The Technical Analysis of the Silver Market
And a fantastic opportunity to review the recent price action of silver and to put it into a wider context to help your understanding as to why you should be buying silver.
Price action since my last posting on the 28th February to the current price as it stands as of 20th March is $32.17.
The silver price on 29th February was at $37.53 and plunged to $33.70.
The question is whether or not, from a technical perspective, this was to be expected and if so how does it affect my recommendation to buy silver.
What is Technical Analysis?
To begin with then, let’s define technical analysis to put it into some context. Briefly, it is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.
Market action refers to the three principal sources of information available to the technical analyst – price, volume and open interest.
Price is self-explanatory. Volume is the number of contracts traded over a specific given period of time. Open Interest is the total number of options and/or futures contracts that are not closed or delivered on a particular day (ok, a bit technical, but this is your wealth guys, either PM me or take a little time to educate yourself).
According to John J. Murphy, the ‘Godfather’ of Technical Analysis, there are three premises on which the technical approach is based:
- Market action discounts everything.
- Prices move in trends.
- History repeats itself.
‘Market Action Discounts Everything’. This is the cornerstone of technical analysis. Unless its significance is understood and accepted at least in principle not much else of what follows will make much sense.
Technical analysis is predicated on the technician, (i.e. ME) believing that anything that can affect the price – fundamentally, politically, psychologically, or otherwise is already reflected in the price of the market. It follows that all that is required to be able to forecast then, is to study the price action. Simple, eh?
Basically, the price reflects the changes in supply and demand. What is interesting with specific regard to silver, is that how although the market is manipulated and has been artificially suppressed, this is still reflected within chart patterns and the price.
I don’t want to go overboard on the technical definition of analysis in this posting, but what I am writing is relevant to my getting across why the recent plunge down in the silver price was to be expected.
For future postings, I will provide forecasts rather than a ‘post-match analysis’. Otherwise I’d just be an economist (not to be confused with someone who has studied economics) and any idiot can look for justifications after the event – turn on Bloomberg right now for examples.
‘Prices move in trends’
This concept is essential to the technical approach. Unless you can accept that markets do trend, there’s not much point in reading further. The whole purpose of charting the price action of the market is to identify initially where we are in a trend, if indeed we are in one at all, but ideally the early stages of a developing trend for the sole purpose of trading in that direction.
As stated in my previous postings, we are not looking to trade. We are investing in silver – BUY and HOLD. And if you are to invest, then that means for all intents and purposes, this may well form part of your legacy planning; you may pass this onto your children and grandchildren. That is how important this investment is.
‘History repeats itself’
The participants in the market are people. You and I. We do not change. The markets are the manifestation of human psychology. Unless our psychology dramatically changes, then the nature of the market will not change. Nor will the price action. So you can expect to see corrections and aggressive retracements, especially with an investment such as silver which is inherently volatile.
For example, chart patterns that have been identified over one hundred years, reflect certain pictures that appear on price charts. They show bullish or bearish psychology. A speck in the ocean of time, granted. But I would suggest that if we had the data to go back far enough, they would still be there.
Technical versus Fundamental Forecasting
Technical forecasting is based around the effect of market movements. Fundamental forecasting looks at the cause. As far as I’m concerned, who cares what the cause is so long as the effect can be identified. Let’s face it, you can hypothesise about why something may or may not have happened but the fact is that you are unlikely ever to really know – especially where the markets are concerned.
Hey, all you need to do is switch on Bloomberg and listen to those guys for a minute or two to realise that they don’t have a clue as to what’s going on or why! I even heard one commentator note that it was a leap year as if that had anything to with the price of silver. I mean…seriously??!!
Here, a February 29 Barron’s blog writes:
“Gold and Silver Get Bernankified. The Federal Reserve Chairman told Congress that he still expects US growth to meet or beat what took place in late 2011. [His comments] were viewed as making it less likely that the Fed will enact another round of quantitative easing. ‘Inflation-haven’ precious metals tend to take a dive any time that trader’s easy-money hopes get dashed.”
That’s the value of fundamental forecasting on a day to day basis: they search the news for a specific big-ticket event that fits a market’s price action… after the fact.
Don’t let that detract from the value of fundamentally fundamentalising the fundamentals (yes, I did write that).
What we’ve already discussed previously about the many and increasing uses for silver is fact. The relationship between supply and demand is fact. The artificial suppression of the price of silver is fact-especially in relation to the true value of the dollar.
But that is all reflected in the chart and the price. And will continue to be so.
It would be impossible for me to write in brief about how on the 27th February it was possible to predict (well on the balance of probability) that a retracement was coming and that it was likely to be at least 38.2% of the rally from $26.14 on the 29th December 2011, in total about 7% of its value from the recent high (it came VERY close to EXACTLY that amount if you check the charts).
That, however, is the beauty of technical analysis. So in terms of how it effects my recommendation? It doesn’t.
BUY SILVER. A decent retracement is a great time to get some more in your vault. Go and do it. Don’t be afraid. It’s a real, tangible, physical asset and should make part of your overall portfolio.
Commentary on the day to day price movements will be more forthcoming. But the outlook long-term remains bullish for silver.