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Author Topic: What Silver Can Tell Us About Technical Analysis  (Read 727 times)
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Capitalist Pig
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Posts: 17830

« on: 2011 Feb 08, 10:06:09 pm »

I wanted to take a moment and write this post to make 2 points. The first is about how to read price charts. The second is about silver specifically.

A lot of people make a lot of noise about technical analysis. groovemachine and I were having a discussion about an article just today in which the author doesn't seem to understand that just because he saw something in the charts doesn't mean anything about what the future will hold. Charts only tell us what something has sold for in the past. It is up to us as traders to interpret that in the context of the market and in the context of human psychology.

Over the past few weeks, silver has been an excellent demonstration of this. Back at the beginning of January, I posted this chart:

The highlighted area shows where silver has penetrated a support trendline. A trendline is nothing more than an apparent line at which buyers come in and buy. A resistance line is apparent line at which sellers come in and sell. Chances are, those are the same people who bought at the support line. Support and Resistance are key concepts in technical analysis. They show us where the overall market has decided in the past that something was undervalued or overvalued. People, including traders, have an attachment to the past. We can often make bets on previous buy levels becoming future buy levels.

Here's a demonstration in silver a few weeks later:

As you can see, silver bounced first off the first support level of 28. To be honest, I bought that bounce, and am still long on that position. But then silver immediately headed lower to the second support level of 26. Here we see a textbook-perfect reflection off support. Silver hit the support level 4 times over as many days, and the 26 level held each time. Since then we've had a massive return to the highs. We shall see how this plays out as the previous highs in the low 30s are approached, but right now it looks like everything is erupting higher.

This is how we use technical analysis. It's not magic or voodoo, it is just gives us insight into past behavior - and people are pretty repetitive. We use this information to stack the odds in our favor for trades.

On to silver specifically...

Silver has been extremely strong as the dollar has fallen over the last month. There are lots of factors for this, and you can read about some of them in my market commentary. The bottom line is that people are buying silver left and right, especially physical silver. There is less confidence in the paper markets than I can ever remember. With food prices exploding, gas going over $100/barrel, and Bernanke says the Fed will continue buying everything in sight, the smart money is going to ground and waiting for the storm to break. I am hesitant to say $20-something silver is a thing of the past, but that's the mood in the markets now. Remember, precious metals are not really investments that appreciate. They are stores of value. They are ways to preserve your wealth in turbulent times when fiat currencies cannot be relied upon. Of course, I would say that's just always, but it's an argument for another day.

Happy trading!

* 2011 02 08 - Silver.jpg (50.2 KB, 900x438 - viewed 258 times.)

Neal McSpadden
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The Primal Prepper - my blog about preparing for the worst while living the best
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