Silver Bulls - Beware

Below is a weekly, logarithm chart of silver from June 2010 until May 2013.  About half way through its parabolic rise (starting from the left hand side of the chart) it paused, rose above and then fell back to retest the 26-27 support zone I have shaded in gold. At the completion of that back test, it shot up with nary a breather until it peaked at almost $50 in April of 2011. From its peak, price fell back to test that 26-27 support zone (second red up arrow) in December 2011. From there it bounced up and crossed 35 only to stop, reverse and fall back to touch that 26-27 support zone for the third time.  Once again, just as before, the bulls stepped in and pushed prices higher but this time they could only get it high enough to cross 34 before it once again reversed course and fell back to the 26-27 support zone.  But this time the bulls were exhausted, the support zone no longer held and price began to fall hard. 

There are two take-aways from the above analysis

1.   Notice how each time it bounced off of support and created a new high, each successive high was lower than the prior high. This is a big warning flag whenever it happens as it shows declining strength/momentum and the potential for a bigger price decline.

2.   A touch of a support line on a weekly chart 2x happens infrequently, 3x is rare but 4x? Its usually a death sentence to the bulls. As such, the big fall that followed should have come as no surprise.

I wanted to go through the above analysis in detail as an educational piece to setup what is happening with the shiny metal right now.  Below is a look at the same chart above except I have extended the time period to bring it up to the present.

They say the markets don’t repeat but they do rhyme. Does it look familiar? It should send chills through the veins of all silver bulls.  It has the exact same setup that we saw in the prior analysis.

1.   3 touches at a critical support zone

2.   3 lower high bounces after hitting support.

3.   3 pushes of hidden bearish divergence (price is falling while momentum is increasing)

Technical analysis is just the study of the past to attempt to get a vision to the future.  There are, of course, no guarantees but if the past is any indication, silver bulls should be afraid, very afraid.