At the Rim of the Silver Bowl

September silver futures are coming up on an important test of a major supporting floor which, if broken, will all but take the remaining wind out of the silver market's sails. Yet if this test is successful, it will prove the silver bull still shines with higher highs to come.

The test we are referring to is plainly visible in the daily silver futures chart (continuous contract). Notice the clearly defined parabolic bowl that started forming with the late May highs through the recent late July lows. Currently silver has closed below $4.60 and looks to test the nearby $4.50-$4.53 benchmark area, which represents the rim of the bowl. A close beneath $4.50 would constitute a breakdown from the bowl, which would be bearish for silver and would lead to lower lows. This in turn would take time to recover from and it would be doubtful silver could recover from such a breakdown to launch a new bull market leg before year-end. In our estimation, silver is at a critical juncture (with the rest of the precious metals markets) and needs a high-volume reversal and soon to stay alive this summer.

A breakdown beneath the bowl in its daily chart would also mean that the late July low was not the true "vertex," or mid-point, of the parabola. If silver goes any lower than its intra-day summertime low of approximately $4.55 it would mean that prices have declined beyond the theoretical mid-point of the parabolic bowl, and this is nearly always bearish. Silver cannot afford to decline much lower than it now has.

Based on our analysis, the levels to watch are $4.50-$4.53 on the downside and $4.63 on the upside (on a closing basis). In fact, a high-volume close above $4.63 on a closing basis would mean that a major line of supply extending from this year's highs to the recent lows has been absorbed, which would add credibility to the bullish case for silver. The final line of supply hanging over the market is currently between $4.85-$4.90, approximately the 50% level of the parabolic bowl in the daily chart.

At present, the silver market is under considerable weakness and the short-term trend is still down. Therefore the market should be considered bearish until proven otherwise. As referenced above, this would require a strong market signal in the form of a close above $4.63 and a follow-through rally. Anything less will only point to further weakness.