-- Posted 2 June, 2004 | | Source: SilverSeek.com
Silver plunged violently in April, making huge gaps down. Normally, this behaviour is characteristic of a blow-off top, and ushers in a bear market. Of course, this interpretation does not square with the seemingly bullish fundamentals, and silver bulls have two basic explanations for this plunge. The first is that the market had become too frothy and that therefore the plunge was a healthy clearout of speculative excess. The other is that the silver market has been cornered by an elite group of powerful players, who have the muscle to manipulate smaller players and periodically flush them out. Due to the extraordinarily steep and violent decline in April, this latter explanation seems plausible to me, as what we witnessed was certainly no ordinary correction, the action was more like that of a volatile penny stock.
I do not normally write much about market manipulation, because I take it for granted. The strong usually exploit and manipulate those weaker than themselves. In markets generally, weaker players, who tend to rely on the mainstream financial press for information, are actually fed disinformation in order to set them up as the “cannon fodder” for the big guns, who are well connected and are privy to information not available to the general public. It is for this reason that I became a technical analyst, so that I could read the language of the market itself, rather than the offerings of “The Ministry of Disinformation”. Even using TA one is not completely immune from this “hall of mirrors” effect, for the big guns have the power, especially in low volume stocks, for example, to engineer false breakouts and shakeouts. They can do it and they do do it.
As I have already said, April’s action in silver was, according to standard technical analysis, bearish. However, if the big guns have cornered this market, as seems probable, then they may be out to systematically milk smaller players in both the metal and the stocks by means of what might best be described as the “toilet cistern” mechanism. I use this simple and graphic analogy because, as everyone knows, a toilet cistern fills steadily over a period of time, and when it is full it is ready for someone to push the handle, whereupon the level in the cistern falls suddenly and dramatically. This is what happened in the silver market in April – the handle was firmly pushed – and we all know what happened to the small specs as a result. If this is, in fact, what is going on, then the big players will have been buying heavily a few weeks ago when the price bottomed.
So what was the plunge in April - the start of a longer decline - or just an organised raid by powerful traders shaking out the weak? There are very divergent views amongst experienced traders and market watchers, with some reputable and well-known observers being resolutely bullish, and others, notably the more reputable Elliott wavers, being equally bearish. None of the people I am referring to are idiots, and all can make a good case for their stance, but they can’t all be right – as usual the market will have the final say.
We will now turn to the charts to see what the market itself has to say about its probable future direction. We’ll start by looking at the 6-month chart for silver. On this chart the April plunge with its huge gaps can be seen in detail. Such big gaps normally have bearish implications. After the decline had run its course there was a hesitant recovery over the past few weeks from a deeply oversold position, that has brought the price back into a zone of strong resistance beneath a large gap, and served to unwind the oversold condition. An important point to note is that after such a severe decline, a market normally needs a substantial period of convalescence before it has any chance of staging a rally of any significance. A good guide as to how long this period will last is frequently provided by the 50-day moving average. In this situation prices usually remain range-bound until the 50-day moving average has come back close to the price and the 200-day moving average. Only then do the chances of a significant advance increase. Until then the trend should be regarded as neutral, with prices likely to be constrained on the upside by the considerable resistance towards the large gap; with further resistance continuing all the way up to the top of the gap. We are therefore likely to see prices drift back again over the next few weeks and fluctuate in a trading range bounded by the support at $5.50 and the resistance towards $6.30. Of course, if the support around $5.50 fails, it will be bearish signal. So for now, the trend is broadly neutral.
On the 3-year chart it is clear that the price is not yet in a position to go romping ahead after the recent plunge. On this chart we can also see the support going back to 1999 that arrested the April - May plunge. Also showing up on the MACD indicator are the wild swings from extremely overbought to extremely oversold, in the space of a few weeks.
The current neutral bias in the silver chart is reflected in the charts of the big silver stocks, where prices are fluctuating between major support and resistance levels. Potential Head-and-Shoulder tops are evident in the charts of Hecla, Pan American and Sterling Mining, and prices will need to advance through the green lines shown on the charts of these stocks to negate the risk of these patterns completing. Such patterns quite frequently abort before completion, a dramatic example being the huge Head-and-Shoulders top that formed in the S&P500, which then failed to deliver – surely a tribute, if ever there was one, to the persuasive powers of Mr Greenspan.
Analysis of the big silver stock charts – Apex Silver, Coeur d’Alene, Hecla Mining, Pan American and Silver Standard follows for subscribers...
-- Posted 2 June, 2004 | |