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Chris Vermeulen

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