Short Term Top In Silver?
Timothy Silvers
September 4, 2006
It has been three months since my last silver update. I have been busy enjoying the warm weather, vacationing and spending less time focused on the markets. Fall is just around the corner, so it is time for me to start paying closer attention to silver and gold again. Usually, summer is a somewhat dull time to follow the precious metals markets, but geopolitical events have kept things interesting. Along with the typical liquidation of commercial short sellers' futures contracts, we saw a correction in gold and silver down to their 200 day moving average (MA) on June 14. I expected them both to double bottom around the 200 day MA shortly after the correction. However, silver shook off the brutal sell off, and has traded in a new channel of higher highs and higher lows since. Gold's trading has been less spectacular, rebounding strongly to $671 by mid July but then trending down to flat since then. This past week, silver broke through the tough $12.50 resistance and is pushing to break $13, perhaps tomorrow.

Many analysts I have read recently think that silver is starting its new bull run to take out May's highs. I think we will see that come to pass, but not before we suffer a correction. There are a few reasons why I think this will happen. First, silver typically sees a correction between the end of August and the end of October. Second, the RSI indicator is again approaching 70 (see chart below). When it exceeds this level, the market is overbought. Silver has never been overbought at this time of year in any of the past 5 years. Usually, the fall correction will send silver back down to an RSI level in the low 30's before it begins its crawl up to new highs in the end of the fourth quarter or the first quarter of the following year.

Third, gold has not been that strong this summer and I would expect to see some leadership from gold before silver begins its next advance in earnest. If not for the political turmoil from terrorist threats, Iran's nuclear ambitions, the Israel/Lebanon war, etc, we would have seen the typical correction in the gold and silver already this summer. That gold has not gained more strongly in the face of these destabilizing events concerns me that there will be future weakness in gold as well.

Finally, I put together a simple trend chart of silver over the past year. These trend charts are not magic, but many people follow trends and will make trading decisions based on whether or not the price breaks resistance or support. Silver is very close to a juncture between its old resistance trend from the past year and the upper boundary of its new channel. That point is around $13.30. Silver took out its previous upper channel at the end of March, and that should have been an indicator that it was going to advance strongly in the short term.

Summary

I am watching this new channel very closely. If silver does not push through the top convincingly, around $13.30, then it will probably sell off and retest the bottom of the channel. I will likely take some profits on my trading positions this week, if it looks like this rally is losing steam. If silver falls through the $12 barrier, then it will likely find support around the 200 day MA around $10.80. This will probably correspond with a RSI level of 35-40 and would be an excellent time put your remaining cash into silver. I am expecting silver to close the year above $15. We shall see how it all plays out. Best wishes on your investing and future.


Timothy Silvers

Timothy Silvers is an independent analyst who has been following the silver market since the late 1990's. Yes, Silvers is his real last name, so it only makes sense that he follows the silver market. If you are interested in more of his analysis, please visit his website at www.silverbrothers.com

Disclaimer: This article represents the opinions and personal views of Timothy Silvers and is not intended to be investment advice. If you choose to use this analysis for your personal trading, Timothy Silvers assumes no liability for the direct or indirect losses you may incur due to using this article to make your investment decisions. You are totally and completely responsible for your own investments. At any given time, Timothy Silvers or his friends and relatives may have positions in silver related investments that may or may not follow the recommendations contained in this article. The information in this article may not be completely correct and accurate. Even though Timothy Silvers has done his best to review the content and accuracy of this article, he is in no way liable or responsible for any mistakes or omissions.