Silver Prices See Steep Decline

June 2, 2011 Justin Technical Analysis

The silver spot price was off by nearly $1.50 per ounce in a continuation of a sell-off that began yesterday. The metal made another attempt at breaking above the 50 day moving average early in the trading session Wednesday but quickly ran into resistance and retreated back below that key level. Selling pressure intensified on the failure and the decline saw prices drop below the lows of the past several days as traders saw tight stops get taken out on the acceleration of the retreat.

The next major level of support for silver doesn’t come in until around the $33.90 level which is the 200 day moving average and also happens to be the closing low from March 15th where the silver market began its steep ascent that peaked back in April.

As we’ve discussed here on numerous occasions, sometimes the best position to take in the commodities market is to sit on the sidelines. Right now, the price is stuck approximately midway between a major area of support and a formidable level of resistance with quite a bit of distance between the current price and either of the two. The theme to remember for the next day or two is that boredom does not constitute a reason to enter a trade. As of right now, there are no attractive trade setups on the long or short side that offer a high probability of success or a favorable risk/reward ratio.

There will likely be several headlines in the news media today claiming that the bull market in commodities is over. Keep in mind that although we are experiencing a pullback, from a technical standpoint both gold and silver remain in an uptrend. Until either of the two breakdown below major support, no reversal of the overall trend has occurred.

Right now, the chart on gold continues to look considerably better than silver and as of this morning, gold has managed to hold on a retest of the breakout above the May 10th high. As long as gold manages to close above that area of support, the upside will remain favored.

The Euro managed to post a gain against the dollar overnight and remains above both the 50 day and 200 day moving average. A declining dollar will help to provide some support for commodity prices. As long as the dollar doesn’t gain any momentum to the upside, the chances of a major trend reversal in commodities will likely be held in check.

Again, no trade opportunities are looking spectacular in commodities right now but if you feel compelled to take a shot at something, a play on gold bouncing off the $1525 support area might give you a small window of opportunity. Set a tight stop on a close below support would be an absolute must if you decide to take the chance. Watch out for the Fibonacci retracement levels of the move from $1544.50 to $1519.65 for possible resistance. This may be something to experiment with in a practice account.

Be sure to keep some trading capital available for bigger opportunities in the coming days. Once a solid directional bias can be established, there will be an opportunity for some profitable commodity trades.

Gold Breaks Out While Silver Consolidates Metals Advance and Continue to Show Strength