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Buying the Silver Pullback


July silver (SI) futures have been running strongly higher, from a low of 13.73 in December to a May high of 18.06.

This rally has reversed the long-term downtrend, indicating more upside to come over the longer-term. After reaching the high though, the price is pulling back. With the longer-term uptrend expected to continue after the pullback, the question is "Where to buy silver on the pullback?"

A couple technical tools provide areas to watch for buy signals.

The rising trendline on the daily chart reveals potential support in the 15.70 area currently, but over the next one to two weeks that trendline will intersect near 16. That gives a support area between 15.70 and 16 over the next couple weeks.

The 16 region also aligns with a 61.8% Fibonacci retracement of the rally from the April 1 swing low to the May 2 swing high. 16 is also very close to a 50% pullback of the entire move from the December low to the May high. A 61.8% of the entire move is approximately 15.40.

Figure 1. July Silver Futures, Daily Chart

There is no guarantee the price will drop to these levels, or stop dropping at these levels, but pullbacks of those magnitudes are very common in financial markets.

With a likely strong support area between 16 and 15.40, wait to see if the price reaches that region (or even slightly above it). Then wait for the price to consolidate in that region--at least two price bars that move sideways. Buy when the price breaks above the consolidation high (high of the two, or more, sideways price bars). Alternatively, a candle stick pattern such as a bullish engulfing pattern can also be used to trigger an entry if the price is near the support zone.

A stop loss is placed below the low that occurs in the support zone (won't know that until the entry signal occurs). Consider placing an initial target at 18.05, and a secondary target at 19.

 

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