After silver staged a dramatic false upside break in late February that whipsawed many bullish traders, the price action has since been forming what appears to be a bearish head and shoulders top pattern on the daily charts. The keyword is staged, as the decline could not have been more ‘unnatural’ from a technical standpoint, yet the nature of these moves are rarely questioned.

If this reading is eventually proven correct, the key neckline level of this pattern broke to the downside on March 14th, which may portend significantly lower silver prices in the near future, achieving the ultimate goal of not-for-profit selling that will ultimately lead to the next short-covering rally.

The nature of speculation has devolved to the extent that the pattern ‘presented’ is the one that will be followed. It is uncommon to question the nature of the mechanism which gives rise to the canvas. What follows is the pattern.

Possible Head and Shoulders Top Forming Since Late January

The price action that forms a typical head and shoulders top chart pattern is characterized by an initial peak, followed by a reaction lower that defines the neckline level, then a higher second peak, followed by another downside reaction to the neckline, and then a third peak that tops out in the region of the first peak.

In the case of silver’s recent price action since late January, the metal’s spot price first rose to peak at $34.50 on February 8th, and then declined to $32.63 by the 16th. The price subsequently rose again to hit a high point of $37.48 on the 29th, before falling to $32.46 by March 6th.

The third and final peak of silver’s possible head and shoulders pattern was seen on March 9th, when the price traded as high as $34.40.

Apparent Neckline Break on March 14th Sees Sharp Selloff

After the pattern’s final peak, the silver market then broke below the pattern’s $32.46/63 neckline region on March 14th. The downward move took the form of a sharp selloff that sent the metal as far down as the $31.61 level that day.

Based upon a classic analysis of the head and shoulder chart pattern, the measuring objective of the current move would be the vertical price distance from the neckline region to the highest peak, projected downward from the neckline’s price level.

In this case, the measuring objective calculation would yield a price target for the potential head and shoulders pattern in the $27.61 region for spot silver over the coming month or so, which would likely have the intended effect of recurrent purging of weak hands who buy into each subsequent rally.

Furthermore, an upward reaction is often seen after such pattern breaks to test the neckline level, which can present traders with a selling opportunity. Buy stops on short positions would typically be placed strategically above the neckline region.

RSI Confirms Down Move, but Volume Does Not

Although the 14-day Relative Strength Index or RSI has confirmed the move lower in silver with a series of lower lows since the $37.48 peak that forms the head of the pattern, trading volume has not been so supportive.

Typically, technical analysts will look for a head and shoulders top neckline break to occur along with a rise in daily trading volume. Nevertheless, daily trading volume actually fell when this neckline level broke on March 14th when compared to that seen on the 13th.

While the downside still beckons for silver near term, given the numerous false technical breakouts seen in silver lately, this volume decrease could be sending a cautionary signal to silver bears or the final green light for the next short-covering rally.