Silver Could Take Off Like a Rocket on Breakout

By: Clive_Maund

It is important not to be fooled by the fact that silver hasn't yet broken out to new highs, unlike gold, and to interpret this as a sign of weakness, for the current setup in silver is very bullish, even if it reacts back significantly short-term as now looks likely.

Many traders don't appreciate that silver has ALREADY BROKEN OUT, even if it hasn't made new highs, and to see what is meant by this we will now look at the silver chart.

On the 3-year chart we can see how silver broke out above a bearish dome pattern in September that had earlier been suppressing the price and forcing it lower. What is not generally understood is that this breakout marked the start of a major new uptrend - the fact that it hasn't yet broken out to new highs is a “red herring” - and that once the current consolidation/reaction is completed the price should breaks to new highs and then the advance should accelerate dramatically. Like gold, the reason that we are using a 3-year chart in this update is so that we can compare recent action to that just preceding the late 2005 - early 2006 ramp, for as we can readily see, there are striking similarities.

One big one is that at that time gold had already broken out to new highs, whereas silver hadn't - just like the current situation. In late 2005 silver had just broken out of a large triangular pattern that ran from late 2004 through September of 2005 and it then went into a consolidation pattern before breaking out to new highs and advancing rapidly. This is very similar to the current situation where silver is now consolidating, having broken out above the dome pattern. The only question now is how long silver will remain in the current consolidation pattern and how far it may react back within it in coming weeks. It is quite possible that silver will remain in the consolidation pattern for several weeks longer, perhaps a month, and during this period it is considered likely that it will react back to support towards the lower boundary of the pattern at about $13.25 or a little lower to support in the $13.00 area. Should it do so it will be regarded as a strong buy as will many silver stocks.

That there is less belief in silver right now than in gold is evident on the latest COT chart, where we can see that the Large Spec long position is much more modest than that for gold, which serves to underline silver's big upside potential.

One final point. Some commentators have referred to silver's recent performance as “pathetic” compared to that of gold, especially as it has not broken out to new highs, whereas gold has. However, as we have seen here, silver had also not broken out to new highs in September - October of 2005, but look what happened to it after that - it took off like a rocket. So it is important not to be fooled by the fact that it hasn't made new highs yet.

By Clive Maund
CliveMaund.com

© 2007 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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