From the February 01, 2011 issue of Futures Magazine • Subscribe!

Silver: Reflections on a breakout

Long-term analysis

Traders tend to spend a lot of time on short-term price fluctuations. We consider a weekly chart covering a few years as long-term analysis. But what about a really long-term chart?

Most chartists consider price breakouts important. What is easily overlooked is that if they are important on a daily and weekly chart, they also are important on a monthly chart. In fact, the biggest moves come when a really long-term breakout develops and a major price zone is violated. This is a purer definition of a bull or bear market.

"Big view" (below) shows a monthly silver chart going back 40 years. The horizontal lines indicate key price points. They’re constructed and begin from the peak price points of the crash of 1980 through 1986. The black line shows the 1980 high. The second line (light blue) is at the first bounce from the 1980 crash when price bounced back to $25. The third line (green) begins at the reaction rally high after the 1982 low when price reached $15 in 1983. The lowest line (orange) begins at the secondary final spike in 1987 at the $10 area. Silver remained below the last arrow for 20 years.

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Once the 21st century’s silver bull market began, the breakout above the lowest price point immediately led to a 33% spike to the $15 area, where the next highest price point was located. It stayed inside that range for two years. After a breakout rally to the $21 area (where the upper channel line was constructed with the top bar of 1980), a crash back to the lowest arrow developed during the 2008 world asset crisis melt down.

This latest leg of the bull market from the crash low rallied to the channel line in May before retreating and finally breaking out. The point of the 2010 manipulation low described earlier is that it tested and failed at the $15 price point.

Aug. 23, 2010 is when the long-term price channel came into play as price had moved to the lower boundary of the channel line under $20. At the time, this upper resistance line was the most important factor on the monthly chart. It was the final barrier of resistance until the $25 area. Any move above the $20 area would suggest a rally to $25.

Silver surpassed the $25 price point this fall and hasn’t looked back. Observe the price spike once it cleared the channel line at $20. A $7 rally transpired in two months. The price action is confirmation that that market recognized this area as a major level.

Long-term charts provide important information regardless of whether you consider yourself an investor or a trader. Having a major breakout on a chart like this can help you understand not only the trend, but the potential scope of such a breakout.

Long-term price charts often don’t give buy signals, but that is the point of watching them. When they do, the moves can be huge and you’ll know the "potential" to move will be greater. Long-term charts should be reviewed once a month regardless of your time frame. They can lead you to where the big trends are most likely to occur and help you avoid jumping on shorter-term trends that butt against these whoppers. Make a point to look at a super long-term chart of each market you trade at least once a month. Look at their message. Is there a major area that price is at and ready to move through or break down from?

Failed breakouts

Many commodities can and do have major price spikes that cause a market to break out, then reverse back into its longer term range. While there are no hard rules that confirm whether the move is a temporary spike, the best evidence is followthrough.

For 20 years, the heating oil market traded under $1.25 (see "Slow burn," below). In early 2003, a long-term breakout developed that turned out to be a trap. The real move did not begin until 2005. Once price did break to the upside, heating oil returned to the original breakout line. In this case, price supported. The moment of truth came once price rallied from that level and made a new high above $1.60. Even then it took a full two years of sideways action between $1.50 and $2.25 before the major move occurred.

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The main purpose of long-term charts is to spot potential major changes in trends. Once a breakout gets underway, shorter-term charts or other timing tools can help you understand direction and duration.

Working with price channels is another way to glean clues of where key price points are. Channel lines are based on the market’s outer price symmetry and play a part in its construction. The channel in both the silver and heating oil charts is a great way to identify extremes on either side of the market. When price breaks above or below these lines by more than 5%, it’s usually a signal of a further breakout.

A good defense is a good offense

While it’s debatable whether pundits and analysts can tell you where price is going, there’s one piece of advice that always rings true. Smart traders and investors don’t step in front of freight trains. They ride them. Yet, that is not what most traders do. Instead of going with the trend, they sit on the sidelines, waiting to pick the top so they can go short. The common thinking is price has gone too high, too fast, and the fast money will be made on the retracement. It’s easier to just go long on the monthly breakout following technical confirmation and ride it until key indicators tell you the ride is likely over.

You don’t make money in the markets by attempting to pick tops and bottoms. You do so by identifying trends that have duration and momentum, and taking profits judiciously. Whether you day trade or are a long-term investor, the strategy should be the same. Try to carve out the middle of a trend and pay attention to long-term price points.


Bill Downey is an independent analyst involved in the study of the gold and silver markets since the mid-1980s. In addition to writing for Futures, he writes articles for public internet distribution as well as his own website at: www.goldtrends.net. E-mail him at Goldtrends@gmail.com.

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