iShares Silver Trust ETF (NYSEARCA: SLV) has now recorded seven straight weekly gains with a positive close last week. With this winning streak, SLV has repeated the performance last seen in 2011. Investors in silver are now asking only one question: is SLV about to break out from its 6-month long downtrend? If charts are used to answer this question, then the answer is a resounding yes.
Here is the weekly SLV chart price chart highlighting the seven consecutive weekly gains in 2011. During this period, SLV shot from $26 to $35.78, quickly amassing more than 37 percent in gains.
The same phenomenon repeated with the last week's closing price of $17.02. In the previous 7 weeks, SLV has managed to gain 12.64 percent. Although this return is disappointing if we compare it against the previous performance, it also leaves room for more gains.
But, SLV has hit the stiff resistance of the 6-month long downtrend at $17. It faces another hindrance from the 200-day SMA of $17.0074. The other two important simple moving averages, namely the 30-day and the 50-day SMAs of $16.1513 and $15.9224 respectively have finally turned north and are sustaining the upmove.
If SLV is able to sustain above the 200-day SMA and the resistance, more gains are likely to follow. These are the final hurdles for SLV to cross and beyond these, the short-sellers will be forced to cover their positions resulting in an increased demand.
My reason for believing that the ETF will eventually head higher is also because it has registered a strong bottom and given a solid breakout from a bullish reversal pattern famously known as the Inverse Head and Shoulders. Investopedia defines this pattern as,
"The inverse head-and-shoulders pattern is the exact opposite of the head-and-shoulders top, as it signals that the security is set to make an upward move. Often coming at the end of a downtrend, the inverse head and shoulders is considered to be a reversal pattern, as the security typically heads higher after the completion of the pattern."
I have marked the same in the daily SLV price chart below. As one can see, post the breakout from the horizontal neckline resistance, SLV has continued with its upmove helped by firm volume readings (green bars at the bottom of the chart). These volume readings are reflective of the investors' participation in the rally. The target price of this pattern comes out to be in the range of $17.85-$17.90, which is an upside of 5 percent from the current levels. Interestingly, this target price also coincides with one of the peaks in the downtrend, meaning that if SLV reaches the target zone, investors may consider booking partial profits.
Another point to put out is that even though the entire structure is bullish and the price target is 5 percent away, it may not head there immediately or it may not be a straight line. There will be bouts of profits booking as well. This bullish pattern will be nullified if the support level of $16.40 is breached. In technical analysis, a breached resistance is taken as the next support for the underlying. Since $16.40 was the previous neckline resistance, it should now behave as the new support for SLV.
To emphasize the importance of booking partial/all profits near $17.85-$17.90 - depending on an individual's risk appetite - I have employed a very important technical indicator Fibonacci retracements to the entire downtrend from August to December last year. The 61.8 percent Fibonacci retracement level of this downtrend is $17.85. Generally, these retracements act as resistances or as 'reversal points.' Since SLV is on its way up, it may see a reversal near the discussed price zone.
SLV may continue with its uptrend in the coming weeks as well after recording seven straight positive weekly closings. The strong bullish momentum is unlikely to die anytime soon but there may be bouts of profit booking. If the resistances posed by the downward-sloping trendline and the 200-day SMA near $17 are taken care of, then SLV might add another 5 percent in gains. This return target has been derived from a bullish technical pattern known as the Inverse Head and Shoulders discussed in the article above. Needless to say, sustenance above $17 is the key to meeting the price objective.
After the target zone of $17.85-$17.90 is touched, an investor should consider booking partial profits as the 61.8 percent Fibonacci retracement will weigh on the underlying. If the time horizon is 3-5 years, then it may not be the best course of action.
My bullish thesis will be proved wrong if the support zone of $16.40 is penetrated on strong volumes.
Note: I cover several stocks in different sectors as well as S&P 500, crude oil, gold and silver, U.S. dollar, etc. So, if you liked this update, and would like to read more of such informative articles, please consider hitting the "Follow" button above. Thank you for reading!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.