Silver Futures Trading

Trendlines, Oscillators and Fibonacci

While the pullback since early December was widely anticipated, due to easily identifiable price-momentum divergences, it has apparently ended in abrupt fashion, by way of this week’s wide-range, bullish reversal bar. With accelerating trend lines firmly in place and fresh oscillator buy signals being flashed, Silver should have little trouble adding a dollar or two to its current price before stalling out again. There are two main factors that lead me to that conclusion:

1. Every time the StochRSI indicator (a hybrid indicator combining aspects of both the Stochastic and RSI indicators) has made a bullish cross above its lower signal line during a confirmed uptrend (an up trending market being characterized by a series of higher highs and higher lows, as is currently the case in weekly Silver), price has rallied to a noticeable degree; note the four red circles near the bottom of the chart to witness the StochRSI’s follow-through toward (and then beyond) its upper signal line during two recent bullish phases in weekly Silver. The price bars have been shaded green to highlight the price gains made in the aftermath of each bullish crossover, and every benefit of the doubt should be given to this new signal, too.

2. The second tip-off that Silver may have enough of a fire burning beneath it to get it moving higher is the fact that it appears ready to cross and then possibly close above the 79% Fibonacci retracement level at $18.50. Silver exceeded this price in early December, but failed to close above it on a weekly basis, so this would be a very bullish development indeed. The main sub -100% Fib levels are 23.4%, 38.2%, 50%, 61.2% and 78.6%, and if a stock or commodity can successfully retrace more than 78.6% on a closing basis, the odds are pretty good that a full 100% retracement will eventually be seen. Fib experts also know that prices will frequently reach one level (in this case, 78.6%) before briefly pulling back to the next lower level (61.8%) before continuing higher. Last week’s reversal bar turned higher just above the 61.8% Fib retracement level of the March 2008- October 2008 sell off, and is now just 5 cents shy of the 78.6% level.

3. On the fundamental side of the equation, Large Speculators (hedge funds) are still carrying substantial amount of long exposure in Silver futures; while not at the record-breaking quantities seen a few months ago, it still is suggestive of massive hedge fund bullishness in the white metal. Of course, the Commercial interests are still carrying extremely large short positions, so expect plenty of tug-of-war price action as each rally of sell off ensues.

Sell a Put.

Here’s a simple, easy to comprehend trade that almost anyone with a futures margin account could qualify for – selling a March 2010 Silver put option with a $15.50 strike price. The put recently settled at $.051, or $255 before commissions. With an expiration date of February 23, 2010, there are only 44 calendar days remaining on this one, and the odds are excellent that this particular put will expire out-of-the-money (OTM) at options expiration.

If you glance back at the chart you’ll see the long (lower) blue dashed trend line; this may be a very tough support level (currently at about $15.70) for Silver to crash through within the next 44 days, especially given all of the bullish factors previously discussed. All in all, this could be a great way to pick up some cash, cash that the market is almost begging somebody to take. Consider selling the put for $.050 or better and then wait for either the option to expire worthless or to double in price, at which point you’d buy it back for a small loss. Keep a close eye on the two trend lines for sharp breaks lower during the lifespan of the trade, as they are your two most valuable tools in helping keep you on the right side of this otherwise low-risk option sale setup. More timid traders might even consider closing the trade out early, say, if the option’s value declines to $.020 of less. Sometimes, when trading the futures markets, it’s better to settle for ‘most of it’ rather than demand the market to give you ‘all of it’ and then ending up with ‘none of it.’

That’s certainly something to ponder should you decide to take this otherwise very attractive put option sale in March Silver. Stay tuned for more developments in Silver, Gold and the US Dollar as they unfold, right here; 2010 may turn out to be one of the most exciting and volatile years in recent market history, offering well-educated traders and investors the opportunity to capitalize on prime trade setups.

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By Donald W. Pendergast Jr.
Contributing Market Analyst
www.EtfTradingPartner.com

Gold Trend

On December 22, March Gold made a major cycle low on its 78-minute chart at $1,075.20 (See point ‘A’ on the chart. Yes, ‘78’ is close to a significant Fibonacci ratio) and then began to slowly reverse higher. The spread between the 50- and 200-period exponential moving averages (EMA’s) was near an extreme at the time of the dead low but have begun to progressively narrow since then. Along with the narrowing spread (which typically indicates a period of price consolidation), March Gold also managed to make a higher swing low (point ‘B’ on the chart) on December 30, 2009. This higher swing low also permitted the plotting of a major uptrend line (gold dashed line), one that will be a wonderful trend-determining assist for both intraday and daily-based swing traders in the days and weeks to come.

Higher Lows
Once the first higher low was made (which was also a cycle low) at point ‘B,’ prices accelerated higher, bouncing back lower after colliding with the 200-period EMA (pink rectangle) before forming yet another higher swing low. Not surprisingly, this fresh 78-minute swing low has allowed us to plot a slightly more aggressive uptrend line (blue dashed line), which, if it should hold, is a prime clue that Gold intends to meet and then likely exceed the 200-day EMA (currently near $1,106) on a close. As most technicians know, a close above the 200-period EMA is a bullish development, and one that a zillion traders and money managers use to determine the long-term trend for a given time frame. Additionally, if the 50-period EMA (red line) crosses above the 200-period EMA (blue line) a second bullish confirmation occurs, one known as a ‘Golden Cross.’ Traders frequently wait for a pullback toward the 50-period EMA after such a crossover to initiate new long positions. Should we see this crossover occur, that might also be an excellent way to help time a series of daily or intraday (60 or 78 minute) swing trade(s), looking for Gold to move higher into significant Fibonacci resistance.

Are We Positive?
Volume analysis can be accomplished by using both the Positive Volume index (PVI) and the Negative Volume index ([NVI] they’re plotted in the lower panels of the chart). Using a 34-period EMA to track the trend of each index, we find that Gold has been rising steadily on negative (lower) volume even as it’s been move sideways to slightly higher on bars with positive (higher) volume. Typically, this is a pattern seen in the early stages of accumulation, and the real tip-off that Gold intends to bust above the 78-minute 200—period EMA will be when both the PVI and NVI are both moving higher, with each index above its respective 34-period EMA.

Resistance Levels
Based on the high at $1227.50 (December 2, 2009) and the major low of $1,075.20 (December 22,2009) and the intermediate swing highs made in between, major Fibonacci resistance appears at $1,134.40 and $1,134.90. This is a combined Fib 38.2% and 61.8% confluence area, one that will almost surely act as a powerful resistance and/or reversal area in this time frame. Bear in mind that $1,135.00 is likely a maximum retracement area, and price may stall well below that area, possibly around the $1,120-$1,125 area. OK, so how to play this anticipated swing move up in March Gold?

Golden Cross
One idea might be to wait for a Golden Cross to occur and try to enter long on a retracement back to the 78-minute 50-period EMA. Then, simply stay with the trade until you see a close below the 50-period EMA. More aggressive traders might try to jump in on a buy stop entry just above $1,097.10, using the fresh blue trend line as an initial stop (about $1,095.50) with a price target of $1,104.00 to $1,105.00, just shy of the 200-day EMA. Trailing a 3-bar stop of the 78-minute lows could also be a simple way to lock in any gains that may accrue; some traders might also want to take half profits near the 200-day EMA as a safety precaution, ‘just in case.’

Down Cycles in Force
What happens should Gold make it back up to $1,135.00, anyway? Well, who really knows? Our best guide is our arsenal of intraday, daily, weekly and monthly charts, learning to rely on the ample amounts of data that they continuously provide us with. However, from the standpoint of the higher time frame price cycles, Gold is still likely to move lower from such a run up to major Fib resistance, as both the weekly and monthly price cycles are still in heavy ‘down’ mode. Ultimately, if $1,050-$1,070 fails on a retest, expect a move back down toward the upper $970 to $990 area before major support kicks in and the major uptrend resumes. Keep watching your charts and make sure you’re trading in the direction of the trend, no matter what time frame you prefer to engage the Gold market in.

Until next time, good trading and a blessed New Year to you!

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By Donald W. Pendergast Jr
Contributing Analyst
www.ETFTradingPartner.com

Silver Trends

Negative divergence
During the course of Silver’s recent year-long uptrend, prices covered a lot of ground, rising steadily from a low of $8.78 all the way back up to $19.42, which was surely good news for those convinced of a long term, secular bull market in the white metal. However, when we examine the money flow on the monthly chart, it becomes clear that Silver has been losing steam for some time now. Notice how negative the slope of the 34-month Chaikin Money flow (CMF) (34) is compared to the bullish price action since last December; this is known as a bearish divergence, one that will usually resolve itself by following through with a noticeable decline in prices. Additionally, take a glance at the current configuration of the StochRSI indicator (in the horizontal panel beneath the price bars); it’s very close to a bearish signal line crossover (see the upper red line). Taken together, this combination of money flow and momentum/cyclical confirmation paints a fairly convincing picture that Silver is likely due for more declines in the months ahead.

Battle of the Titans
Of course, there are additional factors to consider in the Silver market, and an equally negative fundamental factor is the current posture of the commercial and large speculator (hedge funds) positions in the Silver futures market – the commercials are still heavily net short even as the large specs are net long. Large speculators typically employ trend-following systems and methodologies in order to enter/exit the commodities markets that they trade, and it seems clear that they are still believers that Silver’s intermediate-term uptrend still has legs. The commercials aren’t buying that (pardon pun), at least not in large quantities, and seem more intent on keeping some powder dry so as to enable the scaling in of fresh long positions as Silver begins a widely-anticipated corrective move back down toward major support between $15.82 and $15.42.

Technical support for Silver comes in strong in the price zone between $15.42 and $15.82 and then down between $13.50 and $14.00, but daily-based traders might very well find that a decline into the mid-$15s will create some attractive short-term swing trading ops.

Even better, right now you can sell an out-of the money March 2010 Silver $21 call option for more than $500; should Silver reach the mid-$15s during the next month, the value of the option will lose substantial amounts of value and could probably be bought back for a fraction of the sale price. Given the lopsided standoff in the futures market between the commercials and the large specs, this could be a very attractive, fairly low-risk play for those who’d prefer not to trade futures contracts in this market.

Bottom line:
Initiating fresh long positions in the Silver market right now is probably not the best play, given the likelihood of a major A-B-C corrective pattern developing on this commodity’s daily chart. The down wave ‘A’ has already occurred (the drop from $19.42 to $16.80), the ‘B’ wave up is still in progress and all that’s needed now is something to trigger the selling that should start a noticeable ‘C’ wave down toward major support in the upper to mid $15s. The next few weeks should be very interesting in the precious metals market, so stay tuned for more updates as situations evolve.

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By Donald W. Pendergast Jr.
Contributing Market Analyst
www.ETFTradingPartner.com

Sometimes, as traders, we need to stop and do a double-take, especially when a long-depressed commodity or currency suddenly begins to rise sharply. In the case of the US Dollar index (DX), there were most likely thousands of double-takes, as disbelieving traders took a second, third and even a fourth glance at this key currency’s daily and weekly charts. Yes, this Dollar breakout appears to be the real deal, one destined to run even higher in the weeks just ahead, and it might pay for us to invest a little time now and see if we can anticipate the Dollar’s next area of significant overhead resistance. Doing so might even help those of us who plan to re-enter the Gold market (on a cash, ETF or futures contract basis), hoping for a short-term bounce higher when the Dollar eventually meets up with more formidable resistance. Let’s have a look at the weekly chart of the continuous US Dollar Index futures contract (traded on the ICE exchange) to see what technical clues are being offered to us right now.

US Dollar index

The Dollar break seems to be carrying all of the proper technical credentials that might allow it to morph into a major trend reversal (at some point), Here are a few of them:

1. The weekly relative strength indicator (RSI (14)) is rising at a very sharp angle of attack and is just a little below the 60 level; should it increase beyond 60, it would be a substantial confirmation of a strong weekly trend. Notice how the RSI was also manifesting a minor bullish price/momentum divergence prior to the Dollar’s turn higher.

2. Since we all know that the price of the Dollar Index generally moves inversely to the price of Gold, the fact that Gold was anticipated to meet up with very strong weekly and monthly resistance near $1,200 (before plunging by more than $100 over the past two weeks) also offered additional confirmation to this recent Dollar up thrust

3. Notice how the Dollar Index formed a minor double bottom pattern during early-to-mid 2008 (1B and 2B on the chart) before mounting a strong bear market rally as the 2008’s giant commodity bubble was disintegrating. Now look at the price level of the recent Dollar Index low at about $74.21, which is nearly $4 higher than the dead low made during 2008’s double bottom. This means that a higher low has just printed, which is also adding a substantial amount of bullish fuel to this Dollar rally, especially since an up trend is, by definition, characterized by a series of higher highs and higher lows.

4. Trader/investor sentiment in the Gold futures market (as interpreted by way of recent Commitment of Trader (COT reports, put out by the CFTC every week) had been exceedingly (and unrealistically) bullish among large speculators (hedge funds) and small traders, suggesting that a significant correction was imminent. Not surprisingly, the exact opposite situation existed in the US Dollar Index’s COT sentiment interpretation – the large speculators had only just begun to acquire fresh long Dollar positions, meaning that the stage was being set for a complete ‘about face’ in both of these critical investment/commodity markets.

Presently, the Dollar Index appears to be making a beeline toward the major resistance zone near $80.50, a full $3.20 above its current reading of $78.195. This is an important area of resistance ‘confluence,’ meaning that two or more technical tools are in agreement that a particular time/price area should act as a support/resistance (S/R) barrier. Those two indicators include the Fibonacci 38% retracement of the major March 2009 thru November 2009 downswing and the Keltner band mid-line (white curved line), which happens to be a 45-week exponential moving average (EMA). Reasonably, we can expect to see the DX at least pause and rest near that resistance, but only time will tell if that will initiate a correction or a period of sideways consolidation before continuing higher. Gold bulls should monitor for strong areas of support in Gold (1090 –1070 on the weekly time frame) if the DX reaches $80-$81, looking for possible daily-based long swing trade setups in the yellow metal.

The broad US markets are also very vulnerable to a substantial decline of their own, given that the S&P 500 index has been moving inversely to the Dollar index for the past nine months or so. Should this inverse correlation continue, and the Dollar index keeps on rising, savvy traders might start to investigate the possibility of shorting the weakest stocks from the weakest market sectors in the S&P 500 or Russell 2000 indexes.

Long-term, the abysmal fundamental outlook for the US Dollar don’t seem likely to get much better, at least not until the flood of deficit spending is brought under some semblance of control. However, the US Dollar has already experienced two powerful bear market rallies since early 2005, and this current move certainly looks like it has the makings of rally number three. It should be a very interesting New Year for both Dollar and Gold Bulls!

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By Donald W. Pendergast Jr.
www.ETFTradingPartner.com

Author bio:
Donald was born in New York, NY and has been trading and investing since 1979. He has written numerous trade system and educational articles for Technical Analysis of Stocks and Commodities magazine and more than 240 articles for their sister publication, Traders.com Advantage. He actively trades the US futures, stock and options markets using a variety of discretionary trading methods and has been developing mechanical stock trading systems since 1999.

12.13.09
So, we’ve seen a substantial correction in the Gold market over the past couple of weeks, and that means that Gold is now ready to rocket higher to fresh highs, isn’t it? Probably not, at least not right away, and patient and wise traders/investors will want to wait a bit to see what Gold does as it interacts with any number of key support levels. Let’s take a closer look, hoping to ascertain when/where this current downdraft might expect to meet up with major support.

Gold Weekly Chart

1. Metastock v.11
2. Metastock Profitunity (Bill Williams) expert advisor

The weekly chart of cash Gold suggests that the fresh wave of selling, although getting close to significant daily chart support (near 1100-1100), is very likely to keep heading south toward the more significant weekly support levels depicted on the chart above. Here are some of the key technical highlights:

1. The Parabolic Stop and Reverse system (J. Welles Wilder’s famed ‘ParaSar’ system), although still in ‘long’ mode, is getting precariously close to a stop and reverse (to short) signal (see the trailing string of ParaSar dots beneath the price bars). If it does go into short mode, existing speculative longs should consider closing their positions ASAP.
2. The spread between the 21- and 50-month exponential moving averages (EMA’s) is flattening out for the first time in nearly five months, confirming the loss of upside momentum.
3. The recent Commitment of Traders report from the CFTC suggests that commercial interests in the Gold futures market are still heavily short even as the large speculators (hedge funds and the like) are still overwhelmingly long. The action on the price chart means essentially one thing – the commercials are selling the large specs all the Gold they can handle, hoping to cover their short positions at lower prices in the weeks and months to come.

The Path of Least Resistance

While it is true that a market that has completed a move from $700 to $1,200 in the course of a year should be given every benefit of the doubt, the odds strongly suggest that the path of least resistance – given all of the aspects discussed above – in the Gold market remains toward lower prices. As shown on the chart, the next major confluence area of chart support, Fibonacci support and EMA support all converge near the area of 1070 to 1050. At that price zone we find the 50% Fib retracement of the July 2009 to December 2009 weekly upswing, along with the October 2009 swing highs (former resistance which may provide future support). Finally, we also find that the 21-month EMA also coincides with the same support zone. In other words, expect to see major weekly support near 1070-1050, followed by a tradable bounce on the daily time frame. I’ve taken the liberty of drawing a hypothetical ‘A-B-C’ corrective wave (purple zigzag line on chart), one that may be proportional to the size of the major up thrust that preceded it. While no one knows exactly how this correction will play out, this ‘projection’ of how prices may respond might help keep trader’s focus on the importance of keeping on the right side of this highly volatile market.

Finally, there is also a very strong support area spanning the range from 979 to 990; this one is also characterized by another ‘three-fold cord’ (which cannot be easily broken) comprised of the 79% Fibonacci retracement, the 50-month EMA and the September 2009 swing low. This could be a vital support area for Gold – a significant breach beneath it could really unleash a tidal wave of mindless selling that could take months to repair. Essentially, traders need to see how Gold responds as it meets the first support barrier (1070 to 1050); some questions they need to consider are these:

How far does Gold retrace the plunge from $1,215 before falling lower again? And if Gold moves sharply lower from the initial support level (1070 to 1050) down toward the sub-$1,000 level, just how panicked are the sellers as they unload their long holdings? Are the commercials eagerly scooping up Gold from these discouraged longs or are they waiting for more opportune prices at which to rebuild their long positions?

The current bottom line in cash Gold:

Expect a decline toward 1070-1050 before seeing a tradable daily-based long swing setup appear. Existing speculative long Gold positions should be closed out if the weekly ParaSar system goes into short mode. Aggressive traders might even attempt to go short on any bounces higher on daily and/or 30-60 minute intraday charts. If we see an eventual drop toward the lower support area of 990-970, those seeking to acquire more Gold for their long-term ‘core’ position might find that to be an especially attractive area in which to initiate further purchases.

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By Donald W. Pendergast Jr.
Technical Market Analyst

12.5.09
Wow – what a week it was in the world of Gold! After charging above $1,200 on the front-month futures contract earlier in the week, Gold finally finished the week on a very weak note, closing below $1,150, which was right above the low established a week earlier in the wake of the Dubai debt debacle. Clearly, Gold is beginning a trend reversal on a daily-based time frame, but the technical picture is less clear over the long-term. Let’s examine a weekly chart for GLD (one of the financial instruments that holds actual Gold) to get a better fix on what might be expected in this volatile market over the next month or so.

GLD ETF Trading

Before going any further, I must admit to being a Gold Bug, having been afflicted with this wonderful malady for many years – including the time period prior to the recent bull run in Gold from 2001-present. Long-term, and given the abysmal long-term outlook for the US Dollar (and all fiat currencies for that matter), declining mine production (most of the high-quality, easier to mine deposits are used up already) and greater awareness among investors regarding the inclusion of Gold in their portfolios, I believe that Gold will easily make it to $2,500 to $3,000 at some point in the next five years, despite several massive sell-offs along the way to the eventual summit. However, in the here and now, we need to also rely on our charts, technical indicators and COT futures market data (Commitment of Traders report, published weekly by the CFTC) in order to minimize losses and maximize gains by waiting for more opportune times to add to long-term holdings of Gold and/or to capitalize on high probability, short-term moves (up and down) that will likely commence from solid support/resistance (S/R) levels in the weeks ahead.
OK, now on to what the weekly chart of GLD is telegraphing to astute traders and investors here:

1. $1,200 was a key Fibonacci extension/Keltner Band resistance area on both a weekly and monthly time frame; major turbulence was expected well in advance – thus the recent tumble came as no surprise to experienced technical traders.

2. Note this week’s wide-range weekly reversal candle, one that printed on extremely heavy volume (see circle at bottom of chart); this is a major reversal signal, especially for daily-based traders, coming in the wake of such a high profile resistance barrier($1,200).

3. Look now at the short-term and long-term money flows (lower portion of the chart); both of the Chaikin money flow indicators (CMF)(34) and (CMF)(144) are revealing pronounced negative divergences with the actual price trends of GLD, which means that the raw fuel (money flowing into GLD and Gold) needed to drive Gold higher is beginning to dry up – for the time being.

OK, so what? What’s a trader and/or investor to do now, given this information? Well, if you’re a long-term Gold Bug, simply hold your core investment positions for the long-haul; that $100+ trillion US national debt/unfunded liability problem ain’t paid off just yet (and likely will never be), so the future for Gold has never looked better, especially for those wishing to diversify out of the Greenback. Let this corrective move play out and trhen consider adding more at lower price levels – $1,050 might be one such a price zone, which happens to be the current 21-week exponential moving average (EMA) price for cash Gold. For those investing via shares in GLD, the area near $104 also coincides with its own 21-week EMA. More cautious investors might wait for a move lower toward the 50-week EMA, which comes in at about $96 for GLD and $975 for cash Gold. The 21- and 50-week EMA’s acts as strong S/R barriers in nearly every kind of market, and Gold is no exception, so you may wish to do further analysis to see if adding on at those particular price areas makes sense for your financial situation.

Traders can be a bit more aggressive; expect to see some sort of a reaction move higher once GLD/Gold hit their 21-week EMA (green box on the chart shows the likely time/price zone in which to anticipate a reversal higher)– this will most likely be a high-probability swing trade play, one that also needs to have a logical stop loss and profit target as well. Daily-based traders can do the same thing – plan on on the 21-day EMA offering some sort of a floor from which a short-term tradable bounce will commence. But be very nimble, with firm stop-loss and profit targets in place before you enter the trade.

Yes, this is a real correction in Gold, but no one really knows how far the price might fall. Even the strongest bull markets need to pause and correct before moving higher, and perhaps this is the case with the Gold market right now. We should know more as the weeks ahead play out; as always, use common sense, be patient and learn to focus on what the charts and long-term fundamental factors are saying, rather than giving in to fear, doubt or the opinions of those who may not have your best interests in mind.

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By Donald W. Pendergast Jr.
Market Analyst
www.ETFTradingPartner.com

Well, the long-expected retest and subsequent breakout of ‘$1,000 Gold’ has finally occurred, with the rally taking the cash price of the metal to the north side of the $1,100 per ounce level in relatively short order. The big question now, of course, is this – does Gold have enough investor interest behind it to push it to the next significant price level, $1,200? Let’s examine a long-term chart for cash Gold to see if we can find out if Gold can reach that price target before correcting again.

Spot Gold Trading

All told, there isn’t much on this chart that a Goldbug wouldn’t like to see; the trend is moving higher (as in a series of higher highs and higher lows), price is accelerating up and away from the 12-month exponential moving average (EMA), the spread between the 12-month and 50-month EMA’s is rising and the 50-month EMA is also rising. A trend that is exhibiting such upward momentum should be given every benefit of the doubt, meaning that those who are naive enough to attempt to call a ‘top’ in the Gold market at this juncture should re-examine their assumptions regarding the nature of strongly trending markets. Not that we can’t make an estimated guess at to where Gold might want to reverse and correct (a perfectly normal occurrence in every bull market), but to make weighty pronouncements that Gold must go so high and no higher, might be a bit absurd, given the moves that this metal can and does make from time to time.

However, there are various technical tools that we can employ to see just where statistical overhead resistance may reside. One simple tool is called a Fibonacci extension ratio; market technicians long ago observed that many markets will reverse/correct at the 127%, 162%, 200% and 262% extension level of any significant prior A-B swing move. For example, in the case of Gold, it made a high in March 2008 at $1,011 and then corrected lower in one major swing move down to $713 in October 2008. If we label the March 2008 swing high as ‘A’ and the October 2008 swing low as ‘B’, we simply measure the size of that A-B swing to project where the terminus of the current swing (‘C’) may eventually be. All major charting packages offer this useful tool, and, when we plot it on our chart (omitted here for the sake of clarity) we see that the Fib 127% extension of swing A-B has already been exceeded by a price of more than $16 per ounce. That’s a pretty good indication that we should expect to see Gold power up to the next significant Fib extension ratio of 162%, which happens to be near $1,200 per ounce. Interestingly, the extreme upper Keltner band (not shown) is also near $1,200 at the time of this writing, and it will be fascinating to see how Gold reacts if and when it reaches $1,200 on this particular trend thrust. I have seen multiple cases in which Fib extension/Keltner band confluence act as powerful support or resistance barriers in any number of stocks and commodities, and Gold may also react strongly should it hit both of these powerful resistance areas at about the same time.

Finally, there is another way to measure the statistical likelihood that a trend move is ready to exhaust itself; at the top of the chart, the ‘EmaRat’ (short for EMA Ratio) indicator offers a way to measure the spread between two key EMA’s – the short-term 12-period EMA and the intermediate-term 50-period EMA. When the spread rises to (or exceeds) historically high levels, traders are advised to either run much closer stops on long positions or to prepare for a corrective move lower in which to initiate short counter-trend positions. Presently, the spread has a ways to go before it can rise to historically high levels; the horizontal blue lines indicate the high level reached by the EmaRat indicator on each of the last two price spikes in Gold; even using conservative estimates, if the indicator makes it to the lower blue line (a 1.27 to 1 ratio between the 12 and 50-period EMA’s), Gold should be very close to $1,200 per ounce. And if the upper blue line (a 1.32 to 1 ratio between the 12 and 50-period EMA’s) is reached and/or exceeded, Gold could rise to an even higher price, perhaps to $1,250 or even $1,300 per ounce.

A parting thought for Gold bugs:

All of us truly believe that Gold is destined for much higher prices in the years to come, of that there can be little or no doubt. However, don’t let your long-term belief system cause you to freeze up, unable to take some logical profits off the table, should this thrust in Gold actually reach $1,200 or even $1,300 an ounce. Be aware that commercial interests are holding extremely large short positions in the Gold futures market right now, and be sure to use stops just in case a sudden round of selling begins to overwhelm the current uptrend in Gold. We all remember what happened in 2008, and I doubt that any of us want to get sideswiped like that again. A word to the wise should be sufficient.

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Mark Brown

Everyone would agree – the broad markets have made an astounding turnaround in 2009, with the S&P 500 index up as much as 65% from the March 2009 lows to the recent highs made just a few days ago. Hopefully, you’ve been able to profit handsomely as the market reversed from bear to bull mode, but if not, don’t despair – the broad market is made up of many sectors and industry groups, some of which are on an even hotter bull market rampage than the S&P 500. Hard to believe? Take a look at the charts below for proof positive:

Silver Stock Index Weekly Chart

Custom Index
This is a custom silver stock index, one comprised of many of the major players in the primary silver mining industry, names such as Buenaventura (BVN), Coeur d’Alene (CDE), Hecla (HL), Mag Silver (MVG), Pan American Silver (PAAS), Silver Wheaton (SLW) and Silver Standard Resources (SSRI). It’s a simple price-weighted index, one designed to give precious metals equity traders an easy way to track the dominant trends in this highly volatile and frequently profitable industry group. The index made a major, enduring low in late October 2008, bottoming out at $5.27. Just a couple of weeks ago, this index reached nearly $20.00, topping out (for the time being) at $19.85. For those who love interesting statistics, that’s a gain from trough to peak of about 277% in less than 12 months. Even better, one of the index components, BVN, has an annual dividend yield of .29%, adding a few extra dollars of profit for long-term holders of the stock.

The trend of the index is clearly ‘up’, as the blue up trend line plainly demonstrates, and until this particular line is violated on a weekly close, this powerful uptrend should be given every benefit of the doubt. In fact, should the index approach the uptrend line, a significant new buying opportunity may present itself to traders who believe in the long-term prospects for Silver and its related mining shares.

Now, let’s take a look at the S&P 500 weekly chart to compare the two charts:

SP 500 Index Weekly Chart

Good Returns vs. Great Returns – It’s Your Call
Sure, it’s a great looking chart, and it’s not likely that anyone would complain about a 65% gain in less than eight months, but wouldn’t you rather have had the bulk of your money in the sectors and industry groups that were actually outperforming the S&P 500?
With your money in the silver stock index (spread equally across all seven component stocks), you would have increased your money at a rate three times faster than the return generated by the S&P 500 index – for an average gain of nearly 24% per month since October 31, 2008. And while no one knows what the future holds for the broad market indexes or for the seven silver stocks in the index, we do know that industry groups that outperform the broad market tend to continue to outperform. Further, we also know that both Gold and Silver are in major primary bull markets, the likes of which have not been seen in a generation, and that Gold and Silver mining shares typically increase in price at a rate that is usually 200-400% greater than the gains posted by physical (real coins, bullion and bars) Gold and Silver.

Joe Average or Savvy Investor/Trader

So, the choice is yours; you can continue to plow money into an S&P 500 index fund and settle for ‘average’ returns, or you can monitor the various stock sectors and industry groups to determine which are outperforming the S&P 500 index and reap profits that are consistently better that the broad market indexes. And right now, the stocks in the silver mining industry group are among the hottest of all, far outperforming all of the major US stock indexes by a wide margin.

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For more than two hundred years, the average of the Gold/Silver price ratio has been about 30 to 1, and more recently (since 1997) the ratio has been averaging about 60 to 1. The ratio simply means that it would take about sixty ounces of Silver to equal the value of one ounce of Gold. Interestingly, as of today (10.15.09), the ratio stands at 59.27, very close to the average ratio of the last twelve years. Let’s look at a price chart that covers that dozen-year period and see if we can’t make an educated decision about the probable direction for this critical ratio, and, while we’re at it, also seek to determine how to profit from the current trend in the Gold/Silver ratio.

Gold Silver Ratio Trading - CLICK TO ENLARGE

Graphic credit: Metastock v. 11

A Ratio in a Range

If you’ve been an investor and/or trader for any length of time, you’ve probably heard the term ‘go with the trend’ on more than one occasion. And, generally speaking, the ‘easiest’ (although successful trading and investing is likely to be the hardest ‘easy’ money you’ll ever make) times to turn a profit in the financial and commodity markets is to get on board a strong trending move during a periodic pullback against such a trend, letting a continuation move of the trend progressively increase the value of your investment. Now look at the chart above, one that depicts the monthly Gold/Silver ratio (cash price basis) since 1997. One of the most obvious features of this chart is the strong upper resistance line that connects the three most recent swing highs. The line encompasses the range from 83 up to 85 and suggests that this is the upper level for the Gold to Silver ratio, barring some unforeseen change in the fundamental characteristics of these individual metals markets. Now look at the lower portion of the chart and witness the strong area of support that exists between 43 and 45; a blue support line connects the two recent swing lows, suggesting that the ratio may indeed find solid support in that general range, should it continue to keep falling. For whatever reason, once these Gold/Silver ratio swings commence, they tend to keep going until they hit the prior area of strong support/resistance. Perhaps the current downswing will also follow suit, dropping back down toward the 45-43 area, which could be a major boon to Silver traders and investors everywhere.

Powerful Downswing in Motion

If you will, direct your attention now to the individual price swings, all of which have been highlighted with either a gold arrow for ‘up’ or a red arrow for ‘down.’ Note how that once a swing move (up or down) begins, it typically carries forward with a great deal of momentum, with most moves lasting from one to three years. The last complete downswing took nearly three years to complete, with the ratio declining from 84 all the way down to 44 – nearly a 50% decline. If you’ll recall, this was the period when Silver began a massive, multi-year bull move from a sub-$5 breakout pattern, and, even though Gold was also rising in tandem with the white metal, Silver’s move higher was far more dramatic in percentage terms. Now, shift your gaze over to the right side of the chart (also know as the ‘hard right edge’) and note the powerful downswing already in motion in the ratio; it’s already declined from 85 to 59 and with the same kind of intensity previously seen in prior downswings. If the length/duration of past swings continues to be applicable to this latest thrust lower, we may very well expect to see the Gold/Silver ratio test that lower support line within the next six to twelve months. And if the ratio completely breaks down, bursting below 43 on a monthly close, we might actually witness a new attempt of the ratio to drop down toward the long-term historical ratio of about 30 to 1. Clearly, in such a case, it would be far better to own greater amounts of Silver and the shares of Silver mining companies than it would be to own Gold or shares in Gold mining companies.

What This Means in Practical Terms

For the average investor, this chart has a number of practical uses. Since you have a choice of whether to allocate investment funds to Silver or to Gold, whenever you see a high probability Gold/Silver ratio trend in motion (as we have right now), and that the trend is moving lower, a wise investor would bias the bulk of his/her precious metals funds toward Silver rather than Gold. Since we know that the ratio has a high probability of trending lower for some time, a conservative investor might decide to put 35% of his funds to work in Gold and 65% in Silver. There are a variety of ways to purchase and store either of the precious metals, and, if you time your Gold/Silver ratio metals purchases wisely, you may do very well as the long-term bull market in these two metals continues to progress toward new highs. Those who simply desire to hold Silver by way of the Silver ETF (SLV) can use this chart to great advantage as well. Precious metals equity traders might simply bias their investing and trading activities toward the particular metal that is currently outperforming, focusing on the mining shares of the companies that mine Silver either as a by-product or as a primary mining operation. Since Silver is outperforming Gold, that might mean attempting to buy silver mining companies on normal pullbacks toward support. Since the future of the metals market is unknowable, however, it would also pay to trade/invest in Gold and Gold mining shares and ETF’s as well, just in case the ratio begins to reverse in favor of Gold at some point.

Spend some time every month analyzing the current state of the Gold/Silver ratio, a ratio that has served savvy traders very well for many, many years. Learn to put it to good use in your own trading and investing activities and see if it doesn’t also help fatten your bottom line as well.

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Mark Brown

Silver SLV ETF Trading Analysis

Graphic credit: Metastock v.11

One of the first duties of any competent technical analyst is to determine the prevailing trend of a given stock or commodity, and one of the most effective ways to accomplish that is to look at the relationship of prices to a variety of key moving averages. On the chart above, pay special attention to the red and blue curved lines, which denote the 50 and 200-day exponential moving averages (EMA’s) for SLV, the exchange-traded fund that closely tracks the price of cash Silver. On the left side of the chart, witness the green oval, the location of a bullish ‘Golden Cross’ of the 50-period EMA above the 200-day EMA. For technical analysts and traders, this normally implies the likelihood of significantly higher prices to come. It’s not a ‘fail-safe’ technical indicator, but it does a pretty good job of forecasting the future trend of prices across many different markets. Currently, SLV is obliging with a period of sustained follow-through, despite having endured a sharp sell-off in the wake of the recent 50/200 Golden Cross.

As important as the Golden Cross is, it’s equally important that the moving averages confirm the trending moves by starting to slope upward; in this case, both the 50-day EMA and the 200-day EMA are both accelerating higher even as the spread between them is continuing to increase. Pro traders also know that both the 50 and 200-day EMA’s will frequently acts as strong support on pullbacks (especially when such EMA’s are flat or sloping upward), often providing relatively safe ‘re-entry’ points for experienced traders and investors. See the various colored ovals for a few examples of this phenomenon.

Technicians also have another reliable way to determine if SLV is indeed in a strong trend; plotted at the lower portion of the chart is the Aroon (14) trend intensity indicator. Similar in concept to the more widely used Average Directional Indicator (ADX), this indicator attempts to measure the power that underlies any given trending move. In the chart above, we see that every time that the blue Aroon (14) line crossed the red line that a meaningful trend move took place in SLV. While no one can be sure how far this particular move will go, if past Aroon (14) crossovers are any indication, SLV may yet have some room to move higher. SLV’s weekly chart has already moved into a similarly bullish Aroon (14) posture, which may be another clue that SLV (and cash Silver) may yet be destined to meet and possibly exceed the significant highs made in March 2008.

The Silver market also has some amazing fundamental factors going for it that are unique among all freely-traded commodities, and these factors also bode favorably for substantially higher Silver prices in the months and years to come:

• A long-term supply-demand imbalance in this critical industrial metal.
• The worlds’ largest short futures contract position in any major commodity.
• Possible repayment issues with ‘leased’ Silver and unbacked ‘Silver Certificates.’

There’s more, so much more to the Silver story, but savvy traders and investors are beginning to take notice – from early 2003 until early 2008, Silver increased in price by a factor of nearly five times, and the long-term fundamentals also seem to imply that far greater increases may yet lie just over the horizon. As we make the transition to a new decade, make sure that you seek wise guidance in the Silver market, as it could prove to be a very, very attractive market in which to deploy a portion of your trading and investment funds.

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Mark Brown