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As silver tests support, gold traders take heed

A one kilogram gold bar sits on top of silver bars.
Simon Dawson | Bloomberg | Getty Images
A one kilogram gold bar sits on top of silver bars.

Gold fell to its lowest level in nearly three months last week on concerns that a strong U.S. dollar and improving U.S. economy could damp demand, and silver charts suggest that bullion may not regain upward momentum anytime soon.

The downtrend in COMEX silver – shown in cents on the weekly chart – is well-established and prolonged. Technically silver is pounding out a support base near $18.70 and although there has been a reduction in downward momentum there is no technical or chart evidence of a developing rebound and reversal.

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Upside targets remain limited, while technical downside targets have yet to be tested by a fall below support near $18.70. Analysis of Silver is useful because the price behavior of silver has led gold prices since 2011. Understanding silver gives traders a leading advantage when it comes to anticipating the behavior of gold.

The significant feature in the silver chart is the retreat and retest of the support level near $18.70. A successful fourth retest of support near $18.70 would confirm a long-term sideways consolidation.

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Silver has strong long-term resistance near $26.00. Resistance also developed near $24.00, which is the first target for any successful breakout above the upper edge of the long-term group of moving averages where the value is currently near $21.80.

Rebound strength is limited in this market, suggesting a low probability of an uptrend reversal. Failure of support near $18.70 has a downside target near $11.30, calculated by taking the width of the trading band and projecting it downwards below support near $18.70. A break below $18.70 support would be bearish for both silver and gold.

The key features of the trend weakness are shown with the Guppy Multiple Moving Average (GMMA) indicator, which tracks the behavior of traders and investors.

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The long-term GMMA (in red) is widely separated, which confirms continued selling pressure. When the price rises investors enter the market as sellers as shown by the continued separation of the long-term GMMA. Their selling pushes the price down, absorbing upward price momentum and reducing the probability of the rally developing into a trend change. The rally in silver in March 2014 and again in June was defeated by the wide GMMA separation.

How silver behaves near $18.70 will provide a guide for the expected price activity for gold. Traders will watch the development in the sliver price and then wait for confirmation of the behavior in the gold price.

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 CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.