Silver Investing—Price Chart Analysis

In previous posts we have looked at a 5-year and a 6-month chart for silver investing. Recent zones of upward price resistance as well as short-term and long-term trends were identified.  Two weeks have passed, and the picture has changed considerably.  In this post I am utilizing a 1-year trend depict the price resistance and trends relevant to the next few weeks.

Before we get into the technical analysis, I want to clarify that I am a long-term bull when it comes to silver investing.  By long-term, I mean a decade or more. But I am also a short-term investor.  In my IRA brokerage account I have recently shorted silver, and expect to do so again.

This 1-year chart depicts the daily silver closing price on the New York exchange.  On it I have drawn two horizontal dotted lines depicting two levels of upward price resistance, and two solid lines that define two short-term downtrends discussed in recent posts.

silver investing chart

The first price resistance level was about $32.  On Friday January 20, 2012, silver closed at $32.20, breaking through that price resistance.  Note that on the way to $32, the short-term trend line labeled “trend line 1” was broken.  The second price resistance level is around $36. What does this mean for short-term silver investing?

I am considering making a short-term bullish trade.  I will probably trade an in-the-money call spread with a February 18, 2012 expiration date.  I like options and the leverage they provide. Another way to play it is to buy SLV, the silver ETF, and place a close trailing stop.  The problem with that strategy is that silver is so volatile that there is a good chance of an intraday or one-day price move triggering the stop.  The advantage is, if silver keeps going up to $36 and beyond without triggering the stop, profit is not limited as it is in a vertical call spread.  A leveraged variation on the SLV play is to buy AGQ instead.  AGQ is a 200% bull silver ETF. Leveraged ETFs are not designed for long-term investing, but for hedging and short-term trading.  AGQ is twice as volatile as SLV.  If buying SLV is like riding a galloping horse through rough terrain, buying AGQ is like riding a bucking bronco.

I think my written discussion has convinced me to take a small bullish position using a vertical call spread AND a small position with AGQ.  Why not invest more heavily, since price has broken the short-term downtrend and first price resistance?  Notice on the chart that “downtrend 2” intersects the “2nd price resistance” line at about the end of February.  Two types of technical resistance will gang up on the short-term silver investing bulls simultaneously.  By far, the majority of short-term traders and speculators utilize technical analysis.  This point of double resistance is not lost on them. Many may take profits at $35.

As and if price approaches $36, I’ll be watching chart development closely for an opportunity to reverse and short silver. If silver bounces off of resistance in the $36 price range, there is the possibility of an inverted head and shoulders chart pattern developing, which would be very bearish for the outlook for silver.

In the mid-term, one to three years, I believe the macro-economic reality of slowing economies will put severe downward pressure on silver because as world economies slow, industrial demand will lessen.  But in the meantime, the high volatility of silver provides an opportunity, albeit a dangerous one, to make short-term profits in silver investing.

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