Silver Constrained by Uncertainty

The Silver market has found itself under pressure and constrained by uncertainty, affected by the economic slowdown in China and the US Federal Reserve. The result is a consolidation that could force the precious metal to find a fresh six year low.

The economic slowdown in China is causing a rout in commodities across the board and industrial metals in particular are feeling the pinch. Silver is used as a store of wealth in times of uncertainty, however, where it differs from Gold is its use in manufacturing and production. If China slows down, production will inevitably follow, and that is bad news for Silver. If the economic slowdown spreads to the rest of Asia and the West, then industrial demand for Silver could be choked off completely.

On the other hand there is the Federal Reserve. The fact that we have not had a rate rise from the Fed makes silver more attractive to investors thanks to the relative yield. Silver found a six year low in mid-August, but has since lifted on speculation that the Fed would not raise rates in September. As we saw, the Fed held, and silver charged up to a one month high, but the uncertainty constrained the precious metal. That is only likely to continue as the market speculates whether or not the Fed will raise rates at all in 2015.

Technical analysis shows Silver lifting off the six year low, creating higher lows. However, at the same time the highs are getting lower in a classic consolidation pattern. This squeeze can also be seen in the Stochastic Oscillator as it forms lower highs and higher lows in line with the price. The most recent low is right along the bottom of the pennant shape and could see another wave up towards the top.

As we continue within the shape, the likelihood of a breakout increases. The pennant is generally a continuation pattern which would suggest a bearish breakout and a resumption of the overall bearish trend in Silver. If that is the case, the recent six year low will come under extreme pressure and the support is unlikely to hold as the sentiment swings. From here, watch for resistance to be found at 14.897, 15.169 and 15.593 with the bearish trend acting as dynamic resistance. Support will be found at 14.362 and 13.957, but only after the dynamic support along the short term bullish trend has failed.