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Originally published January 8th, 2012
A large and very bearish looking Head-and-Shoulders top appears to be completing in silver which portends a severe decline and thus a deflationary downwave. However, a factor complicating the picture in recent weeks has been the COT structure for silver and sentiment indicators, both of which look very bullish. For reasons that are set out in the parallel Gold Market update, the COT is believed to be highly deceptive at this time, and with regards to sentiment indicators, there is the scope for readings to get even worse (even more bullish) in the event of a breakdown and severe decline.
The big Head-and-Shoulders top can be clearly seen on the 2-year chart for silver. What is remarkable about this pattern is that its "neckline" or lower support line is perfectly horizontal with the price bouncing back up late in December EXACTLY from its September intraday low. This large top area appears to be complete, although action over the past couple of weeks suggests that we will see one last rally before it turns down and breaks below the support at the bottom of the pattern. It is rather hard to determine what it would take to abort its bearish implications - a break above the Right Shoulder high at about $35.70 would be a bullish development but not convincing - it is better for us to use a gold breakout above the top line of its Descending Triangle as a guide to a probable abort of the bearish patterns in both gold and silver.
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Clive Maund
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