Precious metals are hot right now. Gold closed above $2000 per ounce for the first time on August 4th, a historic new high. According to my analysis, gold could go much higher.
Silver has followed suit, closing above $29 per ounce for the first time in seven years on August 10th. Since then, silver has pulled back, and is now trading near $27.
Is this pullback a buying opportunity for silver, or should traders wait for a deeper decline? Let's go to the chart to find out.
Silver broke out of a bullish cup and handle pattern in mid-July. The metal then proceeded to rise in a straight line from approximately $19 to $29, a gain of $10. That rally is marked A-B. This was followed by a pullback which bottomed at $24, marked B-C.
Next, add the $10 gain of A-B to B-C's low point of $24, and we have a target price for silver at $34, which is point D. This simple formation is known as an A-B-C-D pattern.
There is no pattern or technique, either technical or fundamental, that works 100% of the time. Because of this, we need to quantify our potential loss in advance.
For a pattern like this, the protective stop is located below the Point C low of $24. If silver breaks that level, traders can cut their losses and live to trade another day.
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Ed Ponsi is the managing director of Barchetta Capital Management, and is the author of three books for publisher Wiley Finance. A dynamic public speaker, Ed has made appearances around the world, in such diverse locations as Singapore, Dubai, London, and New York. For more information about Ed and his work, click here.