Many investors and traders alike have been caught out out by silver’s recent breakdown and the sharp drop that followed, but there is now a strong case to make for silver either being at its low for this cycle, or very, very close to it.
We start by looking at silver’s 6 month chart, on which we can see its recent price action in detail. Here we see the breakdown from the downward trading channel and the resulting sharp drop. This drop is now regarded as a final capitulation following the long and grueling downtrend that preceded it.
Note the pronounced high volume hammers that began occurring early last week. There is a good chance that these mark the current price area as the final bottom, and if not, we are considered very close to it.
Finally, note how incredibly oversold silver is on its short-term indicators after a prolonged downtrend, notably its RSI which shows it to be super-critically oversold.
What has got so many traders freaked out on the 3 year charts is the breakdown from the Descending Triangle which has been forming from June last year. We can readily understand why this has got so many people worried as it looks like silver is starting another heavy down leg just going on a cursory look. But before we join this crowd, let’s quickly move on to consider why this breakdown is believed to be a bear trap, and the bullish case for silver is now stronger than before.
The 15 year chart presents the other side of the story, as it reveals that silver has still not broken down from its long-term uptrend first begun in 2003 and is still in a zone of major support arising from the extensive trading in this price zone in 2008, late 2009 and again in 2010. This chart makes clear that while silver has certainly been in a bear market since April 2011, in the larger scheme of things this may only be a severe correction within an ongoing major bullmarket.
Next we look at the Silver Optimism Index [Optix] where we see that sentiment is already at an extreme that in the past has correlated with an important bottom, or been close to it. This chart alone makes a compelling case for a silver bottom here.
While we normally don’t look at the US Dollar in Gold and Silver updates, it is important to both metals right now and at such an extreme that we include it in this article.
The whole world is euphoric on the dollar right now, and sentiment towards it is at “off the scale” bullish extremes. For this reason, a correction in the dollar looks imminent, even if it drifts abit higher for a while, and if it corrects, gold and silver should turn higher.
The 3 year chart shows the dramatic spike in the dollar index, which has resulted in the wildly overbought signal on its RSI indicator. It is reasonable to expect a sudden reversal or at least run off into a lengthy consolidation.
Meanwhile the US Dollar Optimism Index chart [Optix] shows that optimism is already at record extremes and is “off the scale”. The record shows that such wild Optix extremes have almost always coincided with a top or closely preceded it.
To conclude, although we have gone back and forth in the recent past and with good reason given that silver just made a new low, we can state with confidence that silver is believed to be either at, or very close to, an important low here. This is especially the case, since its indicators are so horribly oversold and the US Dollar looks set to turn lower soon, both signaling a rise in prices. Only in the event of an immediate deflationary plunge across the board would silver be likely to drop even further.