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Next Target for Silver $39, But Stop Loss is Key: Chartist

Which is better – gold or silver? Often consigned as an industrial metal with limited value, silver has outshined gold in the past 18 months. Between July 2010 and January 2011 the COMEX silver futures price rose by 72 percent from $18.00 to $31.00. Silver outperformed gold by more than three times and it continues to do so.

Chart analysis shows a significant change in the trend and provides a method to set the next upside target in this speculative bubble.

The silver market was dominated by a strong historical resistance level near $19.00. This capped the trend rise starting in October 2008. Silver first encountered this resistance level in December 2009 and then tested the level several times in 2010 before developing a breakout in July 2010.

The rise from $19.00 to $31.00 was a smooth continuous trend that carried the price into blue sky territory. The uptrend line defining this trend is used to track the continuation of this trend following the retreat and rebound behavior in January. Blue sky describes the situation where the price is making new all time highs. Investors cannot use historical price activity to establish support and resistance levels, or new profit targets.

The retreat from the peak found support near $27.00. This was also a small consolidation area in the trend in November 2010. The current price rebound from $27.00 has resistance near $31.00, based on the previous peak high. This price activity developed a consolidation band and this chart pattern provides a method for projecting future price targets.

The width of the consolidation band is measured, and this value is projected upwards. This gave us a potential target near $35.00. That rise of 16 percent has already been achieved. The acceleration of this breakout activity and the better rate of return is attracting investors who want better returns. This leverage impact is increased by trading in silver mines and silver producers.

The width of the consolidation band is projected upwards again to give a new upside target of $39.00. This double projection method has been successfully applied to other fast moving trends and sets valid targets. However, this double projection method also confirms a speculative bubble so traders follow these rises with tight stop loss conditions.

The price of silver has again moved above the uptrend line and this is now used as a support level for the rising trend. A close below the uptrend line is particularly bearish because it is associated with the collapse of speculative momentum.

Historically the demand for silver has been driven largely by the growth of the photography industry and this has collapsed with the rise of digital photography. This destruction of silver demand has not acted a brake on the recent uptrend developments. This disconnection between any obvious changes in physical demand for silver and the silver price also points the way to a speculative bubble. This suggests that silver is a useful trading instrument because bubbles inevitably collapse. For now though, silver will continue to outshine gold in the current market.

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's 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.

Asia Economy