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Let's look at silver first, since it has been bullishly leading gold higher:

Here's a long term chart beginning with the major low put in after the Panic of '08:

The chart shows us a 5 wave advance to complete Wave (1) followed by an ABC three wave correction to Wave (2).  The breakdown of the Wave (1) bull channel appears now to be a bear trap.

Here's a closer look at Wave (2) and the ensuing advance from the low:

We can see that a reverse head and shoulders breakout has occurred and that important horizontal price resistance has been overcome.  We can also see that the breakdown from the head and shoulders pattern that developed from September-January (and which many technical analysts noted fearfully--myself included) has failed and together with reversal of the trend channel failure is leaving behind a very bullish double bear trap.

Here's a closer view of the reverse head and shoulders which includes today's price action:

We can see that silver is now in wave v of the first wave of Wave (3) from the Wave (2) low.  That should complete in the vicinity of the downtrend (red) from the $21.35 high.

Of note is the bullishly smaller right shoulder and the fact that this pattern is almost entirely unrecognized.  The distance from the head to the neckline added to the neckline breakout gives us a completion target of $20.96 for Wave (3).  That will give bears a chance to call for a double top during the Wave (4) correction which may potentially develop there.  On the other hand, this could be an extended Wave (3).

Also of technical significance is that the neckline breakout occurred precisely at the 23.6 Fibonacci retracement level of the entire bull market in silver.  Today price reclaimed the 61.8 Fibonacci retracement of the decline from the  Wave (1) high.  All moving average in all time frames are bullishly aligned and rising together.  Hourly RSI is somewhat overbought so look for small pullbacks on the hourly chart to enter a position. 

We should enter long now with the knowledge that short term there may be a pullback against our position. This is a long term position trade, not a swing trade (though we may swingtrade to take profits and add to our position along the way).  Our stop level is a close below the 61.8 Fibonacci retracement level of the decline off the major top at $21.35, which also corresponds with the 31.8 Fibonacci level off the Wave (1) high as well as the bottom of the recent minor wave iv at $16.43.  A close there will tell us that this analysis is wrong and we should exit our position at a loss right away.

Disclosure: No current positions.

By Steve Vincent

http://www.thebullbear.com

The BullBear is the social network for market traders and investors.  Here you will find a wide range of tools to discuss, debate, blog, post, chat and otherwise communicate with others who share your interest in the markets.

© 2010 Copyright Steven Vincent - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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