Then Retreat Again?
Silver had a strong day on Friday, finishing higher by $0.42 cents or nearly 3.0% to close at $14.71 as of the final trade on the New York COMEX. Friday more than made up for the previous four days of losses, such that for the week in total, silver was higher by $0.35 cents or 2.5%.
What do we make of silver at this stage? Is this the time to invest due to the expectations of a more significant rise in the years ahead? Or is this a temporary rally that will lead to further declines in the price of silver?
Let us examine the data. Below we show the price of silver from the late-2015 bottom at $13.65 through the present. Immediately below the price is a volume indicator, which shows the number of contracts traded on a given day. We will reference the chart below for the subsequent discussion:
Silver Has Broken Intermediate Support
The most important point to note for silver is that the clear horizontal support zone (black lines), which existed between $15.70 – $16.10, was clearly violated in July of this year. The violation is shown by the red callout.
What do we mean by support zone? Support refers to a price region where large buyers emerged on repeated occasions in the past. In the case of silver, we can see that on no less than 12 distinct occasions between December 2016 and July 2018, every time the price dropped into the $15.70 – $16.10 zone, sufficient buying activity emerged so as to cause the price to rebound by $1 – $2 over the subsequent weeks. Those 12 tests on the support zone are shown above by black numbers.
Significantly, what happened in July 2018 as the price of silver approached the support zone for the 13th time? The buyers that rose the price back above its previous support zones failed to do so. Breaking through support zones can be tied back to many economical reasons. One possible reason for the price of silver breaking below its support zones is from the fed raising interest rates. By raising interest rates many investors are more willing to invest in other securities such as bonds due to higher yields.
How do we know this? Because the price of silver broke lower through the previously-established buying zone, down to recent lows near $14.00. We cannot know all reasons why those buyers failed to show up, but clearly, they were exhausted and/or not as determined as we originally would have hoped. Whatever the reasons may be, they were absent in July.
And so, this week, the price of silver rebounded, even in spite of a small $5 loss in gold. What now?
We strongly expect that following a temporary rebound silver will continue falling. If the fed continues to raise interest rates, which they are expected to do for the fourth time in 2018, silver will make a new low below the $14 figure recently observed in September.
Support Turns To Resistance
When examining price trends in the markets, there is a useful adage which says: “Broken support turns to resistance.”
What does this mean?
Imagine a short-term oriented trader, who purchased silver at any point from December 2016 through July 2018, at the previously established support zone of $15.70 – $16.10. His timing on the purchase seemed wise over the subsequent 12 – 18 months, as silver continued to rebound from these lows. Yet what will happen now that the price has fallen below his entry point?
He is likely to sell at break-even.
We must understand that there is not just one trader who is underwater on his previous purchases from this zone, but thousands who bought in the $15.70 – $16.10 range from December 2016 through July 2018.
All of those traders are underwater. What are they likely to do the next time silver approaches their initial buying zone?
Most will look to sell at break-even.
When enough sellers show up within a specific price zone, the price must fall, unless a new group of buyers emerges to scoop up the silver from them.
This is why we strongly expect that the previous support zone will now turn into resistance for silver on any bounce over the coming weeks, and the price will retreat.
Another reason for the expected future drop of silver prices is partly due to the fact that the federal reserve is expected to continue raising interest rates. The fed is expected to raise the interest rate at least three more times in 2019 and one more in 2020. If the fed follows through with this then we can expect to see a drop in all other precious metal prices. People will liquidate their precious metal holdings and put their money into securities that will produce higher yields.
Target for Silver
In estimating a target for a subsequent significant low, we must examine the previous downward sloping consolidation (shown above in blue). Note how the highest surge above the support zone came in at $18.60 in April 2017, a $2.90 amplitude above the $15.70 zone.
Thus, there is an amplitude of $2.90 of traders who are now underwater on their purchases. We expect them to sell to cut losses over the coming months, and so a target can be estimated by that same amplitude subtracted from the $15.70 breakdown point. This reveals an intermediate target of $12.80 for the price of silver over the coming months.
Will this $12.80 target be hit exactly? We cannot say. The markets, as in all parts of life, are in constant flux. However, this target represents our most reasonable expectation based on observable data as to how far the price of silver should fall.
Takeaway on Silver
Many short-term oriented buyers who purchased silver within the $15.70 – $16.10 support zone are now underwater. They will be looking to sell near breakeven the next time the price approaches this zone.
A significant buying opportunity may be setting up for long-term oriented investors near our $12.80 target once this resistance zone is confirmed.
It is also crucial to keep an eye out on other economic factors such as the fed interest rate hike, which impacts precious metals greatly. When silver broke through its support that was right near the time when the fed raised rates for the second time in 2018. If they deliver on future rate hikes than we can expect silver prices to fall even further.
CHRISTOPHER AARON
BULLION EXCHANGES MARKET ANALYST
Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency.
Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.
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