Charts: Silver’s rally is not sustainable

Chris Ratcliffe | Bloomberg | Getty Images

Silver rallied to a one-month high at the end of last week after the Federal Reserve's latest policy statement led investors to push back bets on the timing of a rate hike, but charts suggest that a sustainable trend is unlikely to develop.

In its policy statement last week the U.S. central bank was more cautious with the language around the timing of a rate hike than markets expected, which sparked a bout of dollar selling. The greenback fell from recent highs against various currencies, while traders plowed into commodities with gold posting its best weekly rise since mid-January, according to Reuters. Silver, meanwhile, touched a one-month high of $16.89 an ounce on Friday.

Widely viewed as a proxy for gold, silver leads gold behavior on the charts by several days, providing a leading indicator.

The most significant feature on the weekly silver chart is the strong support and resistance level near $19.00. (Note this chart scale is in cents). This acted as a strong support level and was tested three times between 2013 and 2014. When the level was broken it changed polarity and acted as a resistance, capping the rise in January 2015. There is a high probability this level will limit the current rally.

Historically, silver has developed resistance near $26.00. This creates a trading band, the width of which is projected down from $17.00 and gives a downside target near $11.00. This is the long-term downside target for silver.

The trend is analysed with the Guppy Multiple Moving Average (GMMA) Indicator. This indicator tracks the strength of investor and traders. The long-term GMMA (in red) is well separated, which suggests a solid and sustained downtrend. There is a low probability this downtrend will be reversed.

The lack of compression in the long-term group of averages confirms the strength of the downtrend. This suggests that the rally in Silver is a short-term rally with a low probability of developing into a sustained new uptrend. Traders will look to go short as the rally weakens.

The move towards the downside target near $11.00 is a long-term investment target for the downtrend that may take more than a year to achieve.