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Silver Formed a Bullish Double Bottom and Is Starting to Rally
By Jason Sen
Silver has been in a multi-year bear trend which bottomed out at the end of last year at a low of $14.14. As you can see in the weekly chart below, we staged a good recovery into January of this year when the bear trend resumed. A more gradual decline from the end of January saw us retest December 2014 lows, bottoming out at the end of August at $14.00. From a fundamental perspective, it would appear that precious metals are finding support, perhaps triggered by the worries over the slowdown in the global economy. We have been following gold quite closely in recent articles, and you may therefore be aware of how important the $1086 support was. Obviously this has held and you may remember that we are looking for a break above trendline and 100 day moving average resistance around the $1140 area for an indication of a more prolonged recovery and even the start of a longer-term bull trend. Back to the weekly chart for silver and the lower red trendline in the chart above demonstrates a double bottom in place and through September and beginning of October. We have seen a nice recovery up to a peak of $16.12. There’s a very simple reason why the recovery came to a halt here. Having burst through the blue 100 day moving average line in the daily chart below, you can see how we touched the red 200 day moving average, as we became overbought on the daily chart and hovered therefore a couple of days, before seeing a sharp sell-off yesterday. Nonetheless, we could still be seeing the early stages of a bull market in silver. Of course markets do not move in straight lines and a bout of profit-taking in a bull trend is to be expected. In fact a healthy bull market will move to new highs and then retrace, but the key is for the profit-taking sell-off to hold above previous troughs. Silver bulls now need to keep the price hovering above the 100 day moving average at $15.35/15.25. Yesterday they managed to defend this level with a strong bounce from $15.41. So far so good, bulls remain in short-term control. This means that the important short-term levels have been defined. Support at $15.41/15.25 and resistance at $16/16.12. With prices overbought on the daily chart, we could now see a period of sideways trending in between these support and resistance levels to allow the overbought conditions to unwind. Once this process has been complete, bulls will try to push up through the $16 barrier to commence the next leg in the recovery process. If we zoom in again on the weekly chart below, you can see the purple 55 week moving average line, coincides with the 200 day moving average at around the $16 area. Another good reason why the one month recovery has run out of steam here, but this is also another good reason why a break above here could catapult the market quite quickly to the next upside targets. A break above $16.25 therefore should target $16.45 and eventually meet the intersecting trendlines in the $16.80/$17 area. Only a little higher above here we have 38.2% Fibonacci resistance at $17.12. You can see therefore how this upper $16 to lower $17 area is a strong resistance level and therefore represents the next major challenge for bulls to overcome, if we are to see a more sustained recovery and the start of the longer-term bull trend. If I’m right about precious metals benefiting from safe haven status as global stock markets trend lower in volatile conditions, gold and silver bulls will not want to see stability back in stock markets, nor a resumption of the longer-term bull trend! One thing is for sure, it looks extremely unlikely that gold will be benefiting as an inflation hedge in the near future.
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