see silver bounce nicely off of its close Friday for some part of next week and even take out a critical level of resistance found right around $37 per ounce all in a muted reaction to this past week’s severe reversal. However, there’s an excellent chance such an opportunity will be brief and volatile, but all along it can be judged by how silver trades in relation to that trendline at about $35 per ounce above.

If at any point silver closes below that trendline that ends Monday at $34.85 per ounce and then moves progressively higher by about ten cents each day, the opportunity switches to the downside and that may be the easier one, the more efficient one to profit from since it is aligned with silver’s severe downtrend of this past week.

That being said, there’s something to remember here and that is the fact that silver’s intermediate-term and long-term trends are up and silver’s intermediate-term trend remains up so long as it holds the shorter trendline in the weekly chart below (), while silver’s long-term trend shall remain up so long as silver does not fall below its long-term trendline at about $22.50 per ounce.

Putting all of this together, there will be many ways to trade the opportunities that lie ahead this coming week in silver through SLV, ZSL and the options on these ETFs to name only a few, but none will be for the faint of heart unless silver simply continues to drop from here. In this possible case and one that seems less likely to occur immediately, silver seems rather likely to be a short and whether to $27 or $22 per ounce, it charts out as a relatively straightforward drop to either such level and irrespective of anyone’s internals.

Such an opportunity exists only, however, if silver closes below that intermediate-term trendline at $35 per ounce and until that time there may be some daring fun to be had in trading any stabilizing vagaries that come to exist above $35 per ounce in a possible extension of silver’s bold hold of support.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SLV, ZSL over the next 72 hours.