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What the Silver Chart Is Telling You About Gold

David Muir | Getty Images

The most important feature of the weekly silver chart is the way it moves in advance of the gold chart. The behavior in silver has led the behavior in gold for more than 18 months. Silver's fall below the critical long term support level near $26.50 an ounce gave early warning of the recent collapse in gold. (Note chart scale is shown in cents)

There are two key features on the silver chart. The first feature is the relationship in the Guppy Multiple Moving Averages indicator. They show a well established downtrend. The short term group of average reflects the behavior of traders. The wide separation shows traders are sellers. They are short on silver. The long term group of averages shows the behavior of investors. They are also sellers, as shown by the separation in the long term GMMA. The conclusion is that this is a downtrend that has a lower probability of developing a sustainable reversal.

(Read More: Silver Higher After Wild Ride)

So the important question to answer is to decide how low silver may fall. The answer is given by the long term historical support level near $19.40. This support level acted as resistance level in December 2009 and again in May 2010 and July 2010. The breakout above this level in September 2011 developed into a powerful new uptrend that reached the highs near $49.60 in April 2011.

The fall below support near $26.50 is a break below a significant and well established support level. The next chart target is $19.40. Once this target is achieved traders will watch for a consolidation pattern to develop near $19.40. This may include a sideways movement near $19.40, or a rapid rebound and rally towards $26.50. This behavior is a rally in the environment of a downtrend. It has a low probability of developing into a new uptrend.

A fall below support near $19.40 has a downside target near $15.50. This is also a long term support level. A fall below $19.40 suggests that silver may trade in a narrow consolidation range between $15.50 and $19.40.

(Read More: The Level Gold Bulls Need to See)

This type of behavior offers some trading opportunities but more importantly it provides advance warning of the potential behavior in gold. The silver chart shows that traders who are wishing for a rise in the gold price will be disappointed. The silver downtrend has a high probability of continuing and gold will follow. There is a high probability of an extended period of sideways consolidation behavior following any move towards $19.40. There is a low probability of a new strong up trend to carry prices above $26.50.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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