After a powerful rally from a base, silver has reversed sharply!
Precious Metals's recent rally, correctly predicted back in late December of 2014, seems to now be reversing starting with silver. The base building process during November and December of last year, together with a powerful rally in January, was looking promising until last night's price action created a strong bearish reversal.
Silver approached a confluence of resistance lines, most notably the 200 day moving average seen in Chart 1, as well as the downtrend line and horizontal resistance line (seen in Chart 2). All of this happened as the price became overbought and hedge funds piled in at a rapid pace. While it is too early to say that a new downtrend has started, what we need to remember is that different investor characteristics and behavior apply during a trend.
For example, during an uptrend, when sentiment becomes too bullish and price overbought, usually we see a correction occurring through a modest price pullback and a prolonged consolidation. On the other hand, during a downtrend (which we have been in since 2011), when sentiment becomes too bullish and price overbought, usually we see a sharp reversal which indicates a continuation of the bearish trend and a strong possibility of new lows.
What type of behavior do you think silver investors are resembling right now?
Confluence of important resistance levels has reversed the rally (see chart below)
