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Silver Continues Post-Bubble Behavior

08/08/11 09:37:50 AM
by Mike Carr, CMT

After reaching a bubble top near $50 an ounce in April, silver hasn't given the bulls anything to cheer about.

Security:   SLV
Position:   Sell

Bubbles really are a fairly common occurrence in markets. If we look closely, we can find at least a few every year. Silver certainly fit any definition of the bubble earlier in 2011 and charged higher in the first months of the year before topping in late April (Figure 1). Since then, its price pattern has been one often seen after a bubble as rallies have failed to get back to old highs.

FIGURE 1: SLV, DAILY. The daily chart of SLV shows that rallies were at first constrained by the 38.2% retracement level, then the 50% level, and most recently, the 61.8% level.
Graphic provided by: Trade Navigator.
Silver's initial decline lasted only 10 days and prices fell more than 33%. Over the past three months, prices have been forming a solid base. The top was accompanied by a momentum divergence (momentum is shown as the 26-period rate of change in Figure 1). Momentum has confirmed the higher price action in the past few weeks.

The weekly chart of silver (Figure 2) is even less bullish. The bubble top followed a spectacular price rise and after previous bubbles, additional time has been needed to form a bottom.

FIGURE 2: SILVER, WEEKLY. The weekly chart shows the recent price rise has not even developed from a significant support level.
Graphic provided by: Trade Navigator.
Prices in silver may go higher in the short term as the markets undergo unprecedented turmoil associated with the Eurozone and US debt problems. Longer term, we should see prices much closer to support levels under 30 before a bottom can form.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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