The chart is an intermediate one so as to give a bit better of a picture.
Bearish forces are currently in control of the market. For the last seven weeks, the $20 level has served as an effective cap for the metal. Bulls simply cannot push the price up and through this level for any length of time.
Bears however have not yet managed to push a weekly close in price under $19 this year. This week's poor showing however resulted in the lowest weekly close since the last week of January. In other words, silver put in the worst weekly close in over 4 months. It is currently sitting in an important support zone on the chart. Failure to hold here and quickly rebound, increases the odds of a breach of $19 which would then target a hugely important support level near the $18 mark.
Note very carefully the solid ADX line is beginning to turn higher. As silver began to accelerate lower in January of last year, that ADX line was moving higher simultaneously indicating the presence of a strong trending move lower. In July the market found a bottom near $18 and began to retrace but that was merely a rally in an ongoing bear market as price failed near $25 and began retreating once more.
The ADX line however continued moving lower indicating that the downtrend had been halted and that the market was more likely to enter a ranging trade rather than begin a new leg lower. Bearish forces were in control but bulls were coming in and scooping up the metal near $19. That has been the case since last fall.
However, the ADX line is now beginning to rise as price nears important chart support indicating that the POTENTIAL for another leg lower in price is emerging. IF, and this is another of those big "if's", chart support near $19 fails, the indicator is going to generate a trending signal. Once that occurs, the $18 zone if going to take on even more significance from a technical analysis perspective as that is the last area that the bears must overcome to generate a move down towards $16.
From an internal standpoint, the Commitment of Traders positioning is revealing.
Look closely at the blue line which is the hedge fund category. Note how it peaked in February of this year. That occurred as silver prices peaked near $22. What is that category of traders doing since that time? Answer - dropping their exposure to the long side of silver. See how that blue line is moving lower and heading towards the "0" line? As of this week's COT report, they are now barely net long by only 988 contracts and options combined. Without active hedge fund sponsoring on the long side of silver, the metal's prospects are not good. Silver MUST HAVE HEDGE FUND MONEY CHASING IT to move higher. It is that simple.
Rather disconcerting is the positioning of the small traders or general public. Out of the entire category of speculators, they have the largest net long position. That is not much comfort if one is a bull and realizes that his allies are among the weakest of hands as they are the least capitalized group of market participants and the ones most subject to margin calls and least able to meet those if the market moves against them.
That is why this region near $19 is so important. With the general public remaining stubbornly long in a market sitting just atop a key support level, hedge fund managers may look to go after their vulnerable exposure. If they do and catch those downside sell stops lurking below the market, a quick $1.00 drop is entirely possible. Rest assured the margin clerks will be extremely busy making phone calls and demanding bank wires.
What does all this mean in simple terms? Bulls must hold the price of the metal above $19 to prevent a rout. Can they do so? Stay tuned as we are going to find out.
