Silver continued to trade in a tight range once again last week, with the May silver futures contract closing on Friday at $28.85 per ounce, and whilst gold has seen a modest return of some bullish sentiment, silver remains dangerously waterlogged in a tight trading range.
This area of price congestion extends back to mid February on the daily chart, since when we have seen the metal test the floor of support in the $28 per ounce area, confirmed with the isolated pivot low on the 1st March at $27.92 per ounce. This level is shown with the dotted yellow line. To the upside, the price resistance level is now clearly in place just below the $29.50 per ounce area, and once again confirmed with an isolated pivot high on the 12th March at $29.35 per ounce ( again shown with the yellow dotted line ).
With the trading range now clearly defined, we need to be patient and wait for a breakout from this extended area of price congestion, and the simple question we need to answer is whether the breakout, when it arrives, is likely to be to the upside or the down side. As always, the longer this price congestion continues, then the more volatile will be the break when it finally arrives. To find the answer, we need to consider our other indicators and in particular volume.
And the key point to note looking at the daily volumes is the combination of price action and associated volume during the latter half of February, and in particular the series of five consecutive down candles in the price waterfall from the 13th to the 20th of February. Here we saw each candle close with a wider spread, but associated with rising volume on a daily basis. A clear sign of bearish momentum at the time, with the volume validating the price action. Note also that this volume activity is well above any in the preceding few months, with a well defined spike in volumes over this five day period.
The final bar, with the greatest volume on the 20th February however, did not close at the low of the day, but well off the low, suggesting buyers coming to the market. This indeed was the case, with the price climbing back to test the $29.50 area, but on weak and declining volumes, a signal that the market was not ready to move higher just yet.The hammer candle of the 1st March, with the isolated pivot low was accompanied with above average volume, suggesting buying one again.
Finally we can also see that subsequent down candles, since the start of the month, have been associated with below average volumes, suggesting that selling pressure is falling away, and that the high volumes associated with the waterfall, particularly on the final day, were in fact buying, and often referred to as stopping volume. As always with volume price analysis, turns in the market take time to develop, and just like the oil tanker, the market may take days or weeks to establish a new trend.
The key now is to be patient and wait for a breakout, and if the above analysis is correct, then expect to see silver prices break through the $29.50 region in due course. The breakout should be accompanied with a substantial rise in volume, which may then decline once the breakout is complete. This is normal and we may also see a test of the new support area in a pullback, before the metal continues higher in the medium term.
By Anna Coulling
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