SILVER MAY BE PUTTING IN CLIMAX TOP NEAR $50 TARGET -- WEAKNESS IN SILVER STOCKS ALSO WARNS OF PROFIT-TAKING IN PRECIOUS METALS
OVERBOUGHT SILVER REACHES 1980 PEAK ... We've been enthusiastically bullish on precious metals and silver in particular. The spectacular silver rally now looks dangerously overextended. In addition, it has reached its 1980 high at $50 as shown in Chart 1. The monthly RSI line shows silver to be at the most overbought level in five years. Yesterday's price and volume action have some aspects of a "climax top" as well. Also of concern is relative weakness in silver stocks.
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Chart 1
YESTERDAY MAY HAVE MARKED CLIMAX TOP... A climax top usually occurs after a spectacular upside run and is characterized by a wide-ranging price range accompanied by heavy volume. The daily price and volume bars of Silver iShares in Chart 2 appear to qualify on both counts. After opening sharply higher, the SLV closed marginally higher. The fact that volume was the heaviest in its trading history is another warning sign. The 15 minute bars in Chart 3 give a closer picture of yesterday's trading. It shows a small "double top" forming around the 47 level . Notice that the heaviest volume was to the downside. A close below yesterday's intra-day low at 44.53 would be another short-term negative. Silver stocks have already started to weaken.
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Chart 2
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Chart 3
SILVER STOCKS WEAKEN... Stocks related to silver have been rising along with the commodity. Chart 4 shows the close correlation between the price of silver (solid line) and the Global X Silver Miners ETF (price bars) over the last six months. To the upper right, however, the SIL failed to exceed its high at 31 while the commodity kept rising. Yesterday's downside reversal in the SIL on higher volume forms a potential "negative divergence" between silver stocks and the commodity. Chart 5 shows Silver Wheaton slipping below its 50-day line yesterday. It's been falling on rising volume since the start of April. The same negative divergence is seen between the price of gold and most gold shares. It seems likely that both commodities are due for a correction. Silver, however, appears to be the most over-extended and the most vulnerable to profit-taking.
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Chart 4
