As most of you know from reviewing my previous Chart School newsletters, it is somewhat important to follow the commodity and/or currency markets to gauge the stock markets possible direction. Over the past several months in particular, there has been a direct link between the rising stock market, rising commodities and sinking dollar. If one of these markets were to show signs of turning, couldn’t that be helpful in recognizing the potential turns in the other markets?
For this article I would like to review commodities, specifically silver. Since silver and gold have been moving essentially lock in step, there is no need to review both. However, feel free to analyze gold and you will see similar aspects in what you will see with silver. Also, silver seems to be “leading” other metals higher. Earlier this week I noticed silver hitting an area of potential resistance.
Please review the following chart of silver with my added notations:
The first thing you should be aware of is the up trending resistance line I have drawn. Since this chart of silver only shows closing values, I extended the trend line to where silver would roughly meet that resistance. It would appear that silver would meet the trend line somewhere in the $29.50 – $30 area. So, isn’t it worth noting that silver hit an intraday high of $29.34 on Tuesday? Another question: Does the near-vertical trajectory of silver look sustainable?
An additional way to analyze silver would be to look at the silver ETF, SLV. This ETF would be a way for an investor to buy silver without actually buying the metal. But before looking at SLV, I’d like you to review Investopedia’s definition of a common candlestick pattern know as a Bearish Engulfing pattern:
The above candlestick pattern is common, and meaningful, when a security has went on a sustained rally. A similar candle pattern to a Bearish Engulfing (BE) would be a Dark Cloud Cover (DCC) candle pattern. The only difference being that the closing price of the DCC doesn’t “engulf” the previous day’s opening price. With that in mind, please review the 6-month chart of SLV below:
You will see that Tuesday’s reversal candle is at least a DCC candle, but it sure looks close enough to a BE candle as to not worry about splitting hairs. The implication is the same: A potential reversal has occurred. What adds more validity to the candle pattern is the volume on that day. The SLV had a 650% increase in normal volume on that day. If that doesn’t sound like the end of a run, I’m not sure what would be!
So, does this mean silver couldn’t make one more stab at its up trending resistance? Of course it doesn’t. Remember, technical analysis is more about probabilities rather than absolutes. The point of this analysis is to recognize that there may be reason to suspect a turn in silver, and of course gold with it. If a turndown in silver/gold were in fact happening this week, wouldn’t we also expect a downturn in the stock market?
The Tale of the Tape: Silver (and gold) appears to be showing signs of a reversal. The silver commodity has approached a long-term resistance and the SLV has formed a key reversal candle pattern on a massive increase in volume. Taking a short position in silver could be considered, or, if the stock market does follow suit you might also look at potential short opportunities in the stock market. Considering the rallies that these markets are currently in, short positions would be aggressive, but the reward might be worth it. You would want to at least be cautious and protect any long positions.
Waiting for the most opportune times that I have outlined above could provide you with higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.
Christian Tharp, CMT