Silver Spurred

01/27/06 01:25:27 PM

by David Penn

A cup with handle consolidation from December through January leads to a breakout in silver futures.

Security: SIH6
Position: N/A

Fans of chart patterns have had quite a bit to capture their attention in recent weeks. And this pattern recognition is not limited to stocks ("Caterpillar's Diamond Breakout," Traders.com Advantage; January 26, 2006) and intraday market index action ("An Intraday Dow Diamond," Traders.com Advantage; January 27, 2006), either. Silver futures, long in the shadow of the performance of gold, have spent the past two months fashioning a well-known chart pattern on their own, one that looks likely to propel silver back into the mainstream of trading discourse in much the same way that is sending silver prices higher and higher in late January.

FIGURE 1: MARCH SILVER FUTURES, DAILY. A cup with handle pattern beginning in early to mid-December led to a breakout on increased volume in late January. The measurement rule for cup with handle patterns suggests that March silver could break the $10 an ounce level as part of a minimum upside move.

Graphic provided by: Prophet Financial, Inc.

The cup with handle in March silver began with one of the more bearish, "single stick" candlestick patterns in the book: the bearish engulfing pattern (Figure 1). That pattern on December 12 anticipated the correction that would last the rest of the month. Shown in Figure 2 is the intramonth positive stochastic divergence — actually a midmonth divergence — that telegraphed the end of the correction, if not a move to higher silver prices.

While the market for stocks soared in early January was precisely when silver's late December rally ran out of steam. Silver's advance in the second half of the month completed the "cup" portion of the cup with handle pattern. But it was silver's sideways movement throughout most of January that completed the cup with handle pattern by fashioning a "handle" out of its 50-cent, range-bound trading in the first month of the year.

FIGURE 2: MARCH SILVER FUTURES, DAILY. A short-term positive stochastic divergence in mid-December as silver slipped toward its 50-day exponential moving average suggested that the moving average would indeed provide support. Note the dramatic increase in volume the day before, the day of, and the day after the breakout from the pattern in late January.

Graphic provided by: Prophet Financial, Inc.

Repeatedly bumping into resistance throughout January, silver was clearly trying to find a way higher. But it wasn't until the last full week of the month that the silver bulls were able to impose their will on the silver market. January 24 saw another test of resistance at the $9.25 level, and the next day saw those efforts rewarded with a gap-up breakout that saw silver futures (basis March) close over $9.50.

What sort of upside can traders and speculators in silver anticipate in the days and weeks ahead? The measurement rule for cup with handle patterns calls for adding the size of the pattern at its widest point to the value at the breakout level. In this instance, that would mean adding approximately 90 cents to the breakout level of $9.30. This provides for a minimum upside target of $10.20.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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CUP WITH HANDLE

Silver Spurred

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