Where will the bottom be in Silver?
January 28th, 2010Back on the 15th, I tightened my stops pretty tight after predicting a local top in silver, and prices started dropping soon afterward. That call turned out to be pretty good, getting me out of SLV within a few percentage points of what turned out to be the top.
I’m much more nervous about predicting the bottom than I was the top. The problem is that my (small amount of) experience with precious metals is that once they turn the corner and head back up, they do so sharply. I’m afraid that will make it difficult to be sure the bottom is in without missing the initial breakout. However, we can’t let fear guide our investing decisions, so we have to take the information we have and make the best prediction we can. Once we see the numbers, we can compare them to the price behavior and see if we see an opportunity to get back in.
…And get back in we should. The fundamentals of metal are still very favorable. The world economies remain weak, and many countries are debasing their currency. The stock market is highly overvalued, and metals remain historically undervalued compared to stocks. The weekly chart shows we are still roughly within a rising trend channel and MACD is still positive. I’m fairly certain we are still in a secular bull market for precious metals.
On Jan 20th, there was a pretty clear breakaway gap to start the down-trend. On the 24th, there is what looks like a continuation gap. Measuring from the breakout to the continuation gap and projecting down, we get a target of 15.75. The previous corrections in March and June were 15% and 20%, respectively. A 15% correction from the Dec 2nd high of ~$19 would put us at $16.15. 20% would put us at $15.20. That makes 15.75 seem like a reasonable target. It seems the current price of 16.26 likely has a little further to fall. Support is strong at $16 from the Sept and Oct bottoms and the June top.
The RSI is currently at 50. During the previous 2 corrections, it broke below 50 briefly before turning up. Yesterday the price went down on solid volume, but closed higher than it opened. Today it went down on low volume. Both seem to indicate confusing in the trend. The MACD histogram is still falling, so downward momentum isn’t slowing just yet. The STO has hit overbought territory and is bottoming out, so we do need to be on-guard for a change in momentum.
The dollar is still rallying, which will continue to pressure everything priced in dollars. Looking at the Kitco gold index, the index has started pulling away from the dollar value, so gold (and likely silver with it) has started to have some “price-stickyness” and is not falling in price as quickly as the dollar is gaining in value. This equates to a net gain in value for metals, even as the price drops. That should certainly give metals some inertia upward if the dollar heads back down, but it doesn’t appear to be a big enough departure for metals to rally alongside the dollar yet.
Speaking of gold, there are a few clues there as well. STO has bottomed in oversold territory and the slope of the MACD histogram is starting to turn up. GLD moved pretty high in intra-day trading today, despite closing down on relatively normal volume. This is a sign the bulls could be gaining power.
The dollar rally looks healthy. Like I said, I don’t think metals have the power to rally alongside the dollar right now, so the turning-point of the dollar will be a critical point for metal as well. The MACD is above its trigger line, and the slope of the MACD histogram is weakly up but steady. Looking at the UUP ETF, volume is still much stronger on up days than down days.
Conclusion: I’m looking for a silver bottom between 16.15 and 15.20. It will probably be on the higher side of that due to the strong support at the $16 level. We’ll need to keep a close eye on the dollar to see when the uptrend will really take off, since an uptrend will likely be weak (or more likely non-existent) as long as the dollar continues to rally.