Silver: The Forgotten Metal
While the past month has been an extremely active and eventful one for the gold market, the "other" metal has been shunned by comparison. The rise in gold prices over the past 3-4 weeks has been nearly straight up while silver has languished, at times barely making any headway at all. A spat of newsletter articles, some from well-known and highly respected financial analysts, have castigated silver as a non-performing "industrial metal" and have relegated it to the proverbial dog house. One widely-read newsletter writer even advised his readers to "avoid silver." But need this be the case? Is silver so bad technically, it's image so tarnished, that it cannot participate in the limelight along with the yellow metal? We think not, and if the chart is any guide (as it has been so well lately) we can see a late rally developing in the white metal. Lags between major moves in gold and silver are not terribly uncommon, and considering the fact that the market for silver futures has had to absorb far more excess supply than gold, we believe a come-from-behind rally is currently in the works.
Take a good look at the chart below of daily silver future prices. This is the famous parabolic bowl pattern we've seen so much of in recent weeks, a pattern that has been very profitable and rewarding to those who acted on its message. Bowl-shaped patterns, especially at bottoms, indicate accumulation or the absorption of supply in the market. When prices pass across the mid-point (or "vertex") of the bowl and then move closer to the right side of the bowl near where it begins to curve up, a substantial rally usually follows. This is especially true if the price low for the cycle in which the parabola is made is at the center of the bowl or slightly to the left. As long as the price bottom isn't made after the vertex of the parabola is reached, it is a sign that the market is on an even keel and that a rally is due to occur once prices come into contact with the upward curving rim of the bowl. This is "Parabolic Analysis" in a nutshell.
As the chart above shows, silver reached the mid-way point along the bowl back in early October when the price low was made (approximately $4.30). Since then prices have edged further along the gradual curve of the bowl, making steady (if unspectacular) progress. Now comes the "moment of truth" as they say. March Silver future prices are currently at $4.70 and are practically right up against the rim of the bowl, which means a reaction to the upside should follow, possibly within the next 1-2 days.
Another technical feature of the silver chart worth pointing out is that a classic "fan line" correction has nearly run its course. This is when three successively higher downtrend lines are broken as prices steadily absorb overhead supply and make their way up with higher highs and higher lows. This is exactly the picture that silver has been etching out in recent weeks and months, and yet one final obstacle remains-the final downtrend line that presently crosses the $4.72 area. Once silver overcomes this final line of supply the way will be all clear for a long-awaited and well-earned rally to begin. Stocks to trade when silver begins its rally include Coeur d'Alene Mines (CDE), Pan American Silver (PAAS), Silver Standard Resources (SSRI), all of which reflect the bullish pattern in the silver chart and all of which have bullish intermediate-term outlooks.
Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy. The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment. He is also the author of numerous books, including most recently “Kress Cycles.” For more information visit www.clifdroke.com