The Futures / Inter Market Report

Trading the World's Markets

December 14, 2007

Matthew Caruso, CMT

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Silver correction to extend

            Silver prices corrected strongly this past week falling over $0.50. On November 30^th a forecast was given for continued correction on the energy and precious metal markets. As typical with the markets, the weaker commodities have continued to under perform the strong commodities. By this I am referring to silver which has been weaker than gold and natural gas which has been weaker than rbob gasoline. Trends persist not only in price but in relative performance as well.

            The correction which has begun in silver since its spike above $15 per ounce is likely to continue and will likely lead to a fall to at least $13.25 per ounce. 

Figure 1 chart by genesisft.com

Firstly, there has been a clear change in the intermediate trend for silver as can be see in figure 1. The uptrend line which supported price 3 times has now become resistance and impeded a further rise above $15. As well, prices have now made a lower high and lower low which is essentially the definition of a downtrend and prices will follow the trend lower. 

One way of finding targets for prices is to use Bollinger bands. In this case I applied a 50 day Bollinger band placed 2 standard deviations from the 50 day moving average. As can clearly be seen in figures 2, 3 and 4 this Bollinger band setting is very helpful in finding downside targets in silver during corrections. Figure 3 shows how prices found support at the lower Bollinger band when prices were correcting from their extremely strong rise in the beginning of 2006.  Figure 4 shows how support was found at the lower Bollinger band after the sharp drop in 2004 after yet another strong rise in the prior months. 

It is important to look for downside targets because from a long-term perspective silver is still in a bull market and this is just a correction. I am not contradicting myself with this statement. Silver is in a downtrend on a short-term basis, however, this is just a correction in the bull market that started in silver back in 2001. Corrections tend to be sharp but quick therefore any opportunity to take profits at levels that typically provide support (such as the 50 day lower Bollinger band) should be used. 

Figure 2 chart by metastock 

Figure 3 chart by metastock

Figure 4 chart by metastock

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