Most of the time, Gold and Silver travel along together, much like the Lone Ranger and Tonto. In our Newsletter, we had ventured the opinion over a period of many weeks that the price of Silver was coming into a top and reversal, in a fashion similar to that of Gold. The generally accepted wisdom, of course, is that there was no discernable limit to the price of Silver because the advance of inflation would inevitably continue to propel investors to the perceived “safety” which Silver (together with Gold) could provide.

In our work, we use the Japanese Candlesticks method of price display, together with a group of the standard well-known “Western” Indicators. We especially have our eye out for reversals of trend, because we prefer to enter a trade earlier rather than later if all of the evidence, together, permits a conclusion that the timing is right and that the potential exists. In the light of what we saw in the Candlestick formations and in the Indicator readings, our conclusion was that the generally accepted wisdom was wrong, and that Silver prices were fast heading into a top and a reversal downward.

Silver made several false starts toward a reversal from November 2008 onward; and in January and February its rise in prices became nearly vertical as shown on the charts. The pressure pushing down on Silver prices from above increased to an extreme between February 17 and February 23. It became apparent that at some point, very soon, pressure had to be released in the form of a decline in prices. We continued to search for Candlestick price patterns and other evidence which could lead to the conclusion that the top was near.

Finally, on February 20, we noted the emergence of a “Last Bullish Engulfing” pattern in Daily Silver prices, in which the “real body” of price action that day very nearly enveloped, or engulfed, the real body of the previous day’s price action. We were on the lookout for a lower close the next day, and we got it as prices closed lower in a bearish “Hanging Man” configuration. (The Hanging Man appears near the top of an extended advance in prices. It is attended by a small real body near the top of the price bar). The Hanging Man is subject to confirmation by a lower close on the next trading day. That confirmation requirement was triply fulfilled as prices closed successively lower three days in a row. The cheese was made even more binding as the price bars of February 20, 23, and 24, together, are a variation on a (bearish) Candlestick “Evening Star” pattern. Final confirmation of a turn was provided by the falloff represented by the tall black cand le on February 26.

The Indicators were not asleep while the Candles were putting together all of this evidence for us. Over a period of several weeks, some of them have taken to traveling right along the range extremes of their allowable travel. One of them, the RSI, showed a divergence from the price trend line of Silver, in that the RSI declined while the price of Silver continued to advance. Through experience, we have found that a divergence such as this often is a predictor of lower prices.

It is likely now that Silver will continue to decline. We are targeting the 1075 level before it is likely to find any substantial support. Those investors who are still Long in Silver might begin to think seriously about exiting, or at least in elevating your safety sell stops to a level which is close underneath current prices.

The moral of the story is that Japanese Candlestick price charting plus good Indicators which are accurately interpreted gave us reason enough to conclude that Silver prices were pointing lower; and the proof of the pudding arrived yesterday as Silver finished a four-day period of net decline, to the tune of 155 cents.

William Kurtz
Commodities Junction