Silver Short-term Extremely Overbought Situation

By: Clive_Maund

Over the past week or so we have been seeing the acceleration by silver that we expected following its anticipated breakout against the Euro and the Swiss France. However, coming on top of strong gains since the low last December, this has resulted in an extremely overbought condition developing.

We can avoid confusion and maintain an effective trading strategy with respect to silver at this point by the simple expedient of distinguishing between its short-term and medium-term trend and condition. On the 1-year chart we can clearly see why it has reached an overbought extreme on a short-term basis - the RSI indicator at the top of the chart is well into critically overbought territory, as is the MACD indicator at the bottom of the chart, and a massive gap has opened up between the price and its principal moving averages. Thus, it is reasonable to expect a reaction soon, and given silver's propensity to suddenly crater it could well be swift and savage. Having said that it will probably not take the price below $18, or $17 maximum, for as we shall see, a powerful intermediate uptrend is in force that should take the price to much higher levels before it has run its course.

The long-term 8-year chart is most interesting as it reveals that, having only this year broken out from a massive consolidation pattern dating back to April 2006, silver is still in the early to middle phase of the current intermediate uptrend that promises to drive the price rapidly to the long-term uptrend channel return line now at about $30, so this figure is our target for this advance, on a medium-term basis. The minimum target for the advance is the pale blue return line shown, which gives a somewhat lower objective that will nevertheless involve a very substantial gain from the current price. Note that silver may considerably overshoot the $30 objective, because the uptrend could well accelerate, especially if the dollar burns a hole in the floor.

That the $30 target is a reasonable medium-term objective for silver is made more clear by the 8-year chart for silver plotted in Euros, against which we can see that it is still in the early stages of its new intermediate uptrend. This chart implies that $30 is a conservative target for this advance - which is hardly surprising as the dollar is falling apart.

By Clive Maund
CliveMaund.com

© 2008 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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