(By Michael Harris) Last time SLV dropped below $26, on December 29, 2011, it rallied for about two months to over $36. Last Friday SLV tested again the December 2011 low and closed 50 cents above it at $26.15. Will there be another rally or is this time around different?
Last Thursday I wrote that "A Test of the May Low in Silver is Highly Probable". Actually, it occurred the following day along with the test of the December 2011 low.
It may be seen from the weekly SLV chart above that this ETF rallied more than $10, or over 28%, last December after the test of the low of January 2011 at $26.11. Although the RSI(13) is in oversold territory, there is currently no indication that the near past will be repeated. This ETF may move lower driven by lower spot silver prices towards long-term support near $19.50.
As I wrote in the relevant post last week, technical analysis can only help to identify some importance levels but it is not a reliable forecasting tool. The following scenarios may occur and one can only assign subjective probabilities to them based on experience. Actually, this is what all analysts do all the time whether they admit it or not:
(1) SLV drops straight down from here: sProb = 0.25
(2) SLV rebounds for a few days and then drops again: sProb = 0.35
(3) SLV drops below $26 for a few days here but then rallies sharply: sProb = 0.30
(4) SLV rebounds and rallies: sProb = 0.10
where sProb is a subjective probability.
Now, technical analysts that are not just naive chart inspectors who jump from chart to chart searching for an obvious formation they think it will provide them with an edge have certain ways of utilizing such subjective probabilities so that the initial subjectivity is removed and a number that is "more objective" is obtained. I am not going to provide details about this process here because it is beyond the scope of this post. Anyway, I think those who know something about it will find it boring and most of those who do not know about it will not understand it. The small group of those who do not know about it but would appreciate the effort anyway may wait for another post on this subject. Please do not email me asking me to describe the process to you in a reply because I will not. It is not possible to do that by email.
Disclosure: no relevant positions.