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Silver Reverses On High Volume, Dow:Gold Setting Up For A Fall

|Includes: First Majestic Silver Corp. (AG), DIA, GLD, SLV

Silver opened higher and made new 30 year highs intraday before reversing this afternoon and finishing down $.69 with high volume on SLV. This movement marks a short term top and the beginning of the first swing to the downside since the beginning of March. After an 8 day winning streak and only trading lower 3 out of the last 14 days, silver should finally stop to catch a breather for the remainder of the week.

Trading volume on SLV was almost 78 million and 2x above 50 day average. The candlestick on the daily chart is an engulfing candle, though not quite a key reversal as the close was not lower than friday’s lows. The catalyst is said to be one trader who bet roughly $1million on a Jul 11 $25 SLV put which sent the ETF and the rest of the silver market (and gold for that matter) crashing down to yesterday’s lows.

I have warned of the overbought nature of silver and though one could argue that silver wouldn’t have topped out today if it weren’t for the incident listed above, the fact remains that the incident above likely was an effect, not the cause of the reversal we saw today. When there are too many bulls and not enough bears, you get sharp and volatile reversals that catches dumb money by surprise.

I’ll follow up my analysis once again with the chart of First Majestic Silver (NYSE:AG) :

I warned on the 4th of this month to start putting in hedges against AG longs. On the 6th, Ag reversed on record volume and after today it has broken the parabolic trend going back to the middle of March. This is a great company to own stock in but it’s poised to move lower in the near term.

As far as how low SLV can consolidate to here, it appears that the 20 Day MA will add support somewhere above $38 within the next couple of days and there is also support at $37 and $35. It can be difficult to speculate the momentum that silver will have next so I don’t have an opinion on which support level is most likely to be tested. However, when it does bottom, it should be clear and concise.

One more thing I’d like to point your attention to is the Dow to gold ratio. It appears to be in a situation where gold is on the brink of a breakout versus the dow.

Throughout late 2008 to early 2010, there was a pivot point at 10:1. It rallied to 10 once in August ’09 and again in March ’10, creating a double top. It then made a series of higher lows before the trend broke down in April and gold moved $100 higher as the ratio fell.

Zooming in to the past year, we can see a similar setup is forming. Resistance is at 9:1 which was formerly support from March ’09 to April ’10, has been tested twice and rejected – a double top just like before. Now there is a series of higher lows and the index is sitting just above trendline support at 8.4:1. If this trend breaks down and makes new lows, it could mean the next leg in the gold bull market has started as money moves out of stocks and into gold and other hard assets. Of course this is nothing to hold your breath for, but it is certainly something to watch as we come closer to the end of QE.