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Silver Steep Price Drop Creates Bull Hammer Pattern

Commodities / Gold and Silver 2013 Jan 06, 2013 - 09:51 AM GMT

By: Clive_Maund

Commodities

After the Fed induced scare on Thursday, silver at first dropped again steeply on Friday before staging a dramatic turnaround to close little changed on the day, leaving behind a large bull hammer on its chart that is a sign of a probable final low for the correction.

We can see this action in detail on silver's 6-month chart, and how Friday's positive close meant that the support of the lower trendline held. It looks like the classic 3-wave A-B-C correction in force from early October has now run its course, and it is interesting to observe that the A and C waves were of almost equal magnitude, which is often the case with these 3-wave corrections.


Silver 6-Month Chart

If the observations above are correct then we can look forward to a new major uptrend developing from here, which will be really nice for new buyers around this point, and augurs well for silver stocks too. Keep in mind that the reaction from early October through to now is simply a correction to the impulse wave that occurred in August and September, which itself involved a breakout from a potentially bearish Descending Triangle that we can see on the 7-year chart, which we will now turn to, to get a handle on the bigger picture.

The 7-year chart presents a positive picture and makes clear that silver bulls have nothing to worry about, unless the hugely important support at $25 - $26 fails - if that happens it's time to head for the hills.

Silver 7-Year Chart

Otherwise we appear to be at a classic buy spot right now, for following the breakout from the Descending Triangle in August and September, silver has reacted back to what is now support at the top boundary of the Triangle, and it should now advance away from this point, and Friday's bull hammer is a sign that this is what it is going to do. If it should continue to drift sideways/down in coming weeks it will continue to be a buy right down to the buy spot green circle above and in the key support at the $25 - $26 level and above the long-term channel support line shown.

The latest silver COT chart shows that, while Commercial short and Large Spec long positions are still on the high side, they have moderated sufficiently in recent weeks to allow for renewed advance.

Silver COT

The picture for gold is very similar and much of what is written in the parallel Gold Market update, such as the commentary on the dollar, applies equally to silver and so will not be repeated here.

Before closing, the importance of the support at $25 - $26 cannot be overstated. If this should fail it will probably be due to another major deflationary episode associated with the eruption of another acute banking crisis, as discussed in the Gold Market update, which the COTs for the dollar are showing is a definite risk at this time. For this reason evasive action or hedging should be undertaken in the event that this support fails. Other than this precautionary note, silver looks set to embark on another major upleg very soon.

By Clive Maund
CliveMaund.com

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© 2013 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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