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Silver and the 200-Day Moving Average.

We have a number of new subscribers who have asked to explain this average, as we do tend to mention it on a frequent basis.

There are many indicators that come together in technical analysis to give us clues as to where a particular stock or commodity is headed. One of the most popular indicators is the moving average, which can be range from 5 days to 200 plus days. Market commentators and traders have their favourites, which have previously given them warnings of a directional change that influenced an investment decision to a successful conclusion.

For a definition of a moving average we turn to who provide us with this definition:

“Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets.”

Stockcharts is well worth a visit if you are a novice, as they will help you demystify the techno babble that can be confusing.

In a nutshell the 200-day moving average is the closing price of silver for the previous 200 days added together to form a grand total, which is then divided by 200 to deduce the average figure.

Now if we take a look at the chart for silver we can see that this average is represented by the blue line and has remained fairly steady until the end of 2007 when silver took off and this average started to head north, from around $13/oz to around $15/oz. We can also see that silver has revisited the blue line on three occasions in the last nine months (without splitting hairs too much). In various articles on both gold and silver we stressed the need for caution when silver prices have raced ahead causing a large disparity between the two. We have also taken advantage of buying opportunities when this average has fallen well below the average price for silver. The point being that these aberrations usually don’t last and they come back together sooner or later.

Silver and the 200 dma 10 April 2008

As this average moves forward we can see that as of today higher numbers in the $18/oz range are being added to this average. At the front end of the chart, lower numbers, in the $13/oz range are being removed and replaced as silver rises. From this we can conclude that this average will remain in the ascendancy for some time thus adding support to the price of silver.

In the short term Silver may well head down to meet this average, however, in the longer term this average will move up and close the gap eroding the existing disparity. This upward swing will help to provide a platform from silver can rally and finish the year a lot higher than it is now.

Today we have looked at this indicator in isolation and we are aware that there are many other factors to be considered. We hope that we have answered this question and helped in a small way and that you were not too bored!

Have a good one.

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