Dissector: Silver loses its glitter :: Business Line

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Silver spot price registered a high of 49.4 and peaked out in 1980, after a frenzied rally. Thereafter, it tumbled sharply and was on a downtrend until it found support around 3.5 in 1993.

The metal formed a significant long-term support in the range between 3.5 and 4, before it started to trend upwards taking support in late 2001.

Since then, silver has been on a longer term bull run, forming higher peaks and troughs.

In late 2008, the metal took support from its long-term base between 8 and 8.5 and resumed its structural uptrend. Silver penetrated its important long-term resistance level of Rs 20 in September 2010 and accelerated higher. This bullish momentum prolonged until it encountered resistance around its previous peak of 49.4.

After marking a high at 49.8 on April 25 this year, silver lost its bullish momentum. It failed to surpass the psychological resistance of 50 and began to decline.

This trend reversal was triggered by its daily and weekly relative strength index reaching deep overbought levels.

The daily as well as weekly moving average convergence divergence indicators also touched overbought levels signalling potential trend reversal.

Further, the monthly MACD too had reached the overbought levels which it had previously entered in the year 1980. Silver began to decline and found support in May 2011 at 32, retracing 38.2 per cent Fibonacci retracement of its up move from 2001 low to recent peak.

Long-term support below 32 for Silver is at 27 which is the 50 per cent retracement level. If this support fails to hold silver while trending down, it can decline further down to its next support in the band between 20 and 21. This is also a critical longer-term support and crucial trend deciding level. Strong fall below this level will mitigate the uptrend and can drag the silver down to 15 and then to 10 in the long-term.

However, in the long-term silver can vacillate between 27 and 50, if the support at 27 holds. An emphatic upward break through of 50 will take the silver higher to 60 in the longer-term.

Silver has been on a medium-term downtrend since its peak of 49.8 recorded in April this year. In early May, silver breached its 21 and 50-day moving average conclusively.

Recently, silver failed to surpass its immediate resistance level at 39.5 and appears to have resumed its downtrend. Silver can test its immediate key support around 32. Strong fall below this level can pull it down to 30 in the months ahead. Subsequent significant support for silver is pegged in the band between 25 and 26.5.

Conversely, decisive move above 39.5 will take the commodity higher to 45.4 and then to 48.5 levels in the medium-term.