Silver – Watch the weekly cup and handle

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Few weeks ago, in the weekly precious markets report, we noted that Silver prices were likely to outperform gold. While both these metals posted strong gains yesterday, silver’s rally clearly overshadowed that of gold’s, and it seems like the strong momentum led gains yesterday is just the start. Silver prices popped to an 11-month high yesterday.

The weekly chart for silver prices shows prices breaking out from the $16.0 handle after forming a base near the $14 – $13.8 region. The cup and handle pattern often forms at the bottom of a trend and similar to the more widely popular head and shoulders pattern signals a change of trend relative to the time frame.

With the cup and handle on silver’s weekly chart, the resistance at $16.0 has now given way and the next destination in silver is likely to come in at $18.0 – $18.2, which marks the highs of early January 2015.

Once again and similar to gold’s performance earlier this year, traders are likely to be caught with a dilemma as the big question is whether silver will make a meaningful pullback ahead of its rally to $18. Typically, with prices ranging below the $16.0 handle over 26 weeks, a pullback to establish support on this broken resistance level could be  ideal ahead of the rally to $18.0. For the moment, $17.35 remains very likely for at the very least a ‘touch and go’. If indeed silver prices do retreat from the current levels, then traders will be closely watching for the crucial retest to $16.0

XAGUSD (17.0) – Weekly cup and handle pattern
XAGUSD (17.0) – Weekly cup and handle pattern

The longer term falling wedge pattern shows that if silver moves beyond the $18 handle, a test to $20.5 – $21 is very much likely to unfold over the next few months.

If unlike gold, silver does manage to throw a pullback, then the price levels of $16.0 – $15.75 makes for an ideal level that investors will very likely add to their longs. The daily chart supports this view. $14.90 – $14.80 will be a level to watch if silver does manage to retreat. A close below this region could, however, upset the bullish bias in silver with $16.0 – $15.75 likely to come back as resistance.

XAGUSD (17) – Daily Chart, $16.0 - $15.75 support
XAGUSD (17) – Daily Chart, $16.0 – $15.75 support

Reuters reports that the six silver ETF’s that it tracks; there has been an inflow of nearly 30 million ounces since the start of this year. Tai Wong, the director of commodity products trading at BMO Capital Markets in New York tells Bloomberg that “The market has spotted a shiny gem among the stones and is trying to capitalize on the fact that silver historically has very sharp moves.”

However, traders are still divided on Silver. A report from Clive Maund at MarketOracle argues for the case that silver has likely reached the top end of its rally and notes the extreme CoT position in both silver and gold. He says, “over the past week or so has brought it up to a trend channel target, where the advance has run into trouble, with bearish looking candlesticks in recent days suggesting that it will soon drop away again.

While taking a balanced view, Maund warns that silver has most likely played catch up if not anything else.

For the moment, silver, which is usually overshadowed by gold might get its fair share of attention. Will prices pop higher or will silver’s rally prove to be the damb quib?

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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