Market Update - 13 April 2013 - 14:30GMT

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N.B: All our Reports reflect our Unique way of analyzing the markets: the TFF Way™, which combines our in-house Fundamental Indicators for prevailing market direction with Price Action analysis for timing, to provide our Subscribers and Investors with above average Returns. Our Price Action analysis aims to predict the most likely imminent move in the asset classes we follow - an extremely valuable tool for both Day Traders and Longer Term Traders, to help them make their own trading decisions.
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FUNDAMENTAL AND TECHNICAL SILVER OUTLOOK

FUNDAMENTAL
 
Hedge funds and other speculators are now so negative on silver that the short positions have reached the highest level in the last 17 years.
What does this mean?
Judging by the historical price action over the last two decades, whenever speculators have held such enormous bearish positions, the price of this metal was either at or near a major low. Consider the following:
● As short positions reached 44,790 in 1997 a huge short squeeze doubled the price in the following months.
● In 2000 and 2001 short positions reached over 44,000 triggering the start of a secular bull market.
● Finally, short positions reached 45,163 in 2005 as silver broke out, rallying for almost three years.
 
Couple the above with the following:
Public opinion on silver has reached the second lowest reading in a decade.
During the crash of 2008, when silver declined almost 60%, public opinion fell to only 33% bulls. During the crash of 2011 from $44 to $26, sentiment readings hit 29% bulls and finally, public opinion today sits at 28% bulls as the metal remains almost 50% from its peak reached 2 years ago.
When speculators shorts positions increase it does not mean that others are taking the other side of the trade and going long. It is because commercials whom  are always short are decreasing their short position by buying back.
So in effect this means that commercials are closing short positions and speculators are taking over the short side by opening short positions.
What is absolutely clear is that the commercials are always less short at bottoms and more short at tops whilst speculators are always long at tops and short at bottoms.
 
Decide for yourself which group to follow. At TFF we follow the commercials.
 
TECHNICAL
 
Technically the effect of last week’s Morning Star formation died out as the market failed to break through resistance at 20ema and 28.00. Instead it broke through 27.00 support and stopped at 26.15 Critical Support. This level is best seen in the Weekly chart below. It has acted as a major support on 3 occasions (Sep 2011, Dec 2011 and June 2012 and almost tested as far back as Jan 2011 as well. This is generally referred to as ‘the Line in the Sand’ that the market must not cross if further substantial downside is to be avoided.
Needless to say the technical bias is bearish but what happens next is critical.
                                                                XAGUSD - Daily
                                                             XAGUSD - Weekly
 
The 3 figures below show close ups of how price reacted to this level in the 3 prior reversals. A very obvious pin reversal in Sep 2011, a less obvious pin in Dec 2011 followed by a strong close above the 8ema 2 days later and a massive bullish engulfing pattern in June 2012, later followed by sideways movement before the convincing move up which TFF participated in.
                   Sep 2011                                            Dec 2011                                      June 2012

This Friday’s candle stopped at 26.15 but made no attempt to bounce back off this ‘critical support’. This indicates that this support in unlikely to hold and further downside is to be expected. The weekly chart shows next support level is 25.00 and 22.83 below that.

Shorting at this level is not advisable, unless there was a pull back to static/dynamic resistance around 27.00/27.50 and we saw a clear price action signal to go short.
For a price action reversal signal to arise at this ‘Line in the Sand’ level we would need to see either a massive green candle early next week, forming either a Bullish Engulfing signal closing above Friday’s open of 27.65 or a Morning Star formation by Tuesday’s close in which the defining green candle would have to close above 26.90 (half way up the body of Friday’s bear candle).
An alternative reversal signal, and the one carrying the highest probability of a reversal, would be for price to keep heading down early next week, and ideally even on Monday, heavily reject lower prices forming a daily pin with a massive tail, while at the same time closing at or near 26.15 once again. In this scenario, further downside will need to be endured early on next week.
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CHARTING LEGEND:
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NB: Our MT4 charts are based on One Financial Markets data. OFM being a UK based broker run their charts off GMT (Greenwich Mean Time), so their daily candles close at 00:00 GMT. For our Daily Reports we take snapshots between 21:30-22:00 GMT to coincide with the US closes.

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