SLV Forms Pennant, S&P Bounces, Dollar Falls

Silver bounced on low volume and finished the day up just $.03 while SLV was up $.14 as the market appears to be pausing before making its next move. Currently it is sitting on 20 Day MA support and based on a number of indicators, it looks as if it will consolidate further to the next support level. This type of sideways trading that we’ve seen during the last three sessions is typical after a large selloff and I expect this trend to resume until the market shakes out smaller players. If this support trend fails and price activity falls, that will mark the 3rd consecutive swing in the silver market – top and bottom that I’ve been able to spot within the range of one day since the beginning of the year.

There are several things on this chart that indicate that price activity is poised to continue lower. First, we have the RSI divergence and the recent negative downturn on the MACD histogram. Second and more importantly, we’ve traded into a bear pennant formation during the last three trading days. Pennant’s are continuation signals and in this case, a bear pennant is a small bounce or pause before price activity falls lower. The low volume particularly during today’s session adds to the validity of the pennant and the spinning top candle (spot silver traded into a doji today) is typically the signal of a pivot point.

Support is around $31 and adding to that price target are two things. The first is the 50 Day MA which will likely reach the $31 level around the time the price makes its way down into that area (assuming this in fact is the case). The second is the common method for determining a price target when using the bear pennant candlestick formation. Typically, one would use the top of the wedge – in this case about $34.50, from the bottom of the wedge, in this case roughly $32.75. Next, subtract those numbers – $34.50 – $32.75 = $1.75, then subtract that $1.75 from the breakout point. If we use $33 as the breakout point, then the price target would be $33 – $1.75 = $31.25. This method is never exact but it is in the vicinity of a short term support level that is at $31 and as I just mentioned, the 50 Day MA is closing in on that area as well which makes the $31 price target very likely in my opinion.

We’ll continue to watch this closely. In order for this chart to move higher, I think it would take some type of unexpected news from the market tomorrow. Otherwise, I think that this is headed lower for the time being. I don’t expect it to move lower than $31 but the market has proved me wrong before. I’m using $31 as a general price range but I don’t advocate trading unless there is hard confirmation of a reversal in the trend. So in no way am I suggesting that anyone buy the moment it touches $31, because the market can be volatile and equity trading is always easiest when you let the market tell you when to enter.

Fundamentally silver couldn’t be stronger. On the one hand, the Japanese have no way to fund the damage caused by the earthquake which may lead them to sell US bonds which would either force the Fed to expand its balance sheet by purchasing treasuries themselves, or the US would have to make a deal with another country – perhaps India – to fund our debt in exchange for cheap imports. Either way the weakness in the bond market would be exposed and it would be a victory for inflationists. In addition to that, the Japanese now have $200+ billion dollars that they need to spend on rebuilding. They will need industrial metals such as copper, lead, zinc, silver, and aluminum. Due to silver’s bevy of applications in high tech and Japan’s taste for cutting edge technology, silver stands to benefit from unexpected demand that is now in play.

The S&P sold off hard yesterday but was able to rebound late in the trading session and was also able to stay positive for the duration of today’s trading. It looks oversold in the short term and may begin to stabilize before moving either up or down but the failure to make a new closing or opening high for the last 10 sessions suggests bad news for the market. If you’re a bull, you don’t want to buy into a bounce like today until we get more confirmation that the market can move higher. It’s also important to note that we filled the Dec 31st gap today making us negative for 2011. I’d recommend staying away from this chart right now unless you’re day trading.

The dollar got crushed thanks to the rush into the Yen this week and some analysts gave been wondering if the dollar is still considered a safe haven investment. I firmly believe that in relative terms the dollar is still the safest currency to be in though against other assets it will continue to underperform. I was pleased to hear that commodities guru and precious metals champion Jim Rogers agrees with my dollar sentiment and said today that he would consider buying the dollar as a trade if it soon finds it footing.

The dollar index is still off of support unlike the ETF UUP which as of today is in no man’s land after the BOJ didn’t intervene in the forex market. For that reason I chose not to show that particular chart as it is not correlating properly with true price activity. The dollar is very close to support and the bullish divergences on the MACD, STO, and RSI all indicate that a bounce will take place as soon as support is tested.

I do not believe that the dollar is underperforming because it isn’t considered a safe haven anymore. Quite the contrary actually – you could say the same thing for gold right now. Of course, you won’t hear many gold bulls admit to this which is partly why I was so pleasantly surprised to read the article above from Yahoo in which Jim Rogers proved that he truly is as wise as people say he is. I believe that many commodities bulls are afraid to think of the dollar as a buying opportunity and regard owning it as a way of defeating the purpose of simultaneously buying gold. Getting back on track with why the dollar hasn’t rallied, to put it as plain as possible, for the time being the Yen is so much more attractive than the dollar or anything else for that matter. It’s extremely easy to buy into the Yen while headline news is broadcast throughout the financial community which suggests massive deflation risk due to the earthquake. Deflation is still the number one fear in the minds of many investors and a rising yen would be considered deterimental to the already fragile global economy.

In any case, I think that the dollar is extremely oversold and will surprise many pundits in the next several months as the euro continues to rally despite the blatant obviousness of the exploding sovereign debt situation in Portugal, Greece, and Spain. The way I see it, it’s only a matter of time for the PIIGS and the exchange rate is setup to fall exponentially.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

2 Responses to SLV Forms Pennant, S&P Bounces, Dollar Falls

  1. Zoe says:

    Hi, Aaron. That’s a great article, and I pretty much agree with you that we’ll see stronger euro and weak dollar… I’m a beginner trader… and still have a lot to learn. By the way, this is a great site for people interested in ETF trend trading http://www.trendtradesystems.com Check it out.

    • aaronbasile says:

      The euro may continue to rally for some time but I think that ultimately in the long run the dollar is the safer play. I think both currencies are doomed but the EU will default by inflation many times over before the US reaches it’s boiling point.

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