Wednesday, July 2, 2014

Silver Traders: Here's Your Next Move

Silver has made a massive move over the past two weeks.
 
The metal rallied from less than $19 per ounce to more than $21. And this has some folks wondering if it's time to buy...
 
Take a look at this weekly chart of silver...
 
 
Silver has broken out of a long-term consolidation pattern. I expect the metal to rally to $26 sometime later this year. So if you don't own any silver, buying it here is not a bad idea... But be prepared for some downside action in the short term.
 
You see, silver is wickedly overbought right now. Take a look at this chart...
 
 
You can see that silver is overbought by looking at the 14-day relative strength index (RSI) – a short-term momentum indicator – at the bottom of the chart. This indicator recently rose into the 80s... which is an extremely overbought reading. Note that similar readings flashed in mid-2013 and this past February. Both were followed by sharp corrections.
 
The full stochastics – another measure of overbought and oversold conditions – is also at a level that often precedes at least a short-term pullback in the price of silver. And the chart is bumping up against a down-trending resistance line. Silver looks set for a short-term pullback from here. So, traders should wait to buy until silver works off its overbought condition.
 
Yes, silver could still go higher. And this doesn't mean I'm selling any of my silver. I'm just not adding to my position at this level. But I will buy aggressively on a pullback to around $20. That's about 5% lower than where it is right now. And it's when traders should look to buy.
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