Silver Has Established Strong Support

08/11/11 11:45:47 AM

by Chaitali Mohile

After correcting 15 points from the new high, the silver spot price is consolidating. The index is likely to maintain its bullishness.

Security: $SILVER
Position: Sell

In mid-June 2010, the silver spot price (EOD) ($SILVER) initiated a robust bullish rally from $17.50. The 50-day moving average (MA) extended strong support to start the fresh upward rally. The index surged to $30 in December 2010, gaining nearly 15 points in five months. The range-bound relative strength index (RSI) (14) was one more technical reason that helped $SILVER to begin the rally. The average directional index (ADX) (14) was struggling to sustain above 17 levels. The rally pulled the trend indicator in a developing uptrend region, which supported the index to move higher. After traveling 15 points, the price rally entered a short-term consolidation. During this sideways price action, the index rested to accumulate strength for the rally. The index had to consolidate due to the overbought RSI (14) and an overheating uptrend.

FIGURE 1: $SILVER, WEEKLY. After descending from the new high, $SILVER established support at $32.03.

Graphic provided by: StockCharts.com.

Although the indicators marginally drifted during the horizontal rally, they sustained their bullish levels. As a result, the index could resume the prior advance rally. Gradually, the price moved to a new high of $50. The entire journey (19 to 50) was one-sided. Such rallies are highly dangerous as they undergo sudden selloffs. Though these rallies surge like rockets, they usually plunge with equal speed. We can see in Figure 1 that $SILVER plunged to $32 in just one week. On technical terms, the correction of $SILVER was anticipated due to the extremely bullish indicators. The RSI (14) in Figure 1 was overbought at 90 levels, reflecting a reversal rally for the silver index. The ADX (14) reached 60 levels, signifying an overheated uptrend. These indicators and the single direction rally resulted in the serious breakdown of $SILVER.

Thereafter, the index established support at $32.03, consolidating in a wide range of 42 and 32. The descending rally of the RSI (14) stabilized at 50 levels, showing the bullish strength in the index. The ADX (14) declined as well but restricted the bears by entering the trend. Thus, the bullish sentiments of the buyers were protected. The ascending 50-day MA has established a robust bullish force at $32.03. Thus, $SILVER would consolidate with the support at 32.03 levels. Since the trading range is wide, traders can trigger their positions in the direction of the price action. Currently, the index is ready to retrace toward the $32.03 support, and therefore, short-term traders can go short.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company:	Independent
Address:	C1/3 Parth Indraprasth Towers. Vastrapur
	Ahmedabad, Guj 380015
E-mail address:	chaitalimohile@yahoo.co.in
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Silver Has Established Strong Support

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