Several closely watched technical factors played a substantial role in precious metals trading last week as traders noted that increasingly bullish signals of an impending rally accumulated strength. It is our conviction that ultimately the physical market will trump paper and drive technical traders, which in term will set-off the algorithm-funds, leading to significant moves higher or as we like to frame: a return to real equilibrium.

Technical analysts pointed to a bullish potential chart pattern in silver’s price combined with a down trend line break, as well as gold’s price breaking above a key long term moving average, as supportive technical signs for the precious metals.

Furthermore, both of the recent corrective upwards trends in silver and gold prices have been reinforced by gradually increasing levels observed in their respective Relative Strength Index or RSI readings, without the rallies yet having pushed the key momentum indicator into overbought territory above the 70 level for either metal.

These observations indicate that the most recent technical rally seen in these metals since their late December lows may well have further to go.

Technical Buying Ahead of Support Sends Silver Above Important Trend Line

To start with, the price of silver continued its short term upwards trend and has managed to break — and thus far hold safely above — a significant downwards trend line that had been limiting upside price action since the intermediate peaks of September 2011.

The downwards slanting line can be drawn between the September 5th spot price peak at 43.36 and the December 8th 33.21 peak and the price action demonstrated several close tests and reversals to the downside ahead of this line before the notable break above it occurred on January 10th.

Technical analysts also noted that this trend line break was confirmed by rising trading volume observed in silver on the day of the event.

Potential Double Bottom Pattern in Silver Also Improves Technical Picture

Technical silver buying has also emerged in recent sessions due to a closely watched price reversal ahead of key support in the 26.05/15 region that could indicate the grey metal is in the process of forming a classic double bottom chart pattern with a neckline in the 35.66 region. This level also roughly corresponds to the current reading of its 200 day Moving Average.

That closely watched long term indicator — which currently reads at the $35.72 level and is showing a decidedly downward slope — still yields a bearish outlook for the grey metal. Nevertheless, a sustained break above it would improve the technical picture for silver considerably, especially due to the presence of a possible double bottom neckline in that region.

Furthermore, the computed measuring objective of a future sustained break of that double bottom neckline is $39.56 and would be projected upwards from the neckline to yield a technical target in the $45.22 region.

Gold Sustains Gains Above Key Moving Average, While Silver Still Below

Another classic bullish signal seen in the precious metals recently that has prompted significant technical buying has been the break in the price of gold above its key 200 day Moving Average. This notable bullish signal, which is further supported by a continued positive slope in the indicator, occurred initially on January 10th of this year during a supportive period of rising volume.

Although the spot gold market has since dipped below the indicator intraday, the price has thus far generally sustained gains above it on a closing basis, and the yellow metal now seems set to test a key declining trend line currently drawn at the 1688.93 level.

A break above that line would send another important bullish signal to technical traders, with a potential double bottom neckline providing subsequent resistance at the 1802.63 level supported by two key reversal lows at the 1522.55 and 1532.15 levels.

Nevertheless, silver’s spot price has yet to climb above its 200 day Moving Average that it fell sharply below in its latest managed price crash that occurred on September 22nd and 23rd of 2011.