Silver (XAG) Forecast: Silver Analysis Shows Critical Trendline at Risk of Failure

Silver Breaks Below Key 50% Level, Tests Critical Uptrend Support

Spot Silver (XAGUSD) is trading sharply lower on Thursday after crossing to the weak side of a key 50% level at $77.05. The downside momentum created by the move has put the market in a position to test an uptrend line at $74.03. This indicator has been providing support for the uptrend since the $48.64 main bottom on November 21. Although we could see a technical bounce on the first test of the trendline, a break through it will put the last swing bottom at $70.07 back on the radar.

At 13:43 GMT, XAGUSD is trading $74.36, down $3.82 or -4.88%.

Secondary Lower Top Forms After Reversal Pattern

Following Wednesday’s minor reversal top and today’s follow-through move, a secondary lower top has formed at $82.77. A trade through $84.03 will signal a resumption of the uptrend, while a move through $70.07 will change the main trend to down according to the daily swing chart.

Taking out $70.07 will not only change the trend to down, but it could fuel an acceleration into the intermediate retracement zone at $64.79 to $60.25. The latter forms a potential support cluster with the 50-day moving average at $59.60.

CME Margin Hikes and Index Rebalancing Cap Rally

The long-term fundamentals are still intact—there’s still a shortage and high demand—but two outside factors have dampened the calls for an extended rally into $100 over the near-term. The first factor, two margin increases by the Chicago Mercantile Exchange (CME), put in the record high at $84.03. The second factor, the anticipation of a massive rebalancing of two major commodity indexes, helped put in the top at $82.77 on Wednesday.

$6.8 Billion in Silver Futures Face Liquidation

According to Citigroup, traders of funds tracking the Bloomberg Commodity Index and the S&P Goldman Sachs Commodity Index are preparing to dump silver contracts equal to about 12% of the open interest on Comex. This is estimated to have a value of about $6.8 billion.

Short Pressure Emerges After Months of Bullish Sentiment

The secondary lower top at $82.77 is the first sign of short-selling pressure in the market in several months. We’re not going to declare the market “bearish,” but new short-sellers indicate someone is looking for more than a normal correction.

Outlook: Exit Strategy Critical as Trendline Test Looms

Looking ahead, a failure at the trendline at $74.03 should alert any stubborn longs that further price declines are coming. I’ve said several times in the past to have an exit strategy, otherwise the market will tell you where to get out and usually that is a very expensive proposition. Well, I think that this is one of those cases. If you wait too long to take profits or even lighten up on the long side, then you may end up selling at precisely the points I told you were support.

The direction of the market into the close is likely to be determined by trader reaction to the trend line at $74.03.

More Information in our Economic Calendar.