Silver price vs Dow technical analysis: Divergence

Divergence between Silver price vs Dow since October 2011

Since early 2000s, silver price versus the Dow Jones Industrial Average has shown remarkable positive correlation i.e. when Dow up, silver up. However this correlation appears to have ended at the end of September 2011. Is this shift permanent or a divergence only?

XAG vs Dow chart

Silver price is represented by the black line in this chart

Silver investors speculate quantitative easing will create hyperinflation

This is why besides the commodity boom since the early 2000s, silver price vs Dow has also shown remarkable correlation once the Fed started quantitative easing. During QE1 and QE2, silver prices rallied together with the movement of the Dow index. Both peaked before QE2 was over. But something changed then. When the Dow bottomed and picked up again from October 2011, price of silver did not.

At first, investors thought it was a consolidation. ‘The rally will come soon’ must be on the mind of many silver bulls. Unfortunately the divergence is now obvious for all to see.


How will this divergence in silver price vs Dow turn out?

There are three possibilities that I can think of:

The long term correlation is over

Whatever reason may be, each will follow their own technical direction from now on. If so, silver price has broken the lows of the past two years and short term-wise is clearly on its way down. However we may see relief and support at around $19.75, hopefully a resistance (2008 high) turn support.

Today’s silver price action near to 19.75 looks remarkably like an exhaustion move and reinforces the likelihood of finding support here. We have to observe price action at this level the next few days to draw conclusion.

Silver daily chart


Correlation between the two is not over

  1. Silver is doing its own consolidation. Likely support could be high of 2008 at around $19.75. The current movement is a retracement driven by a mix of profit taking by weak bulls, sellers speculating that silver is over-bought, weak long-side speculators being stopped. After consolidation, price of silver will catch up with the Dow on its way up.
  2. The Dow is lagging, over-bought and is due for its own correction soon.


As long as the correlation between both is not terminally broken, one has to catch up with the other very soon.

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