Silver's King-Sized Cup With Handle Pattern

04/07/06 08:16:55 AM

by David Penn

A note on silver's rally above $12 and how it got there.

Security: SI, SIN6
Position: N/A

Back in January, I pointed to a cup with handle pattern in silver futures ("Silver Spurred," January 27, 2006). That pattern developed over the course of December 2005 and January 2006 and, based on the measurement rules suggested by Thomas Bulkowski in the second edition of his book Encyclopedia Of Chart Patterns, suggested a breakout at 925 ($9.25) and a minimum upside to somewhere between 1000 and 1025.

FIGURE 1: SILVER, CONTINUOUS FUTURES, WEEKLY. The two-year cup with handle pattern that formed in silver futures provided the base from which the amazing rally in the second half of 2005 and the first few months of 2006 began.

Graphic provided by: Prophet Financial, Inc.

Suffice it to say that this feat was accomplished, though not without some distress. Silver futures (basis March) rallied to a closing high of 988.50 ($9.89) on the last day of January before pulling back sharply. That pullback was so sharp it sent silver futures briefly back below the level of the breakout at 925 by mid-February. However, silver found support just above the 900 level and once again began to move higher, this time taking out the resistance at 925 and reaching its minimum price objective (basis April) on the second day of March.

The long-term cup with handle under discussion here has been a much smoother ride by contrast. As Figure 1 shows, this cup with handle began with the near-vertical advance from late 2003 to early 2004. In the wake of this rally, silver futures first slipped, then began moving fitfully higher over the balance of 2004. On its first attempt to take out the highs of 2004 late in the year, silver futures were repelled. This time, however, the futures fell above half as much as they did when silver first tested the 840 level back in the first few months of 2004. Finding support just south of 660, silver futures (basis continuous futures) moved largely sideways over the course of 2005, albeit with a slightly upward bias.

FIGURE 2: SILVER, JULY FUTURES, DAILY. The last three sell signals in the TRIX had no follow-through to the downside (that is, a close lower than the low of the sell signal day), thus keeping alive the numerous buy signals that in fact were accompanied by follow-through to the upside (that is, a close higher than the high of the buy signal day).

Graphic provided by: Prophet Financial, Inc.

We can use the same measurement rule from "Silver Spurred" to get a minimum upside projection for this larger cup with handle in the weekly chart. With a high of 840 and a low just north of 540, we add a formation size of 300 to the breakout level of 840 to get a minimum upside of 1140 or $11.40. This level was reached on a weekly closing basis during the final week of March 2006. Compared to the smaller cup with handle from December 2005 to January 2006, the ride provided by the larger, weekly cup with handle has been smoother. While there was a two-week correction in mid-December (which coincides with the beginning of the "Silver Spurred" cup with handle), the breakout level in the weekly chart was never broken.

What is ahead for silver in the near term? A number of commentators have thrown cold water on silver's 2006 rally, pointing out that bets on silver as the "poor man's gold" are typically a speculative play, especially when silver is leading gold, as has been the case in recent weeks. And the growing gap between silver and its 10-day exponential moving average (EMA) certainly suggests that silver might be getting ahead of itself. Nevertheless, as long as the market fails to show follow-through to the downside in the wake of down days (such as the sell signals indicated by the TRIX in Figure 2), the upside likely will remain the path of least resistance.

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's King-Sized Cup With Handle Pattern

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