-- Posted 11 January, 2011 | | Discuss This Article - Comments: Source: SilverSeek.com

Silver is now looking vulnerable as last week it clearly broke down from its steep uptrend in force from last August, after making new highs at the turn of the year. As we know from experience, when silver breaks down things can turn ugly fast, and technically the only thing that has preventing it from plunging thus far following the trendline failure has been the support level in the $28 area near to its rising 50-day moving average. Silver is now short-term oversold and one scenario we should take note of here is that it could enter a trading range bounded by this support and the resistance at the highs. However, there are 3 factors in play visible on longer-term charts which suggest that a breakdown and corrective drop is now more likely than a high trading range.

 

On its 3-year chart we can see that silver's uptrend from last August has been steep and prolonged, which has resulted in a large gap opening up between its moving averages that increases the risk of a substantial correction. Furthermore, the advance has taken it to the top boundary of the large parallel channel shown, which as it turned out marked the target - we had earlier thought that silver might accelerate out of this channel. Silver went up a lot faster than gold and it could go down a lot faster too, and there is clearly room for a substantial correction here, although it is thought probable that if $28 is breached it will drop back to the vicinity of its 200-day moving average approaching $22 before stabilizing, and not as far as the strong support at the breakout point shown. Options protection should be implemented BEFORE $28 is breached, as prices can be expected to ramp if $28 is breached as a steep drop is likely to follow immediately.

 

Again, as with gold, on no account should investors part with physical silver, and if we see a sharp correction shortly the opportunity should be used to grab whatever physical you can - because when the ship goes down physical gold and silver are going to be among the only lifeboats. Holders of physical silver or silver ETFs and stocks etc can hedge by means of out of the money Puts, or bear EFTs.

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