Silver Volume Climax – Blow-Off Top

by OLIVIER on APRIL 26, 2011

The silver price has now officially spiked. The silver short squeeze is over for now. The volume for SLV the Silver ETF has dramatically increased and price has reversed. Buyers have become exhausted and has been met with huge selling. Technically speaking this is a classic distribution pattern. What makes holding silver-related assets a risky proposition here is that we witnessed a reversal after a prolonged uptrend. Price got rejected at the former all time high dating back some 30 years. Adding the psychologically important round number 50 US$ to the equation makes recent price action even more significant. Another factor that added to the recent selling pressure is the distance of price in relation to its 200 day moving average, which is extremely extended to say the least.

No surprise though. This kind of price action where sellers would become desperate to sell and would overwhelm buyers was to be expected. The above mentioned pieces of the puzzle and the ominous price divergence between SLW – Silver Wheaton vs. SLV – Silver ETF I wrote about recently was raising a huge red flag.

• Silver – Sector Overview Chart Big Cap Stocks
• Silver – Sector Overview Chart Small Cap Stocks
• Silver Price – Long-term Chart

So what to expect next? Technically speaking we are dealing with exhaustion, which signals a change in the nature of the current trend. There are two things to keep in mind here:

• A trend change here can mean switching to a down trend or a sideways trend.
• It is only with the benefit of hindsight we will know if this is a short to medium-term top or a long-term top.

Conclusion:

Gold doesn’t look as exhausted as silver but the gold miners vs. the price of gold are showing severe price divergences as well. This is raising another potential red flag. I still think that ultimately we will see higher prices in gold and silver. Silver is trading at the same price it traded 30 years ago. There are not many things I can think of that you can buy for the same price you had to pay 30 years ago. Adjusted for inflation, silver still has to be considered being relatively cheap. Add the fact silver is an extremely small market, we have the potential for another big spike down the road. The prudent thing to do now is to wait for a consolidation pattern in order for the chart to rebuild pressure. Summer is typically a seasonally challenging and mostly weak period for precious metals. So, gun to head, I wouldn’t expect silver to do much to the upside until fall or early winter. The charts will be my guide. As usual, stay calm and focused. There is never a shortage of opportunities in the market.