Monday, April 4, 2011

A Flaw In The Silver Topping Theory

There seems to be a lot of silver pundits calling for a major top in silver lately. There’s basically two main reasons why they are calling for a top: 1) silver is currently stretched above its long term moving averages and 2) silver looks spiky on a chart. Anybody that has followed markets for a while and looked at charts knows that when they see things like that they should grow cautious. This is because they have most likely experienced the other side of a spike at least once, where the market snaps back hard to the downside. They have also likely experienced that hard move down with an overly aggressive position due to being too bullish at the top, which caused even more painful losses.

So given that there are two good reasons to be cautious on the silver market, are there any good reasons that caution should be discounted at the current time? Let’s look at the state of the gold market at previous major tops in silver. The next two charts show silver and gold’s relationship to their 200 day moving averages during two previous major tops in silver and gold. Notice how silver and gold made major tops when they both became stretched above their 200 day moving averages.

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