Silver Prices Meteor Decline

February brings about several events. First we have Valentines Day, Lent begins with Ash Wednesday and of course most traders look forward to Presidents Day as we observe a three day holiday. The truth of the matter is for die hard trading junkies, we can still trade currencies and stock indexes as the CME GLOBEX is open from Sunday night through Monday Morning. Apart from that, we have several seasonal trade situations that occur in this month.

The S&P 500 has shown a strong tendency to decline right before the Presidents day holiday (February 20th) that can last into early March. In addition, Crude Oil prices make a strong seasonal bottom.  In the agricultural sector, Live Cattle prices tend to see follow through strength from Januarys gains. Soybeans begin a bullish advance that can last into late May through early June.

As for the precious metals,  Gold tends to peak out as can Silver from mid month. In fact, according to our work in the Commodity Traders Almanac Silver prices in the last 39 years has declined in this time period 29 years for a success record of 74.4%. One of the worst performing years was last year as silver made a historic counter seasonal rally.    The price of Silver moved from Januarys close of 28.02 and by the end of April Silver traded to a high of 49.82, basis the continuous front month contract. Since that high was made, silver has been in a downtrend reaching a low of 26.145 in December of 2011. It could be a very interesting situation as we are now in a presidential election year both here in the US as well as other foreign countries, specifically Russia and France.

Also, we have a different global economic picture. European Central Bankers provided their own “Quantitative Easing” to help shore up European banks to avert a further debt crisis. Moreover, both China and India are expected to maintain a solid albeit lower GDP growth rate in 2012. These factors could quash investors fears as well decrease demand from a slowing of economic expansion from these two developing nations. Combined, these factors could reduce demand from a flight to safety perspective for Silver this year

Technically speaking I am viewing a potential target of resistance in Silver between 37.00 and 38.00 dollars based on a variety of technical tools. First using simple Fibonacci retracement levels from two different time and price locations we have what is called a confluence of resistance between the 37.35 to the 37.95 area. From the high in April to the low in December of 2011, you will see we have an exact 50% correction level at 37.95. From the peak high in August to the December low we have a .618% retracement value at 37.35.

Secondly, If you draw a simple trend line from the peak’s of those two highs and extend out to the right it will intersect by mid month (red circle) at the 37.00 level.

Thirdly one of my favorite bearish candle patterns is a Red Opening Marabozu formation that was created from the week of September 23rd. Generally speaking markets will come back to test the midpoint of the real body (opening-closing range) and this can act as a resistance level. Notice the similar reaction from the Red Opening Marabozu formation from May of 2011? The high made in August was just at the midpoint of that candle as marked “point “A” on the chart in Figure 1.

 

Figure 1

 

 

One last coincident resistance target level is 35.52; this was created by the use of the Monthly Persons Pivot indicator. Using a daily chart in figure 2, we see the current trend is up, and Silver is in an official buy signal as established from the green triangle that was created on January 3rd. In the lower quadrant I am using Joe Granville’s On Balance Volume indicator to better reflect the health of this current uptrend. Once and if prices do trade near the 37.00 level I will be looking for a formal sell signal and confirmation from a potential divergence in volume to confirm the uptrend has lost momentum before establishing any short position.

 

Figure 2

 

The technical tools I have used to identify the potential resistance level for silver are non-correlated. We have Fibonacci, trend line analysis, Candle Stick Analysis and Pivot Points. All we need to do is wait for a signal to sell to generate to confirm a reversal to complete a time and price objective. On the other hand do be aware if Silver penetrates this level of resistance drawn from the various tools illustrated in this article, prices could extend significantly higher.

 

In summary:

Technical analysis is a fascinating field, I have discovered the more tools that point towards a specific resistance or support level the better the odds that level can hold. If all the Fibonacci analysts and trend line users and Pivot Point users see a resistance or support point it attracts that many different users to reach the same conclusion. But be aware if a level fails that means there are that many more traders who are wrong and will likely get out of the position, and that is what can propel prices sharply higher as I just mentioned.  I use seasonal analysis to alert me to time a potential trend change, but when combined with the use of specific technical tools as I have used in this example, we can nearly pin point the price level from where a price turn may occur.  It will be interesting to see how this trade scenario will work out, which we will follow up in next month’s article or you can visit my website for more information.

 

Remember the old adage, “The trend is your friend until it ends”, the tools discussed in this article may give you an edge in determining just when a trend will in fact end.

 

All the best to you this month in all your trading endeavors.

 

Sincerely,

John L. Person.