The Candlesticks Speak and Silver Shudders

The price of silver has been quite volatile over the past several years. There were times when interest in the silver market has reached manic proportions, to the point where prices exceeded $21 per ounce in March 2008. Prices collapsed on March 19 and 20, and then rose and fell in a general but broad sideways pattern which led to a runup to a high of $18.33 on May 23. However, the price bar which was left behind by that day's trading was an easily-recognizable Japanese Candlesticks "Hanging Man" pattern, which is a bearish pattern subject to confirmation by a lower close the next day; and it was also the first phase of an "Island Top," which is also a bearish warning.

The next trading day, which was May 27, did in fact produce a lower closing price, so the "Hanging Man" was confirmed. It was the depth of the decline - 83 cents - which carried even greater significance, because price action on that day formed a powerfully bearish variation on the "Evening Star" pattern and thereby foretold an even greater decline to follow. The next day after that was a very modestly "down" day; but prices declined another 113 cents today, May 29, for a total decline of about 183 cents over three trading days, which converts to $9,150. In other words, if an investor had sold one contract of July silver at the closing price on May 23 and bought it back at the closing price today, he would have earned $9,150.

The beauty of it all is that this decline was predictable. This is not brain surgery or putting a lander in a precise position on the surface of Mars. It simply involves a proper reading of the pictures which prices leave behind them as they make their way across the charts. This is not unlike a skilled physician's ability to read the lines and squiggles of an electrocardiogram. Recognition of key Candlesticks reversal patterns can lead to a very quick payday when the perfect setup appears.