Silver Update: Risk/Reward Ratio Favors Longs (1:4)

Back in September, I posted a Silver update with the very promising title, "The Time Has Come," where I suggested both target and time for this fading downside move. The target at the $13.7 level hadn’t been reached as buyers did not wait to buy on the dips and had followed Gold to the upside beyond $15, but the time goal (which I stressed in the title) worked out perfectly according to the Fibonacci time zone extension. The downtrend exhaustion appeared in September and it has been really wasting away as not only the low, but also the high of September have both been trapped in the shadow of August (margins have been highlighted in two black dashed parallel horizontal lines). Below the chart, I am going to expand on the prospects of the current reversal.

Chart courtesy of TradingView.com

Laozi said, “A journey of a thousand miles begins with a single step” and the above daily chart shows us important details that can’t be seen on the monthly chart. Here we can see the last steps of the previous “journey” down and the first “step” for the way up.

The red CD segment has finished the last leg of correction that I depicted in my previous Silver update. The length of it has overshot the length of the red AB segment by 20% and that has been enough for sellers as the price of Silver has reversed up. Below the price chart you can see another point for reversal – the RSI divergence (highlighted in red) indicator has continued higher while the price has continued to stream down; and now you can witness the outcome – price has finally followed the direction of RSI and made higher lows and highs both on the price chart and on the RSI graph. And that’s all about the history, now let’s get down to current prospects.

The first zigzag upside was made in August and September and is highlighted in the small green ab segment (small letters, because it’s just a part of the first larger AB segment on the monthly chart and not shown here). Moreover, the correction during the rest of September was completed last Friday, and it couldn’t even break below the previous low.

Now we have three higher lows in a row and only two higher highs, last Friday has shaped a very large bullish daily candle amid disappointing NFP data, but it hasn’t been enough to hit the third higher high. We are very close (another 21 cents to go). It's more important that we started the second leg of the upside move, and again I have used the Fibonacci ratios between segments to calculate the target. The most common ratio is 1.618 which will bring the price of Silver to target 1 (d1) at $16.7 which is $1.5 away from the current level ($15.2). Target 2 (d2) has been calculated as 2.618 of the green ab segment and equals $18.2, which is another $2 to gain from here.

The pattern analysis has detected the falling wedge pattern (highlighted in blue) which has been broken two times. The first break appeared to be false as the price returned deeply inside of the wedge; the second try happened on Friday, and I hope it will be valid. The target for the breakout is located at the $18.5 level and is equal to the distance measured from the highest high of the wedge ($17.8) to the lowest trough of it ($14) and added to the break point ($14.7). It is interesting that this target almost coincides with the target 2 of the green cd segment and also hits the important maximum of the red AB segment which acts as a strong resistance area.

The risk/reward ratio (1:4) now favors Silver longs as the technical picture is clear, and the higher peaks/lows persist. A short term stop should be set below Friday’s low of ($14.40). A medium term stop is safer to be set below this year's low of ($13.98); below it the bullish scenario would be invalidated.

Intelligent trades!

Aibek Burabayev
INO.com Contributor, Metals

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.