With a silver breakout occurring, the metals market might start to receive some shine, says a Bank of America Merrill Lynch technical report out Tuesday. Silver in particular is looking like it could begin a bull move higher.
The recently weekly price chart of silver looks, in part, like the historical performance of the Chicago Cubs: A continuing series of lower lows and lower highs.
But something different may be afoot, as a rising trend pattern might be indicating a test of key resistance. Using a break-out pattern recognition methodology, UBS technical strategist Paul Clana, who covers currencies, interest rates and commodities, thinks the recent break above the $16.10 level is an important benchmark and foretells higher prices for silver, with a specific eye on $18.59.
To develop price forecasts, Clana uses an Ichimoku cloud methodology combined with other indicators and traditional support and resistance pivot points to determine his market forecasting. Ichimoku cloud is a forward looking price moving average cross methodology that plots the span of average price movements on a relative basis. In the case of silver, the price on a weekly basis has broken above the six month forward looking average, indicating that trending behavior could result, is the thesis.
“The Ichimoku cloud is also nearing a bullish cross while MACD just turned more bullish by crossing above zero,” Clana wrote in an April 19 flash analysis piece. “Momentum as defined by RSI broke out to its highest level in years suggesting momentum supports this trend.”
The price of metals in general has rocketed higher since the January low in the Philadelphia Gold and Silver index (XAU), which was near $40. The price has since rocketed to $84.12, pointing to a silver breakout with potentially more to come, Clana notes.
Separate analysis indicates the metals markets are sometimes watched by stock market traders as a corollary indicator, sometimes negative and sometimes positive based on the fear in the market. The XAU bottomed on January 19 and engaged in a strong up trend over the following three months, with certain shorter term momentum strategies receiving entry signals near early February to the 22nd of the month.
While silver might be on a bull market run higher, there could be intermediate bumps in the uptrend and a potential re-testing of the break-out region.
“Today’s (Tuesday’s) large silver rally led to a TD Setup sell signal,” Clana observed, pointing to mean reversion patterns. “Of the past 16 signals where RSI was overbought, 11 times or 69% of the time silver prices declined the next day. Of all the 55 sell signals since 2000, price declined 35 times or 64% of the time one day later.”
Markets seldom go up in straight lines. Often times fundamental supply and demand, driven by either economic indicators or, in some cases, global fear, can drive up the price of metals such as silver. Unlike gold, silver has industrial uses and is sometimes considered a proxy for economic activity, with copper considered more of an economic pure play. Fundamental moves often trigger algorithmic trading systems into action. While a fundamental trend can last months or years, there is typically up and down price movement within the trend, a degree of which is based on technical factors.
“Tomorrow, price may retrace some of the recent move providing a better opportunity to go long silver,” Clana observed Tuesday. On Wednesday the futures prices are slightly higher with outer delivery months trading at a premium to the spot price. For Clana this is just a short term condition. “Looking forward four and five days after the TD Setup sell signal with RSI overbought, price tends to continue higher.”
Courtesy: Mark Melin
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