Thursday, September 22, 2011

Q&A With The Doc: Is Silver Forming a MASSIVE Cup & Handle Formation?

Silvergood writes:

Do you see a "poor mans" cup and handle formation developing in silver?
It looks like the right side of the cup never made it high enough to fully qualify. The rest looks pretty good with a little "back-fill" at the end of the handle (volume low) as we are seeing now. Could it be good enough to break-out????

30 Year Cup in Silver
5 Year..Not Yet Completed Silver Cup

Silvergood, you are correct, silver has not completed a true cup and handle chart formation in the US dollar (on the short 5 year chart, as we'll discuss later, a MASSIVE 30 year CUP has just completed).
Could one still develop on the short term chart as well? Sure, especially as silver's action since the May correction to date has closely mirrored silver's action following the early 2008 correction, which DID produce a large cup and handle formation in the 2 years that followed. It's a little easier to see with this compressed chart.

However, if we widen our perspective outside the dollar, and view silver's charts in several other colors of toilet paper competing to make it down the drain in 1st place, we notice that Euro, Aussie $, and Canadian $ silver charts are all much closer to completing classic cup and handle formations in their 5 year charts than is USD silver. 

First, let's look at Euro silver:

The Euro silver chart above has clearly almost completed a large cup formation- whether the handle forms over the next 6 months remains to be seen.

Ditto for Canadian $ silver.  While still working on completing the right side of the cup, the formation looks headed to a classic cup.

Aussie $ silver has not yet completed a cup, but has not yet broken down and actually looks even better than the Canadian $ silver chart.

While the USD chart isn't as close to completing a large cup and handle formation as the Euro, Aussie, and Canadian silver charts, the USD silver chart remains nicely within it's beautiful 2 year up-channel.  As silver is currently nearing the bottom of this channel, (and has not yet broken down as recently stated incorrectly by Clive Maund) it looks like a good place to buy.  IF price breaks below the 2 year uptrend, we will likely see a larger correction and buying opportunity, but a professional trader will buy an asset as it nears the bottom of a long term uptrend in a major bull market, and adjust his actions and respond accordingly by increasing the size of buy orders IF/WHEN a major uptrend line is in fact broken.

Now, for the MAIN EVENT...the massive, 30 year Cup and Handle forming in silver.
Thanks to reader JBSlear of Fort Wealth Trading Co, who reminded us of the formation, as well as for the excellent chart.
This could well be the mother of all cup and handle formations, as the 30 year cup is now completed, and work on the handle begins.
Should silver work out a handle on this formation, the price target of the breakout is approximately $150-$250.