In this brief technical analysis, we will present technical evidence to determine if the recent drop in silver is likely a minor correction…or if silver has hit a long-term peak. Does the correction provide a buying opportunity to “load up” on more silver…or…is it time to sell (or stop accumulating) silver?

This analysis uses the ETF (exchange traded fund) “SLV” as a proxy for silver prices. There are many ways to participate in silver as an investment (coins, bars, mining shares, ETF’s, etc.). Each investor must choose what’s best considering individual investment goals, risks, and so on. For the purpose of this analysis, SLV will represent all silver related investments (coin, bars, mining shares, etc.). The reality, however, is that silver-related investments will vary from the price movements of silver.

Figure 1. SLV – Analysis of Trendline Support – Dec 9, 2009

Now…there are many ways one can determine support levels, but we’ll keep it very simple here. As seen in Figure 1, SLV failed to find support at the upper blue trendline. Over the last 3 days, SLV has fallen to the next trendline support level. In fact, it violated this trendline in the most recent bar in the chart (Dec 9th), but closed the day nearly on top of the trendline it had violated during the day. If SLV cannot hold its position in the last bar…it is likely to fall to the next lowest trendline…and so on. If SLV finds support, it may be able to resume the previous upward trend.

There is reason to believe SLV will find support…either at the current trendline…or the next lower trendline (and possibly as low as $16.00). The reason is illustrated in Figure 2.

Figure 2. SLV – Trend and Cycles

Trends tell you the general direction you are heading. Cycles are oscillations within the general trend. Figure 2 displays both. The wide channel can be considered a trend envelope – with the heavy center blue line reflecting the overall general trend. The inner envelope oscillates within the wide channel, and prices oscillate within the inner envelope.

The wide channel and inner envelope in Figure 2 is based on a mathematically measured 75 day cycle in SLV. If past cycles continue, prices should stay within the projected inner envelope, and the inner envelope should stay within the wide channel.

Putting it all together…

The wide channel and inner envelope forecast a peak 4-6 weeks in the future (early-to-mid January). The trendline on which SLV rests on Dec 9th leads into this forecasted peak. If SLV finds clear support on this trendline…then trendline support will then agree with cyclic analysis. Prices are likely to continue to respect a trendline that is proven to provide real support…especially when natural SLV cycles contribute to an upward trend. Even a drop to the third trendline (from the top) argues for a resumption of the original bullish trend…assuming prices hold at the trendline of course.

This analysis suggests that what we are witnessing is likely a pullback in the price of SLV…and a good buying opportunity. That said, the medium-term trend will flatten soon…possibly at or near the all-time highs for SLV (nearly $21 in 2008). There may be more upside over the long-term, but this medium-term analysis suggests one additional surge in silver prices into January before silver prices consolidate at a new higher level.

As with all technical analysis, it’s based on probabilities, so let’s see what happens.

Disclaimer: This analysis is provided for educational purposes only. Any reference to trading or investing is only for training purposes.