Potential Silver Cup and Handle

Metals Momentum 

With non farm payroll numbers coming out slightly better than expected on Friday and the unemployment rate dropping by 0.2%, we saw a slight pullback in the price of precious metals. This begins what could potentially be the "handle" of a "cup and handle," an extremely bullish formation. First, let's examine the definition of a cup and handle before looking at the current silver chart. The fine people at investopedia.com do an excellent job of defining a cup and handle:

http://www.investopedia.com/terms/c/cupandhandle.asp

Definition of a cup and handle:

A pattern on bar charts resembling a cup with a handle. The cup is in the shape of a "U" and the handle has a slight downward drift. The right-hand side of the pattern has low trading volume. It can be as short as seven weeks and as long as 65 weeks.

As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for four days to four weeks... then it takes off. Below is an example of a cup and handle chart pattern:

Investopedia explains 'Cup and Handle'

A couple points on trying to detect cup and handles:   Length - Generally, cups with longer and more "U" shaped bottoms, the stronger the signal. Avoid cups with a sharp "V" bottoms.    Depth - Ideally, the cup should not be too deep. Also, avoid handles which are too deep since the handles should form in the top half of the cup pattern.    Volume - Volume should dry up on the decline and remain lower than average in the base of the bowl. It should then increase when the stock finally starts to make its move back up to test the old high.    Retest (of old high) - doesn't have touch or come within a few ticks of old high. However, the further the top of the handle is away from the highs, the more significant the breakout needs to be.

While this definition given by investopedia.com  uses a stock chart for their example, I believe that all charting patterns are relative whether it's a stock, commodity, currency, or any free trading open market. A chart is a chart is a chart.

Let's take a look at Silver's potential cups:

chart provided by kitco.com

I've drawn the two cups I see forming. The smaller one looks a little better formed. If a true cup and handle is forming here, look for continued price sell-off going into next week. Support could come anywhere in this range of $30 - $33/oz, but gut instinct tells me that if it is indeed forming a handle, support will be found somewhere between $32 - $33/oz. 

I maintain my position that no new positions should be opened until there is confirmation of a breakout, but if you're feeling adventurous, it might be worth the risk to open a small percentage of your new long positions when/if silver finds support in this trading range and begins moving up. The more conservative approach would be to wait until there is a confirmed breakout over $34 (the lip of the cup) or the even more prudent move would be to wait until silver is over major resistance of $35. You may be a little late to the party by waiting, but if this formation comes to fruition, chances are there will be a fairly decent percentage move to the upside and a new trading range established at higher prices. As with any trade, it's always a good idea to put in a stop loss. Actual price points of stop losses should vary depending on your entry point.

All technical patterns are sort of self fulfilling prophesies. In other words, we cannot say that it is true cup and handle until the pattern completes and the market begins it's breakout over resistance. I'm just as prepared to reopen shorts if the market confirms breakout below range support at $30/oz again. No one knows for sure whether the market is going to go up or down, it's just a good idea to have a plan either way. Best of Luck!

-AJL

Adam Laigo

Semper Pacific Wealth Strategies

metalsmomentum@gmail.com

Twitter: @PrcsMtlsGuy