Rally in Precious Metals Is in Peril

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Silver Futures eSignal

Silver has traveled a more difficult path than gold in the last few years. The contract's long bull market stalled well short of the historic high near $800, posted in the early 1980s when the Hunt brothers tried to corner the market. However, just like gold, its upward trajectory ended in March, with a swift pullback into the summer, followed by a vertical descent.

Price bottomed out near $85 in October, with price chopping higher in a weak rally into December. So far at least, the contract has failed to press above resistance at the 200-day moving average. This mediocre progress predicts the recovery effort will eventually stall out and give way to a test of the lows, perhaps as early as the first quarter of next year.

The structure of the decline also raises red flags as we head into 2009. Note the vertical selloff between March and May, followed by a weak bounce into July and a much steeper decline into October. This price action is carving out a perfect Elliott 5-Wave pattern, in which the latest bounce marks a fourth wave countertrend ahead of a major selling climax.

The last leg of the long downtrend is likely to match the March-into-May decline. This yields an eventual downside target between $60 and $65. Notably, that level would correspond with the broad boundaries of a 2004-2005 basing pattern. So, my recommendation to silver bugs is to ease out of positions and wait for a better entry.

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Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.