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Start Watching for a Low in Silver

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A buying opportunity is approaching.

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Silver has taken a spectacular tumble since 2011, losing more than 60% of its value. Now that it has forced many would-be long traders out of the market, we believe the decline is nearly over. It's even possible that a low may already be in place for precious metals, although a more likely forecast places a low during the next few weeks, probably before May. Thus, there may be two opportunities nearby for swing traders – a relatively quick short trade into one of the downward target zones, and a long trade that could stretch into the second half of 2014 or beyond.

As we have pointed out previously, silver's breach below its 2008 high suggests that the overall decline is something larger than a mere fourth-wave correction, even though the structure of the decline is corrective. On the big-picture monthly chart shown below, silver has stayed contained by the downward-sloping channel and has produced at least one test of the center line. A second test of the center line, especially if it is near the target region shown, would be a clear signal for any short traders to take profits.

The ideal target region for the decline to finish lies between $11.93 and $14.20, based on ratio relationships between the major swings on the monthly chart. However, it now appears less likely that price will reach that region during the time remaining in the current cyclic downward phase. Also, as can be seen on the weekly chart shown later in this article, price appears to be in the late stage of the pattern. Thus, silver may find support even before a second test of the channel center line. For any traders who are short, it may be safer to take at least partial profits at some of the levels shown on the weekly chart.

2014-01-28 TOTM silver image 1

On the weekly time frame, silver is behaving well with respect to our main count. The small advance since the beginning of the year was halted at the top of the channel shown on the chart below. From here, we expect to see a fifth-wave sell-off into what should be a lasting low. The lowest realistic target for a sell-off is probably near $12.77, which would represent a decline of about 35% of current value. Although one would not normally expect wave v of (v) of [c] to be that large, such extreme moves are seen more often in silver than in most other commodities. Note for example silver's steep decline in late 2008, which coincided with the falling equities market. Since we also are expecting a downward move in equities soon, we may see a repeat move in precious metals.

Other levels to watch for support include $17.53 and $15.44, which would represent a decline of 11% and 22% respectively. Those levels could act as "speed bumps," or they could seat the low, especially if bears fail to make much headway before the cycle low that is due in the first quarter of 2014. We offer some additional observations about timing and price levels for silver in the latest Trading on the Mark podcast.

2014-01-28 TOTM silver image 2

Looking forward to the second half of 2014, we do not expect silver to climb out of a new low in the same rapid way it did from 2009 to 2011. It is more likely that the next big-picture upward move will be corrective, but it still may be large enough to produce a nice trade for those who are patient and willing to tolerate some choppy price action.

This article originally appeared on Trading on the Mark.
No positions in stocks mentioned.
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